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Requirements Planning with Pricing and Order Selection

Flexibility
Joseph Geunes, H. Edwin Romeijn, Kevin Taaffe,

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Joseph Geunes, H. Edwin Romeijn, Kevin Taaffe, (2006) Requirements Planning with Pricing and Order Selection Flexibility.
Operations Research 54(2):394-401. https://doi.org/10.1287/opre.1050.0255

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 OPERATIONS RESEARCH informs ®
Vol. 54, No. 2, March–April 2006, pp. 394–401
issn 0030-364X
eissn 1526-5463
06
5402
0394 doi 10.1287/opre.1050.0255
© 2006 INFORMS

TECHNICAL NOTE

Requirements Planning with Pricing and

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Order Selection Flexibility

Joseph Geunes, H. Edwin Romeijn
Department of Industrial and Systems Engineering, University of Florida, Gainesville, Florida 32611-6595
{geunes@ise.ufl.edu, romeijn@ise.ufl.edu}

Kevin Taaffe
Department of Industrial Engineering, Clemson University, Clemson, South Carolina 29634-0920,
taaffe@clemson.edu

Past requirements-planning research has typically assumed that the firm’s demands are determined prior to production
planning. In contrast, we explore a single-stage planning model that implicitly decides, through pricing decisions, the
demand levels the firm should satisfy in order to maximize contribution to profit. We briefly discuss solution methods and
properties for these problems when production capacities are unlimited. The key result of this work is a polynomial-time
solution approach to the problem under time-invariant finite production capacities and piecewise-linear and concave revenue
functions in price.
Subject classifications: production/scheduling: planning; inventory/production: policies; marketing/pricing; programming:
integer, applications.
Area of review: Optimization.
History: Received November 2003; revisions received February 2004, December 2004; accepted December 2004.

1. Introduction
Firms that produce made-to-order goods often make pricing
decisions in addition to planning the production required
to satisfy demands. Such pricing decisions are typically
made before establishing future production plans and are
in many cases made based on the judgment of sales and
marketing personnel. This results in decisions that do not
account for the interaction between pricing decisions and
production requirements, and how these factors affect over-
all profitability. Past operations-modeling literature has not
fully addressed integrated pricing and production-planning
decisions in make-to-order systems with the types of non-
linear production cost structures often found in practice as
a result of production economies of scale. This work par-
tially fills this gap by developing modeling and solution
approaches for integrating these decisions in single-stage
systems.
Since Wagner and Whitin (1958) addressed the basic
economic lot-sizing problem (ELSP), numerous extensions
and generalizations of this basic problem class have fol-
lowed (e.g., Zangwill 1969, Love 1972, Afentakis et al.
1984, Afentakis and Gavish 1986). Intensive research on
the capacitated dynamic requirements-planning problem
began in the 1970s (see Florian and Klein 1971, Baker
et al. 1978, Florian et al. 1980), and has received increased
attention recently as a result of the application of strong
valid inequalities that enable faster solutions (e.g., Barany
394
et al. 1984, Pochet 1988, and Leung et al. 1989). Lee and
Nahmias (1993), Shapiro (1993), and Baker (1993) pro-
vide excellent overall analyses of the generalizations and
solution approaches for dynamic requirements-planning
problems.
With some notable exceptions that we later discuss,
past research on dynamic requirements-planning problems
nearly always assumes that demands are prespecified by
time period and that all demands must be completely filled
at the time they occur (or after they occur in models that
permit backlogging). In contrast, we consider a model that
implicitly determines the best demand levels to satisfy in
order to maximize contribution to profit when demand is
decreasing in price. Our combined pricing and production-
planning model applies more broadly to order selection
contexts, where a firm faces a set of customer orders, from
which it must select the most profitable subset (in this con-
text, each order may have a unique price, rather than a
single price for all demands). Our results for the uncapac-
itated case generalize past lot-sizing results by providing
a “tight” linear programming formulation of our require-
ments planning with pricing model under fixed plus lin-
ear production costs and piecewise-linear, concave, and
nondecreasing revenue functions. Our main contribution,
provided in §2.3, demonstrates that the capacitated ver-
sion of the model with time-invariant production capacity
limits and piecewise-linear concave revenue functions can
be solved in polynomial time.
 Geunes, Romeijn, and Taaffe: Requirements Planning with Pricing and Order Selection Flexibility
Operations Research 54(2), pp. 394–401, © 2006 INFORMS
Thomas (1970) provided an analysis and solution
algorithm for a closely related integrated pricing and
production-planning decision model. His model generalized
the Wagner and Whitin (1958) model by characteriz-
ing demand in each of a set of discrete time peri-
ods as a downward-sloped function of the price in each
period, thus treating each period’s price as a decision
variable. This model sets a single price for all demands
Downloaded from informs.org by [156.209.105.5] on 01 May 2018, at 13:55 . For personal use only, all rights reserved.
in any given period, whereas our model permits differ-
ential pricing in different markets. We provide a “tight”
linear programming formulation for this problem under
piecewise-linear concave revenue functions, account for
more general production cost functions in each period
(Thomas 1970 considered only fixed plus linear produc-
tion cost structures, while we show in §2.2 how the model
and solution approach permit piecewise-linear and con-
cave production costs), and, most importantly, provide a
polynomial-time solution approach for a capacitated ver-
sion of the problem (with time-invariant capacities).
Additional contributions to the integrated pricing
and production-planning problem include the work of
Kunreuther and Schrage (1973) and Gilbert (1999), who
considered the uncapacitated problem when a single price
T . Inventory costs are charged against ending
must be used over the entire horizon. Kunreuther and
Schrage (1973) provided a heuristic solution approach
for the problem, while Gilbert (1999) provided an exact
algorithm under stationary production and holding costs.
Van den Heuvel and Wagelmans (2004) recently provided
an approach for the nonstationary production and holding-
cost case, which also improves upon the complexity of
Gilbert’s approach (from

T 3  to

T 2 , where T is the
horizon length) in the stationary cost case. While each of
these papers assumes that a single price must be set for the
T (1)
entire horizon, we permit period-specific pricing flexibility.
Loparic et al. (2001) considered a related (uncapaci-
T (2)
tated) problem in which a producer wishes to maximize
T
(3)
net profit from sales of a single item and does not have
to satisfy all outstanding demand in every period. Their
model, however, contains no pricing decisions, assuming
that the revenue from a single demand source is propor-
tional to the volume of demand satisfied. Bhattacharjee and
Ramesh (2000) considered the pricing problem for perish-
able goods using a general function to characterize demand
as a function of price. Biller et al. (2003) analyzed a model
similar to ours under strictly linear production costs, i.e.,
no fixed setup costs, and assuming (time-varying) produc-
tion capacity limits, which they solved efficiently using a
greedy algorithm. While our discussion of the literature
has focused on deterministic approaches for pricing and
production-planning problems, additional work on dynamic
pricing exists that addresses stochastic demand environ-
ments; see Thomas (1974), Gallego and van Ryzin (1994),
and Chan et al. (2003).
The remainder of this paper is organized as follows.
Section 2 presents a definition and mixed-integer program-
ming formulation of the requirements-planning problem
395
with pricing. We briefly discuss solution methods for this
problem and provide a tight linear programming formula-
tion for the case of fixed plus linear production costs and
piecewise-linear and concave revenue functions. We further
discuss the generality of solution approaches with respect to
different production-cost functions and under multiple mar-
ket price-demand curves in any given period. Section 2.3
provides our main contribution, which demonstrates that
the equal-capacity version of the model under piecewise-
linear concave revenue functions can be solved in polyno-
mial time. Section 3 provides conclusions and directions
for future research.
2. Requirements Planning with Pricing
Consider a producer who manufactures a good to meet
demand over a finite number of time periods, T . The pro-
duction cost function in period t is denoted by gt
·, and is
a nondecreasing concave function of the amount produced
in period t, which we denote by xt . Similarly, the revenue
function in period t is denoted by Rt
·, and is a nonde-
creasing concave function of the total demand satisfied in
period t, which we denote by Dt , with Rt
0 = 0 for all
t = 1
inventory, where ht denotes the unit holding cost in period t
and It is a decision variable for the end-of-period inventory
in period t. Letting C denote the production capacity limit
(which does not depend on time), we formulate the require-
ments planning with pricing (RPP) problem as follows:


T
[RPP] maximize
Rt
Dt  −
gt
xt  + ht It 
t=1
subject to Dt + It = xt + It−1 t = 1
xt
C t = 1
xt It Dt  0 t = 1
The objective function maximizes net profit after produc-
tion and holding costs; constraint set (1) ensures inventory
balance in all periods, and constraint set (2) enforces pro-
duction capacity limits. The general RPP problem defined
above maximizes the difference between concave functions
and is, therefore, in general a difficult global optimization
problem (see Horst and Tuy 1990). By providing certain
somewhat mild restrictions on the functional forms of the
revenue and production cost functions, Rt
Dt  and gt
xt ,
we arrive at a family of special cases of the RPP problem,
several of which have broad applicability in practice.
Consistent with past production-planning literature,
except where noted, we assume that production costs con-
tain a fixed-charge structure, i.e., a fixed cost of St is
incurred when there is a setup in any period t, while
the variable cost per unit in period t equals pt (we later
discuss necessary extensions to handle production costs that
are piecewise-linear, nondecreasing, and concave in vol-
ume). Under fixed plus linear production costs, unlimited
 Geunes, Romeijn, and Taaffe: Requirements Planning with Pricing and Order Selection Flexibility
396 Operations Research 54(2), pp. 394–401, © 2006 INFORMS

production capacity, and a single price offered to all mar-
kets in each period, we have the model first analyzed by
Thomas (1970), who proposed a dynamic programming
recursion for solving the problem. The algorithm is similar
to the Wagner and Whitin (1958) algorithm for the ELSP,
and relies on similar key structural properties of the prob-
lem. We can also use a shortest-path approach using the
well-known Wagner and Whitin (1958) shortest-path graph
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optimal mixed-integer solution value. To show this, we
begin with an explicit base formulation of the uncapacitated
RPP under piecewise-linear concave revenue functions and
fixed plus linear production costs, using much of the nota-
tion already defined. This base formulation both illustrates
the model’s link to (and generalization of) past production-
planning models, and permits a clear and interesting alter-
native “order selection” interpretation of the model. The

structure and labeling the “cost” on arc
t  (with  > t) formulation requires defining binary variables zjt for t =
as the maximum possible profit obtained between periods t 1


T and j = 1


Jt , such that zjt = 1 if Dt 
j
and  − 1 using (at most) a setup in period t (in this case k=1 dkt , i.e., when the total demand satisfied in period t
we actually solve a longest-path problem on an acyclic net- occurs at the jth or higher breakpoint of the piecewise-
work to maximize net profit). linear concave revenue curve; otherwise, zjt = 0.
The remainder of this section considers an explicit func- By the definition of the zjt variables and the fact that
tional form for the concave revenue functions, which we an optimal solution exists where total demand falls at an
will use for more detailed analysis. Suppose that the rev- interval breakpoint in each period, we have Jthat the total
enue function in each period can be represented as a non- demand satisfied in period t equals Dt = j=1 t
djt zjt , and
decreasing piecewise-linear concave function of demand. Jt
the corresponding total revenue equals j=1 rjt djt zjt . We
We assume that the revenue function in period t has Jt + 1 define binary setup variables, yt , for t = 1


T where
consecutive (contiguous) linear segments. The first Jt of yt = 1 if we perform a setup in period t, and yt = 0 oth-
these segments have interval width values d1t d2t


dJt t , erwise. We can thus formulate the uncapacitated RPP with
and let rjt denote the slope (per unit revenue) within the piecewise-linear concave revenue functions, which we refer
jth linear segment; the
Jt + 1st segment has slope 0, i.e., to as the RPPPLC , as follows:
the
Jt maximum possible total revenue is finite with value
T 

j=1 rjt djt for t = 1


T . This implies that we can state
Jt


our revenue functions as follows: [RPPPLC ] maximize rjt djt zjt −St yt −pt xt −ht It
t=1 j=1

Rt
Dt  Jt


   subject to It−1 + xt = djt zjt + It



k−1

k−1
 rjt djt + rkt Dt − djt

j=1



 j=1 j=1 t = 1


T (5)



k−1
k
  J 
for d
D < djt k = 1


Jt

T

= jt t
0
xt
dj yt

 j=1 j=1

 =t j=1




Jt

Jt
t = 1


T (6)

 rjt djt for
 djt
Dt
j=1 j=1 I0 = 0 It  0 t = 1

T (7)
(4)
where r1t > r2t > · · · > rJt t > 0. It is straightforward to
T j = 1
Jt (8)
show that an optimal solution exists such that the total
demand satisfied in each  period t occurs at one of the
T
(9)
breakpoint values, i.e., at kj=1 djt for some k between 1
and Jt (note that we can, without loss of optimality, ignore
the
J + 1st interval because the revenue is constant in
that interval and the cost functions are nondecreasing). If
the functions Rt
· are piecewise linear and concave with
at most Jmax segments, the slopes at each breakpoint and
the resulting revenue function computations can be per-
formed in

Jmax  time, for a total arc “cost” calculation
time of

Jmax T 2 . Because the acyclic longest-path prob-
lem requires

T 2  operations, our problem solution can
be found in

Jmax T 2  time.
When the RPP contains piecewise-linear and con-
cave revenue functions and fixed-charge production costs,
a mixed-integer linear programming formulation exists
whose linear programming relaxation value equals the
0
zjt
1
t = 1
yt ∈ 0 1 t = 1
In the above [RPPPLC ] formulation, the objective func-
tion provides the net revenue after subtracting production
and holding costs. Constraint set (5) ensures inventory bal-
ance, while the setup-forcing constraints (6) enforce set-
ting yt equal to one if any production occurs in period t.
Constraints (7) through (9) encode our variable restrictions.
Because an optimal solution exists for the uncapacitated
problem such that the demand satisfied in any period occurs
at a breakpoint value of the period’s revenue function, the
optimal solution to [RPPPLC ] is equivalent to that under
the formulation obtained by explicitly imposing the binary
restriction on the zjt variables. We formulate the prob-
lem with the relaxed binary restrictions, however, for later
extension to the equal-capacity case in §2.3. Note that the
 Geunes, Romeijn, and Taaffe: Requirements Planning with Pricing and Order Selection Flexibility
Operations Research 54(2), pp. 394–401, © 2006 INFORMS 397

above formulation can also be interpreted as an order selec- dj yt −xjt  0

tion problem in which djt denotes the quantity associated
t = 1

T  = t

T j = 1

J (12)
with some individual order j in period t, with an associated
per-unit revenue of rjt ; in this context zjt now represents −zj  −1  = 1

T j = 1

J (13)
a binary order selection variable equal to 1 if order j in
yt xjt zjt  0
period t is accepted, and 0 otherwise.
Note that we need not impose any specific constraints on t = 1

T   t j = 1

J
(14)
the relationship between zjt variables corresponding to the
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same revenue function in a given period t. The concavity of Note that because a positive cost exists for setups, we
the revenue functions allows us to consider each interval of can show that the constraint yt
1 is unnecessary in the
the revenue function independently from one another in our above relaxation, and so we omit this constraint from the
formulation (that is, we need not introduce constraints that relaxation formulation. To show that formulation [RPPPLC ]
specify the strict ordering of the piecewise-linear segments has zero integrality gap, we can extend the proof techniques
of the revenue functions, because the optimization prob- used for the reformulation of the ELSP (see, for example,
lem will always first “use” the higher-revenue segments). Nemhauser and Wolsey 1988, Barany et al. 1984, Barany
The concavity of the revenue functions thus implies that et al. 1986); alternatively, in Geunes et al. (2004) we pro-
if zkt = 1 in an optimal solution, then we must also have vide a proof based on the primal complementary solution
zjt = 1 for j = 1


k − 1. This ensures that the quanti- of a dual-ascent-based algorithm.
Jt Jt
ties j=1 djt zjt and j=1 rjt djt zjt correctly provide the total
demand satisfied and the total revenue in period t. 2.1. Multiple Price-Demand Curves
While the [RPPPLC ] formulation correctly captures the This section extends the applicability of the model pre-
RPPPLC problem, its linear programming relaxation value sented above by demonstrating that any uncapacitated RPP
does not necessarily equal the optimal value of the RPPPLC , with multiple demand curves in a period can be refor-
i.e., its integrality gap is not necessarily 0. An equiva- mulated as an RPP with only a single demand curve per
lent formulation exists, however, for which the integral- period. In particular, we assume that Dt , the total demand
ity gap is equal to 0. This approach generalizes a tight satisfied in any period t, is the sum of the demands satis-
reformulation of the ELSP, a discussion of which can be fied from Mt distinct markets or revenue sources. In each
found in Nemhauser and Wolsey (1988). Starting with market we employ a standard assumption of a one-to-one
the [RPPPLC ] formulation, we first eliminate the inventory correspondence between price and market demand volume
variables
t from
t the Jformulation via substitution using It = in any period, where market demand is a downward-sloping
x − 
d z . After introducing a new cost function of price (see Gilbert 1999), and each market’s rev-
=1  =1 j=1 j j 
parameter, ct , where ct ≡ pt + T=t h , the objective func- enue is a nondecreasing concave function of demand sat-
tion of the RPPPLC can be written as isfied in the market. The decision variable for the amount
  of demand we satisfy for revenue source m in period t is
J


T

T

t

denoted by Dmt , and Rmt
· is the
minimize
St yt + ct xt  − ht dj zj Mcorresponding revenue
t=1 t=1 =1 j=1
function. We replace Rt
D 
tMt with t
R
m=1 mt
D mt  in [RPP],
and add the constraints m=1 Dmt = Dt , t = 1


T , and
J


T

Dmt  0, m = 1


Mt ; t = 1


T . Now observe that,
− rj dj zj
(10) for a given choice of Dt , we will choose the demand quanti-
=1 j=1
ties for each revenue source that yield the maximum profit.
Let xjt denote the number of units produced in period t Therefore, the uncapacitated RPP is equivalent to
corresponding to demand satisfaction within linear seg-

T

T

ment j in period , for   t, and replace each xt with maximize R t
Dt  −
gt
xt  + ht It 
T  J t=1 t=1
=t j=1 xjt . Defining jt as a modified revenue

param-
eter for linear segment j in period t, where jt = T=t h + subject to Dt + It = xt + It−1 t = 1


T
rjt , this leads to a reformulation of the linear programming xt It Dt  0 t = 1


T
relaxation of the RPPPLC , which we denote by [RPPPLC ]:
where the aggregate revenue function for period t, R t
Dt ,
[RPPPLC ] is defined through the following subproblem as
  T Jt Mt Mt


T J
T







minimize St yt +ct xjt − jt djt zjt [SP] R t
Dt  ≡ max Rmt
Dmt  Dmt = Dt !
m=1 m=1
t=1 =t j=1 t=1 j=1

 Dmt  0 m = 1


Mt

subject to xjt −dj zj = 0

t=1 The function R t
Dt  is concave (see Rockafellar 1970,
 = 1

T j = 1

J (11) Theorem 5.4), and clearly R t
0 = 0. It now also easily


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I  −1 > 0 in an opti-
lt
t  − 1 and positive pro-
  must
  ). Because at most one
T lt is the maximum num-
  , we either produce 0, %, or C,
D  /C. We then con-
Geunes, Romeijn, and Taaffe: Requirements Planning with Pricing and Order Selection Flexibility
398
follows that if Rmt
· is piecewise linear and concave (and
Rmt
0 = 0) for all m and t, R t
· is piecewise linear and
concave for all t (and R t
0 = 0). This can be shown by
ordering the slopes of all segments in a given period in
decreasing order, and noting that the function R t
Dt  will
“use” these segments in nondecreasing index order (or non-
increasing value order). Observe that if the Rmt
· func-
tions are all everywhere differentiable, then the demand
values selected for each revenue source in a given period t
as a result of solving subproblem [SP] will be such that
R1t
D1t  = R2t
D2t  = · · · = RMt t
DMt t . In other words, at
the optimal demand level, the marginal revenue for each
revenue source will be equal. Thus, if the revenue sources
are distinct but have identical revenue functions, we will
charge the same price to every revenue source.
2.2. Piecewise-Linear Concave Production Costs
Consider the case in which the production cost function
in each period is piecewise-linear concave and nondecreas-
ing in the production volume in the period. Note that any
nondecreasing piecewise-linear concave function can be
viewed as the minimum of a number of fixed-charge plus
linear variable cost functions. Therefore, if the production
functions are piecewise linear and concave with a finite
number of segments, we can view this as a choice between
a finite number of alternative production modes. It is easy
to see that in any period we will only use a single produc-
tion mode without loss of optimality. We can write such a
production cost function in the following form:
0 if x = 0 that consists of capacity-constrained production sequences
gt
x =
min Skt + pkt x if x > 0
k=1
Let D  = t=+1 dt denote the total demand satisfied
where k denotes an index for different production “modes.”
Given a sequence of periods t
we know that total production in periods  + 1
duction in period t, we now essentially also need to choose
which of the lt cost functions (or production modes) to
use. Given any production mode, we can determine the
optimal demand quantity corresponding to that mode. The
time required to find all arc profits using the shortest-
path method is O
LT 2  multiplied by the time required to
find the optimal demand value for each production/demand
period pair, where L = maxt=1
by C, in which case % equals 0). So, given D  , in each
ber of linear segments for any of the T piecewise-linear
concave production cost functions. As this analysis shows,
the case of piecewise-linear concave production cost func-
tions can be handled in a straightforward manner, even
under general concave revenue functions, without a sub-
stantial increase in problem complexity.
2.3. Production Capacities
This section considers a capacitated version of the RPPPLC
where production capacities are equal in all periods.
Taaffe and Geunes (2004) showed that the RPPPLC with
time-varying finite production capacities is NP-hard by
Operations Research 54(2), pp. 394–401, © 2006 INFORMS
demonstrating that it generalizes the capacitated lot-sizing
problem (CLSP). The special case of the CLSP where pro-
duction capacities are equal in every period, however, can
be solved in polynomial time (see Florian and Klein 1971)
with a complexity of

T 4  under concave production and
holding-cost functions in the amount produced and held,
respectively, in any period. In addition, when holding costs
are linear in the amount of inventory at the end of a period,
van Hoesel and Wagelmans (1996) provide an algorithm
that reduces the complexity to

T 3 . Because of this,
we investigate whether the equal-capacity version of the
RPPPLC contains a similar special structure that we might
exploit to solve this problem in polynomial time.
The polynomial solvability of the equal-capacity CLSP
relies on characterizing so-called regeneration intervals
(Florian and Klein 1971). A regeneration interval is char-
acterized by a pair of periods,  and   (with  <    such
that I = I  = 0, and I+1 I+2
mal solution. An optimal solution therefore consists of a
sequence of regeneration intervals (including the possibil-
ity of a single regeneration interval
0 T ). A capacity-
constrained sequence between periods  +1 and   is one in
which xt = 0 or C for all periods between (and including)
 + 1 and   except for, at most, one. For the equal-capacity
CLSP, an optimal solution exists consisting of a capacity-
constrained sequence within each regeneration interval
(Florian and Klein 1971). Given any choice of demands in
every period for the equal-capacity RPPPLC problem, the
resulting problem is an equal-capacity CLSP; thus, an opti-
mal solution exists for the equal-capacity RPPPLC problem
within consecutive
  regeneration intervals.
between periods  + 1 and   , where dt is the demand satis-
fied in period t. If
    comprises a regeneration interval,
equal D  (because I = I  = 0 and D  is the demand
satisfied in periods  + 1
period contains production at a value other than 0 or C
in a capacity-constrained sequence, we must have D  =
kC + %, where k is some nonnegative integer, and % is the
amount produced in the period in which we do not pro-
duce at 0 or C (assuming that D  is not evenly divisible
of the periods  + 1
with a production amount of % in only one of the periods.
We can easily determine both k and % given D  and C,
i.e., % = D 
mod C, and k =
struct a shortest-path graph that contains a path for every
feasible capacity-constrained production sequence between
periods  + 1 and   . Solving this shortest-path problem
provides the minimum cost capacity-constrained sequence
for every
    pair (with   > ). Given a value of D 
for every possible
    pair, we can use the van Hoesel
and Wagelmans (1996)

T 3  CLSP solution approach to
solve the equal-capacity RPPPLC . The challenge then lies

 
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  − 1, and I  = 0. The adjusted revenue
t −1, and production in period s.
t − 1 and pro-
  −1, we can increase (jt by some % > 0 and
  . In particular, if t
t  , ods, increases (jt by one unit, reduces inventory in peri-
It −1 . The ods t
s − 1 by one unit, and increases xs by one unit.
t  − 1 (in that reduces (jt by one unit, increases inventory in periods
s −1 by one unit, and reduces xs by one unit. Repeat-
  will demand not be satisfied

T 2 ). Letting Jmax denote the maximum number of lin-
T Js , Lemmas 1 and 2 lead to the
  is one of the Proof. Consider a potential regeneration interval
   
  . For
  with at most one 0 < (jt < djt in the
Geunes, Romeijn, and Taaffe: Requirements Planning with Pricing and Order Selection Flexibility
Operations Research 54(2), pp. 394–401, © 2006 INFORMS
in determining appropriate D  values for each possible

    pair. To address this issue, we show that the candi-
date set of D  values for each
    pair can be limited to
a manageable number of choices. Note that Loparic (2001)
provides a similar analysis for a lot-sizing model in which
total revenue is linear in the amount of demand satisfied.
This work, however, contains no pricing decisions; in pric-
ing contexts, a concave revenue function, such as the one
we consider, is more broadly applicable.
Consider a regeneration interval
   , and recall that
by definition we must have I = 0, Ij > 0 for j =  +
1
to show that given an optimal solution satisfying these
 parame-
ter that we introduced in §2, i.e., jt = rjt + Ts=t hs for
 < t
  , will play an important role in the analysis that
follows. We also let (jt denote the decision variable for the
amount of demand within segment j in period t that we sat-
isfy, and recall that at most djt units of demand exist within
segment j in period t. The following lemma is important
in developing a useful solution algorithm.
Lemma 1. Suppose that an optimal solution for RPPPLC
contains a regeneration interval
   , and suppose that
jt  it with  < t, t 
  . If an optimal solution exists
with (jt < djt , an optimal solution also exists with (it = 0.
Equivalently, if an optimal solution exists such that (it > 0,
then an optimal solution also exists with (jt = djt .
Proof. Consider the regeneration interval
    and some
jt  it with  < t, t 
  . Suppose that we have an opti-
mal solution with (it > 0, and (jt < djt . Because It > 0 for
t =  +1
larly, if period t is before period s, a feasible solution exists
decrease (it by % without changing the amount produced
in each of the periods  + 1
we can set % = mindjt − (jt ! (it ! minIt
resulting change in objective function value equals
rjt −
  −1

rit − ts=t hs % =
jt − it %  0, and we either have
(jt = djt , (it = 0, or Is = 0 for some s = t
the last case, t and t  no longer belong to the same regen-
eration interval). Similarly, if t  < t, we take % = min(it !
djt − (jt , and the resulting change in objective function

value equals

rjt − t−1 s=t  hs  − rit  % =
jt − it  %  0,
with either (it = 0 or (jt = djt . 
Lemma 1 ensures that an optimal solution exists such
that within each regeneration interval
    in at most one
of the periods  + 1
at a value equal to one of the breakpoints of the revenue
function. The following additional lemma allows us to fur-
ther reduce the number of potential values of D  that we
must consider for a given regeneration interval.
Lemma 2. An optimal solution exists for RPPPLC contain-
ing consecutive regeneration intervals
    where the
production plan in periods  + 1
following types:
(i) We produce 0 or C in every production period in the
interval  + 1
potential regeneration interval
   , we sort J
   
interval; or
399
(ii) We produce at a value of %, with 0 < % < C, in at
most one production period in the interval  + 1
(and all other production levels are either 0 or C in this
interval), with all (jt values equal to either 0 or djt within
the interval.
Proof. We have shown that an optimal solution exists
containing a sequence of regeneration intervals, and that
at most one (jt value exists in a regeneration interval with
0 < (jt < djt (Lemma 1); we also know that a capacity-
constrained production sequence exists. We therefore need
properties with a production quantity xs within a regenera-
tion interval such that 0 < xs < C, and with a (jt for some
period t in the regeneration interval such that 0 < (jt < djt ,
an optimal solution also exists satisfying the conditions
stated in the lemma. Suppose that we do have such an opti-
mal solution, and that the production period s occurs prior
to or including the demand period t. Because inventory in
each period in the regeneration interval is positive, a feasi-
ble solution exists for the regeneration interval that uses the
same setup periods and reduces (jt by one unit, along with
inventory in periods s
Because this solution does not improve over our optimal
solution (and given the linearity of costs), this implies that
at least as good a solution exists that increases (jt by one
unit, along with inventory in periods s
duction in period s. Repeating this argument until either
xs = C or (jt = djt implies the result of the lemma. Simi-
for the regeneration interval that uses the same setup peri-
Because this solution does not improve over our optimal
solution, this implies that at least as good a solution exists
t
ing this argument until either (jt = 0 or xs = 0 proves the
result. 
Lemmas 1 and 2 taken together imply that a limited
number of candidate optimal solutions must be consid-
ered for each possible regeneration interval (note that the
number of possible regeneration intervals is bounded by
ear segments of the revenue functions among all periods,
i.e., Jmax = maxs=1
following theorem:
Theorem 1. The equal-capacity RPPPLC problem can be
solved in

Jmax T 6  time.
containing n periods, and let J
    denote the total
number of linear segments in periods  + 1
values of jt ; let this index sequence of sorted values
 Geunes, Romeijn, and Taaffe: Requirements Planning with Pricing and Order Selection Flexibility
400 Operations Research 54(2), pp. 394–401, © 2006 INFORMS

J
    , i.e., 1  2  · · · 
J
    − i.
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be denoted by
1 2
either djt or zero), the equal-capacity version of the prob-
J
    , where each index i identifies a unique segment- lem is NP-hard.
period pair within the regeneration interval. For potential
regeneration interval
   , note that Lemma 1 implies 3. Concluding Remarks
that if (i takes a value strictly between 0 and di we must
An increasing amount of attention is being placed on
have (i+k = 0 for k = 1
revenue management, through pricing models, in manufac-
Lemma 2 implies that within each potential regenera-
turing contexts. This paper contributes to this effort by pro-
tion interval
    of length n, we need to consider two

viding models and efficient solution methods for a general

types of solutions. The first type of solution produces a
quantity of zero or C in each of the n periods. For this
type of solution we will have at most one (i < di for
1
i
J
   , with (i−k = di−k for k = 1
i − 1, and
(i+k = 0 for k = 1
J
    − i. The choice of the seg-
ment i such that (i < di (of which there are J
    + 1
possible choices, including the choice to produce zero for
all periods) uniquely determines the number of periods in
which we must produce at full capacity and, therefore, the
values of (i for i = 1
J
   . This in turn determines
fixed demand levels that must be satisfied in an equal-
capacity lot-sizing problem for the regeneration interval

   , which is solvable in

n3  using van Hoesel and
Wagelmans’ (1996) algorithm.
The second type of solution we must consider sets
each (i equal to zero or di for all i = 1
J
    and
produces at a value strictly between zero and C in at most
one period in the regeneration interval. The choice of the
index i such that (i−k = dji−k for k = 0
i − 1 and DMI-0322715 and DMI-0355533. The authors gratefully
(i+k = 0 for k = 1
J
    − i (of which there are acknowledge the insightful comments and direction pro-
J
    + 1 possible choices, including the choice to pro-
duce zero for all periods) uniquely determines the number
of periods in which production at full capacity is required,
and the value of production required in the single period
such that xt < C. In total we must consider 2J
    + 1
potential values of the demand vector
(1 (2
(J
    
for each regeneration interval of length n, which implies
that the number of potential demand vectors for an inter-
val of length n is bounded by

Jmax n. For each of these
vector values, we solve an

n3  equal-capacity lot-sizing
problem. Therefore, the time required to evaluate a regen-
eration interval of length n is

Jmax n4 , which is clearly
bounded by

Jmax T 4 . Because we have at most

T 2 
potential regeneration intervals, the total effort required is


Jmax T 6 . 
Observe that if we allow concave holding-cost functions,
we can use Florian and Klein’s (1971)

T 4  algorithm
to solve each equal-capacity CLSP, resulting in an overall
complexity of

Jmax T 7 . Note that, unlike the uncapac-
itated case, in the capacitated case it is now possible to
choose an optimal demand level in any period that is strictly
between breakpoint values of the revenue function. While
this is not a critical distinction in the pricing problem set-
ting, we must explicitly consider this factor in the order
selection problem setting when customers do not allow par-
tial order satisfaction. In Geunes et al. (2004), we show that
in the order selection context, when customers require all-
or-nothing demand satisfaction (i.e., where (jt must equal
set of pricing problems in manufacturing settings where
fixed setup costs comprise a substantial part of operations
costs. Our primary contribution demonstrates the ability to
efficiently solve integrated pricing and production-planning
problems in which time-invariant finite production capaci-
ties exist.
These models can serve as a starting point for future
research on more general models with even broader appli-
cation. Future research might, for example, consider vary-
ing degrees of producer flexibility (where certain minimum
order fulfillment requirements must be met) or modeling
more complex market interactions and price as a decision
variable (where market demand is a function of the pro-
ducer’s price and/or the price offered by competitors).
Acknowledgments
This work was partially supported by NSF grants
vided by Yves Pochet at the International Workshop on
Optimization in Supply Chain Planning in Maastricht, The
Netherlands, June 2001, which significantly strengthened
the material in §2.3.
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