Revenue Management in a Make-to-Order Environment

Abstract

Manufacturing companies in a make-to-order environment sell customer specific products. Usually, a company offers more than one product, faces a stochastic demand, and a time-varying product price. The latter cannot entirely be set autonomously by the company due to competitors. The decision the company has to make for an incoming order is whether to accept or reject the order, depending on the remaining capacity, the contribution margin of the order and the orders expected for the future. In our contribution we will discuss if the methods for the airline revenue management are applicable to the described problem. After giving an overview about the requirements a decision support system ought to fulfill to improve the order selection process in a make-to-order environment, we will discuss the differences of such a system to existing revenue management approaches in service industries. Subsequently, we give a mathematical formulation for the described problem and apply it to a simplified practical example.