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Reliable Due-Date Setting in a Capacitated MTO System with Two Customer Classes

Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Tepper School of Business, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213
roman.kapuscinski{at}umich.edu
stayur{at}smartops.com

We study a finite-horizon discrete-time model of due-date setting (equivalently, reserving capacity) in a make-to-order setting, where demands arrive from two different classes of customers. Demands in each period are stochastic. The two customer classes penalize with different margins the lead times quoted to them, which (once quoted) are to be satisfied reliably. We first derive the optimal policy for reserving capacity that maps to quoted due dates. We use the insights from its structure to develop a novel approximation that provides near-optimal solutions quickly. Currently available heuristics are tested and are found to be considerably less effective than the above approximation.

Subject classifications: production policies; operating characteristics; approximation; heuristic; stochastic models; dynamic programming.
History: Received May 2000; revision received November 2005; accepted November 2005.