Abstract

Seyed Jafar Sadjadi, Mir-Bahador Aryanezhad and Armin Jabbarzadeh*

One of the primary assumptions on many optimal pricing strategies is that there is no imperfect product. This simple assumption often makes them impractical to use, since it is almost impossible to manage a production with virtually no defect. In this paper, the study proposes a new method where the reliability of the production is incorporated into pricing, marketing and production planning. The integrated model of this paper simultaneously determines price of products, marketing expenditure, lot size, setup cost, inventory holding cost and reliability of the production process. This model is formulated as a nonlinear optimization problem and the optimal solution in closed form is derived using geometric programming. In order to examine the behaviour of the proposed method, the study tests the modeling formulation using a numerical example.