Continuous review inventory control when capacity is variable

Many complex production/inventory systems are characterized by uncertain capacities due to unexpected break-downs, unplanned repairs, etc. The authors analyze the effects of variable capacity on optimal lot sizing in continuous review environments. Two models are considered: the basic EOQ model and the order quantity/reorder point model with backlogging. For both cases, the authors obtain the optimality conditions for generally distributed variable capacity; they then show that the optimal order quantities for both models, and the optimal reorder point for the second one, are greater than those without variable capacity. When the variable capacity distribution is exponential, the authors develop effective procedures for finding the optimal solutions.