Accurate response by postponement

Accurate response and postponement are two strategies for a firm to deal with demand uncertainty and better match supply with demand. Under accurate response, reactive capacity could be used for customized make-to-order (MTO) production according to customer demands. On the other hand, using postponement a firm could perform the non-postponed activities speculatively and use reactive capacity only to customize the final product thereby enhancing the profitability of accurate response. Surprisingly existing research in the areas of accurate response and postponement does not address this potential. In this paper we aim to fill this gap by proposing a stylized model for accurate response by postponement. Specifically, we analyze a situation where a manufacturer is faced with uncertain demand for a product during a short selling season. The manufacturer has three supply options. First, it can manufacture and offer a standardized version of the product. Second it can use postponement by manufacturing a standard component speculatively and customizing it once demands are revealed at the beginning of the selling season. Third, it can produce customized products in a pure make-to-order fashion during the selling season. This situation is modeled as an extension of a newsvendor problem. Our main research question is then to analyze specifically under which conditions postponement is part of the optimal supply strategy and more generally what kinds of supply strategies will arise in different model settings.