Centralized admission and production control in a two-stage supply chain with single component and customized products

This paper considers a two‐stage supply chain that a make‐to‐stock facility produces a single component in anticipation of future demand and a make‐to‐order facility produces customized products using components with the option of to accept or reject each customer order. We address the problem of centralizing the admission and production control that maximizes the supply chain's profit subject to the system costs. Using a Markov decision process model, we characterize the structure of the optimal admission control and production policy and establish the monotonic impact of system parameters on the optimal policy. Two heuristics are presented and their performance is numerically compared to the optimal policy under different operating conditions of the system.