Optimal stock allocation for a capacitated supply system

Optimal stock allocation for a capacitated supply system

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Article ID: iaor20032220
Country: United States
Volume: 48
Issue: 11
Start Page Number: 1486
End Page Number: 1501
Publication Date: Nov 2002
Journal: Management Science
Authors: , ,
Keywords: production, programming: dynamic, queues: applications
Abstract:

We consider a capacitated supply system that produces a single item that is demanded by several classes of customers. Each customer class may have a different backorder cost, so stock allocation arises as a key decision problem. We model the supply system as a multicustomer make-to-stock queue. Using dynamic programming, we show that the optimal allocation policy has a simple and intuitive structure. In addition, we present an efficient algorithm to compute the parameters of this optimal allocation policy. Finally, for a typical supply chain design problem, we illustrate that ignoring the stock allocation dimension – a frequently encountered simplifying assumption – can lead to incorrect managerial decisions.

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