Optimal control of a two-station tandem production/inventory system

A manufacturing facility consisting of two stations in tandem operates in a make-to-stock mode: After production, items are placed in a finished goods inventory that services an exogeneous Poisson demand. Demand cannot be met from inventory is backordered. Each station is modeled as a queue with controllable production rate and exponential service times. The problem is to control these rates to minimize inventory holding and backordering costs. Optimal controls are computed using dynamic programming and compared with the kanban, basestock and buffer control mechanisms that have been proposed for manufacturing facilities. Conditions are found under which certain simple controls are optimal using stochastic coupling arguments. Insights are gained into when to hold work-in-process and finshed goods inventory, comparable to previous studies of production lines in make-to-order and unlimited demand environments.