A Postponement Model for Demand Management

• Main Authors: Iyer, Ananth, Deshpande, Vinayak, Wu, Zhengping
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2003
• Subjects: Management Sciences and Quantitative Methods
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/2274; https://proquest.umi.com/pqdweb?did=417821601&sid=7&Fmt=4&clientId=44274&RQT=309&VName=PQD
• Institution: Singapore Management University

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.