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Digital Object Identifier (DOI) 10.1007/s10107-005-0681-5 Math. Program., Ser. B (2005)

Summary: Digital Object Identifier (DOI) 10.1007/s10107-005-0681-5
Math. Program., Ser. B (2005)
Elodie Adida Georgia Perakis
A Robust Optimization Approach to Dynamic Pricing
and Inventory Control with no Backorders
Received: July 12, 2004 / Accepted: August 7, 2005
Published online: Springer-Verlag 2005
Abstract. In this paper, we present a robust optimization formulation for dealing with demand uncertainty
in a dynamic pricing and inventory control problem for a make-to-stock manufacturing system. We consider
a multi-product capacitated, dynamic setting. We introduce a demand-based fluid model where the demand is
a linear function of the price, the inventory cost is linear, the production cost is an increasing strictly convex
function of the production rate and all coefficients are time-dependent. A key part of the model is that no
backorders are allowed. We show that the robust formulation is of the same order of complexity as the nominal
problem and demonstrate how to adapt the nominal (deterministic) solution algorithm to the robust problem.
1. Introduction
1.1. Motivation
Fluid models provide a powerful tool for understanding the behavior of systems where
the dynamic aspect plays an important role. In recent years, there has been a lot of
research in an attempt to provide a deeper understanding of fluid models from a the-
oretical as well as an application point of view. In particular, an attractive feature of


Source: Adida, Elodie - Department of Mechanical and Industrial Engineering, University of Illinois at Chicago


Collections: Engineering