Route-based approximate dynamic programming for dynamic pricing in attended home delivery

European Journal of Operational Research

Posted: 30 Oct 2017 Last revised: 21 May 2020

See all articles by Sebastian Koch

Sebastian Koch

University of Augsburg

Robert Klein

University of Augsburg

Date Written: May 20, 2020

Abstract

Attended home delivery describes the delivery of goods by e-grocers or e-tailers to customers within an agreed time window. Because customers expect narrow time windows, offering such services may lead to expensive fulfillment operations. This has led to research on how to influence customers’ bookings using time window pricing or slotting. In this paper, we reconsider the problem of demand management through dynamic pricing for attended home delivery services.
This problem is usually modeled as a stochastic dynamic program, but even small instances cannot be solved to optimality due to the curses of dimensionality. The major challenges consist of finding feasible time windows for an incoming customer, estimating the opportunity cost, i.e., the future monetary loss due to accepting a booking, and optimizing the time window prices in real time.
In this paper, we propose a route-based approximate dynamic programming approach to tackle these challenges. The approach carefully combines and partially extends state-of-the-art methods in attended home delivery, dynamic pricing, and dynamic vehicle routing. In an extensive simulation study, we com-pare its performance with state-of-the-art benchmark heuristics. The results indicate a superior perfor-mance of our approach in terms of both profit and number of customers served.

Keywords: Attended Home Delivery, Last Mile, Approximate Dynamic Programming

Suggested Citation

Koch, Sebastian and Klein, Robert, Route-based approximate dynamic programming for dynamic pricing in attended home delivery (May 20, 2020). European Journal of Operational Research, Available at SSRN: https://ssrn.com/abstract=3061350 or http://dx.doi.org/10.2139/ssrn.3061350

Sebastian Koch (Contact Author)

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

Robert Klein

University of Augsburg ( email )

Universitätsstr. 2
Augsburg, 86159
Germany

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