Application of yield management to capacity rationing

In make-to-order manufacturing companies, whether it is the due date setting in the order entry stage or the order scheduling and dispatching in the order processing stage, capacity planning plays an important role. Facing many uncertainties, MTO companies must have effective and efficient capacity planning techniques to survive. In this research, yield management technique is utilized to achieve the optimum utilization of the short term fixed capacity of MTO companies. YM, originating from airline industry, has mainly been applied to service industry so far. This paper adopts the YM principles and combines the specific characteristics of the MTO companies to present the static, stochastic modeling of two priority level orders. The backward-recursive algorithm of dynamic programming is utilized to solve the objective function of the maximization of the expected profit. Subsequently, some properties are analyzed and a numerical study is conducted to verify the methodology.