Rationing Capacity Between Two Product Classes

Abstract

In this paper, we study the capacity allocation problem faced by make-to-order manufacturing firms encountering expected total demand in excess of available capacity. Specifically, we focus on firms' manufacturing short-life-cycle or seasonal products such as high fashion apparel. Using a decision-theory-based approach, we develop a capacity allocation policy that allows such firms to discriminate between two classes of products (one yielding a higher profit contribution per unit of capacity allocated to it than the other), resulting in selective rejection of orders for the class with the lower unit contribution. The effectiveness of capacity rationing is investigated under a wide array of conditions characterized by variations in factors such as the ratio of unit profit contributions of the two product classes, the ratio of total available capacity to expected total demand, the ratio of expected demands between the two classes, and the variability in demand for each product class. The results indicate that capacity rationing is very effective in increasing the total profit, and could therefore serve as a valuable decision tool for managers in such firms.

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