Pricing and capacity planning decisions for BTO manufacturing based on priority differentiation strategy

Many BTO manufacturing firms are exploring production strategies when customers may be segmented into different classes based on service level or priority. Such segmentation can result in a more efficient production system as well as a better match between supply and demand. A BTO manufacturing system with two customer classes is studied, where one customer class has higher priority of fulfillment than the other customer class. Optimal pricing and capacity planning decisions for each segment assuming each segment demand as being linear in price are developed. Numerical studies show that priority differentiation strategy increases profit and product substitutability influences a firm's differentiation strategy.