Semiconductor inventory management with multiple grade parts and downgrading

In semiconductor manufacturing, product performance can vary from the intended design specifications. When we add long manufacturing lead times, high demand uncertainty and short product life cycles, finding efficient supply and demand planning becomes a challenging task. This paper is concerned with inventory management of a semiconductor production system that results in multiple grade parts. Downward substitution (i.e. downgrading high grade products) is used to satisfy unmet demand for lower grade parts. We model this problem as an inventory cost minimization problem with service constraints and introduce the notion of a critical part to propose two heuristics for determining near optimal build quantities in key stages of manufacturing. We show that a single period allocation scheme does not result in inventory performance deterioration in the multi-period stationary case. We demonstrate the effectiveness of this methodology by running extensive numerical experiments.