Dynamic capacitated lot sizing with random demand and dynamic safety stocks

We present a stochastic version of the single‐level, multi‐product dynamic lot‐sizing problem subject to a capacity constraint. A production schedule has to be determined for random demand so that expected costs are minimized and a constraint based on a new backlog‐oriented δ‐service‐level measure is met. This leads to a non‐linear model that is approximated by two different linear models. In the first approximation, a scenario approach based on the random samples is used. In the second approximation model, the expected values of physical inventory and backlog as functions of the cumulated production are approximated by piecewise linear functions. Both models can be solved to determine efficient, robust and stable production schedules in the presence of uncertain and dynamic demand. They lead to dynamic safety stocks that are endogenously coordinated with the production quantities. A numerical analysis based on a set of (artificial) problem instances is used to evaluate the relative performance of the two different approximation approaches. We furthermore show under which conditions precise demand forecasts are particularly useful from a production–scheduling perspective.