Application of the scenario aggregation approach to a two-state, stochastic, common component, inventory problem with a budget constraint

The purpose of this paper is to study, from a new perspective, the problem of allocating a given budget among product components, that are required for manufacturing the end items in an assemble-to-order environment. Since some of the components are common to a number of different end items, this constitutes a commonality inventory problem that in fact can be described as a two-stage stochastic programming problem. The authors explore the new possibilities made available by the scenario aggregation technique recently proposed by Rockafeller and Wets in work at the International Institute of Applied Systems Analysis. Their method was subsequently extended to deal with discrete problems. This extension is utilized in the current study.