Explain how tailored postponement can improve profitability

What will be an ideal response?

Answer: In tailored postponement, a firm uses production with postponement to satisfy a part of its demand, with the rest being satisfied without postponement. Tailored postponement produces higher profits than when no postponement is used or all products are manufactured using postponement. Under tailored postponement, a firm produces the amount that is very likely to sell using the lower cost production method without postponement. The firm produces the portion of demand that is uncertain using postponement. On the portion of the demand that is certain, postponement provides little value in terms of increased forecast accuracy. The firm thus produces it using the lower cost method to lower manufacturing cost. On the portion of demand that is uncertain, postponement significantly improves forecast accuracy. The firm is thus willing to incur the increased production cost to achieve the benefit from the improved matching of supply and demand. Tailored postponement allows a firm to increase its profitability by only postponing the uncertain part of the demand and producing the predictable part at a lower cost without postponement.