Simple Policies for Managing Flexible Capacity

In many scenarios, a fixed capacity is shared flexibly between multiple products. To manage such multi-product systems, firms need to make two sets of decisions. The first one requires setting an inventory target for each product and the second decision requires dynamically allocating the scarce capacity among the products. It is not known how to make these decisions optimally. In this paper, we propose easily implementable policies that have both theoretical and practical appeal. We first suggest simple and intuitive allocation rules that determine how such scarce capacity is shared. Given such a rule, we calculate the optimal inventory target for each product. We demonstrate analytically that our policies are optimal under two asymptotic regimes represented by high service levels (i.e. high shortage costs) and heavy traffic (i.e. tight capacity). We also demonstrate that our policies outperform current known policies over a wide range of problem parameters. In particular, the cost savings from our policies become more significant as the capacity gets more restrictive.