Optimal and heuristic solutions for a simple common component inventory problem

This paper addresses a so-called assemble-to-order environment. There are a number of end items each of which requires an assembly of several components. Some of the components are unique to specific end items while others are common to two or more final products. Components must be ordered prior to knowing the end item demand levels (assumed normally distributed), but final assemblies can be completed after knowing the demands. The problem addressed is the allocation of a given budget among the components so as to maximize the expected total of end items sold. For a relatively simple commonality structure the optimal allocation is developed. A much simpler heuristic allocation procedure is shown to give excellent performance over a wide range of parameter values.