INTEGRATING EARLY SALES WITH PRODUCTION DECISIONS AND ITS EFFECT ON BUDGETARY CONSTRAINT

Many companies are facing the challenges of dynamic market and capital shortage. To overcome these challenges, we examine the case in which the company develops early sales strategy that entices customers to commit to their orders at a discount price prior to the selling season. The time between payment and fulfillment of these pre-committed orders provides an opportunity for the company to "lock" part of market demand and relieve the company's procurement budgetary constraint. This paper evaluates the benefits of the early sales strategy. Firstly, we provide a novel method to compute the optimal discount rate of the early sales strategy; comparative static analysis of parameters (e.g., market size, sensitivity level of the market responding to price change, and the probability of a customer purchasing the company's product) toward the optimal discount rate is also investigated. Secondly, we investigate the model of the early sales where the company is with procurement budgetary constraint. It is theoretically proved that the optimal discount rate in the model is larger than that without the constraint. Computational study demonstrates that early sales can significantly relieve the budgetary shortage, and substantially increase the expected profit.