Joint management of capacity and inventory in make‐to‐stock production systems with multi‐class demand

Joint management of capacity and inventory in make‐to‐stock production systems with multi‐class demand

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Article ID: iaor20133319
Volume: 212
Issue: 2
Start Page Number: 312
End Page Number: 324
Publication Date: Jul 2011
Journal: European Journal of Operational Research
Authors: ,
Keywords: programming: markov decision, heuristics
Abstract:

We evaluate the benefits of coordinating capacity and inventory decisions in a make‐to‐stock production environment. We consider a firm that faces multi‐class demand and has additional capacity options that are temporary and randomly available. We formulate the model as a Markov decision process (MDP) and prove that a solution to the optimal joint control problem exists. For several special cases we characterize the structure of the optimal policy. For the general case, however, we show that the optimal policy is state‐dependent, and in many instances non‐monotone and difficult to implement. Therefore, we consider three pragmatic heuristic policies and assess their performance. We show that the majority of the savings originate from the ability to dynamically adjust capacity, and that a simple heuristic that can adjust production capacity (based on workload fluctuation) but uses a static production/rationing policy can result in significant savings.

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