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A Postponement Model for Demand Management

Author

Listed:
  • Ananth V. Iyer

    () (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

  • Vinayak Deshpande

    () (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907)

  • Zhengping Wu

    () (Singapore Management University, 469 Bukit Timah Road, Singapore 259756)

Abstract

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.

Suggested Citation

  • Ananth V. Iyer & Vinayak Deshpande & Zhengping Wu, 2003. "A Postponement Model for Demand Management," Management Science, INFORMS, vol. 49(8), pages 983-1002, August.
  • Handle: RePEc:inm:ormnsc:v:49:y:2003:i:8:p:983-1002
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    File URL: http://dx.doi.org/10.1287/mnsc.49.8.983.16403
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Reimann, Marc, 2012. "Accurate response by postponement," European Journal of Operational Research, Elsevier, vol. 220(3), pages 619-628.
    2. repec:spr:infosf:v:15:y:2013:i:5:d:10.1007_s10796-013-9414-0 is not listed on IDEAS
    3. Jian Li & Suresh Chand & Maqbool Dada & Shailendra Mehta, 2009. "Managing Inventory Over a Short Season: Models with Two Procurement Opportunities," Manufacturing & Service Operations Management, INFORMS, pages 174-184.
    4. Heshmati, Almas, 2012. "Survey of Models on Demand, Customer Base-Line and Demand Response and Their Relationships in the Power Market," IZA Discussion Papers 6637, Institute for the Study of Labor (IZA).
    5. Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
    6. Gunasekaran, Angappa & Ngai, Eric W.T., 2009. "Modeling and analysis of build-to-order supply chains," European Journal of Operational Research, Elsevier, vol. 195(2), pages 319-334, June.

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