A Postponement Model for Demand Management
In this paper, we analyze demand postponement 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, we can reduce overall stockout costs. We formulate and solve a two-stage capacity planning problem under demand postponement. We propose a power range class of distributions to capture the nature of demand surges. We establish the scalability and conjugate properties of the power range distributions under demand postponement, which leads to a tractable analysis of the problem. We analytically solve the problem of determining the optimal regular and postponement period capacities, and the demand splitting rule to minimize the supplier's expected cost. We show that (a) the value of postponement may be significant depending on cost and demand parameters, (b) a postponement strategy may lead to reduced investment in initial capacity, and (c) it may be optimal to do no demand postponement over a range of demands even after observing a higher demand signal. We then relax several model assumptions and provide results for these extensions. We conclude with managerial insights.
Volume (Year): 49 (2003)
Issue (Month): 8 (August)
|Contact details of provider:|| Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA|
Web page: http://www.informs.org/
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- James D. Dana Jr., 1999. "Using Yield Management to Shift Demand When the Peak Time is Unknown," RAND Journal of Economics, The RAND Corporation, vol. 30(3), pages 456-474, Autumn.
- Hau L. Lee & Christopher S. Tang, 1997. "Modelling the Costs and Benefits of Delayed Product Differentiation," Management Science, INFORMS, vol. 43(1), pages 40-53, January.
- Nancy L. Stokey, 1979. "Intertemporal Price Discrimination," The Quarterly Journal of Economics, Oxford University Press, vol. 93(3), pages 355-371.
- Oren, Shmuel S & Doucet, Joseph A, 1990. "Interruption Insurance for Generation and Distribution of Electric Power," Journal of Regulatory Economics, Springer, vol. 2(1), pages 5-19, March.
- Marshall Fisher & Kumar Rajaram & Ananth Raman, 2001. "Optimizing Inventory Replenishment of Retail Fashion Products," Manufacturing & Service Operations Management, INFORMS, vol. 3(3), pages 230-241, November.
- Chen, F., 1999.
"Market Segmentation, Advanced Demand Information and Supply Chain Performance,"
99-2, Columbia - Graduate School of Business.
- Fangruo Chen, 2001. "Market Segmentation, Advanced Demand Information, and Supply Chain Performance," Manufacturing & Service Operations Management, INFORMS, vol. 3(1), pages 53-67, February.
- Marchand, M. G., 1974. "Pricing power supplied on an interruptible basis," European Economic Review, Elsevier, vol. 5(3), pages 263-274.
- Smith, Stephen A, 1989. "Efficient Menu Structures for Pricing Interruptible Electric Power Service," Journal of Regulatory Economics, Springer, vol. 1(3), pages 203-23, September.
- Joseph M. Milner & Panos Kouvelis, 2002. "On the Complementary Value of Accurate Demand Information and Production and Supplier Flexibility," Manufacturing & Service Operations Management, INFORMS, vol. 4(2), pages 99-113, December.
- Haresh Gurnani & Christopher S. Tang, 1999. "Note: Optimal Ordering Decisions with Uncertain Cost and Demand Forecast Updating," Management Science, INFORMS, vol. 45(10), pages 1456-1462, October.
- William S. Lovejoy, 1990. "Myopic Policies for Some Inventory Models with Uncertain Demand Distributions," Management Science, INFORMS, vol. 36(6), pages 724-738, June.
- Katy S. Azoury, 1985. "Bayes Solution to Dynamic Inventory Models Under Unknown Demand Distribution," Management Science, INFORMS, vol. 31(9), pages 1150-1160, September.
- Samuel Karlin, 1960. "Dynamic Inventory Policy with Varying Stochastic Demands," Management Science, INFORMS, vol. 6(3), pages 231-258, April.
- Jayashankar M. Swaminathan & Sridhar R. Tayur, 1998. "Managing Broader Product Lines through Delayed Differentiation Using Vanilla Boxes," Management Science, INFORMS, vol. 44(12-Part-2), pages S161-S172, December.
- Scott Carr & William Lovejoy, 2000. "The Inverse Newsvendor Problem: Choosing an Optimal Demand Portfolio for Capacitated Resources," Management Science, INFORMS, vol. 46(7), pages 912-927, July.
- Donald L. Iglehart, 1964. "The Dynamic Inventory Problem with Unknown Demand Distribution," Management Science, INFORMS, vol. 10(3), pages 429-440, April.
- K. Sridhar Moorthy, 1988. "Product and Price Competition in a Duopoly," Marketing Science, INFORMS, vol. 7(2), pages 141-168.
- Eyal Biyalogorsky & Ziv Carmon & Gila E. Fruchter & Eitan Gerstner, 1999. "Research Note: Overselling with Opportunistic Cancellations," Marketing Science, INFORMS, vol. 18(4), pages 605-610.
When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:49:y:2003:i:8:p:983-1002. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)
If references are entirely missing, you can add them using this form.