A Postponement Model for Demand Management

Publication Type

Journal Article

Publication Date

8-2003

Abstract

In this paper, demand postponement is analyzed as a strategy to handle potential demand surges. Under demand postponement, a fraction of the demands from the regular period are postponed and satisfied during a postponement period. This permits capacity to be procured to satisfy the postponed demands. A reimbursement per unit is paid to customers whose demands are postponed. The basic idea is that by preempting stockouts through demand postponement, overall stockout costs can be reduced. A two-stage capacity planning problem under demand postponement is formulated and solved. A power range class of distributions is proposed to capture the nature of demand surges. It is shown that: 1. the value of postponement may be significant depending on cost and demand parameters, 2. a postponement strategy may lead to reduced investment initial capacity, and 3. it may be optimal to do not demand postponement over a range of demands even after observing a higher demand signal.

Discipline

Management Sciences and Quantitative Methods

Research Areas

Operations Management

Publication

Management Science

Volume

49

Issue

8

First Page

983

Last Page

1002

ISSN

0025-1909

Identifier

10.1287/mnsc.49.8.983.16403

Publisher

INFORMS

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