Rationing Capacity Between Two Product Classes

A study examines the capacity allocation problem faced by make-to-order manufacturing firms encountering expected total demand in excess of available capacity. Specifically, it focuses on firms' manufacturing short-life-cycle or seasonal products such as high fashion apparel. Using a decision-theory-based approach, it develops a capacity allocation policy that allows such firms to discriminate between 2 classes of products, 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 2 product classes, the ratio of total available capacity to expected total demand, the ratio of expected demands between the 2 classes, and the variability in demand for each product class. Results indicate that capacity rationing is very effective in increasing the total profit and could serve as a valuable decision tool for managers in such firms.