Dynamic Capacity Reservation in a Make-to-Order Environment

Motivated by many industrial applications, we study a basic discrete-time model of reserving capacity (equivalently, quoting lead times) in a make-to-order setting for customers belonging to two diierent classes. Demands in each period are stochastic. Diierent customer classes penalize us with diierent margins for the lead times quoted to them. We derive the optimal policy for reserving capacity, and use the insights from its structure to develop an approximation that provides near-optimal solutions quickly. Currently available heuristics are tested and are found to be lower in eeectiveness.