Motivated by issues at a manufacturer of customized- and standard messenger bags, we develop an iterative two-stage framework (involving marketing and operations models) to determine the conditions under which a firm benefits from production spackling. With spackling, the firm uses flexible capacity to produce custom products as demanded each period,
and then fills in, or spackles, the production schedule with make-to-stock output of standard products to restock inventory. Spackling broadly addresses market preferences, while mitigating the effects of "bumpy" demand for custom products by smoothing production, thereby improving capacity utilization as compared to a focused approach, where standard items are made with efficient capacity and custom products with flexible capacity.
The marketing model employs logit-based choice and, given product costs and customer preferences, identifies optimal pricing, expected demand, and demand variability. Interestingly, we find that, under certain assumptions, the firm should price all products to achieve a constant absolute dollar markup. The resultant demand parameters are fed into an operations model, which specifies optimal efficient and flexible capacities (and decides between spackling and focus), thereby determining product costs, which are fed back into the marketing model to solve iteratively. That is, we link operations decisions regarding capacity to marketing decisions regarding price, and vice-versa. We examine conditions under which convergence of the two models is achieved, and illustrate our framework with data from the messenger bag manufacturer.