Co-production processes with random yields in the semiconductor industry

A wide variety of manufacturing operations can be characterized as co-production with substitutable demand. That is, there are many situations in which the availabilty of two or more items are related, and because of randomness in either supply or demand, it can be advantageous to substitute one of these items for another. The present research was motivated by the semiconductor industry, where chips are produced in large batches. Because of the presence of randomness in the process, individual chips in a given batch can perform differently. Because some customers have stricter specifications than others, chips within the same batch can be classified and sold as different products according to their measurable performance. The authors model the production and inventory problem as a stochastic dynamic program in which the objective is to minimize the costs of meeting contractual obligations. After developing heuristic methods of solving the problem in practice, they validate them against a lower bound on the cost of an optimal solution to the dynamic program.