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Ordering and Production Decisions with Supply Quality and Demand Uncertainty

Author

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  • Y. Bassok

    (Engineering and Public Policy, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

  • R. Akella

    (Graduate School of Industrial Administration, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213)

Abstract

In this paper, we solve a production planning problem that has a direct bearing on the cost to a facility of vendor quality and reliability. This solution is also an important first step in solving the multi-plant coordination problem. We consider a manufacturing facility with one critical raw material, and one or more products whose demand needs to be met. It is assumed that demand for finished goods and the arrival process for raw material are stochastic. We calculate simultaneously the optimal production level, and the raw material order quantity which minimize the total expected cost subject to capacity and release level constraints. The results obtained by our model (the integrated model) show that the production level should be no larger than the production level obtained by solving the traditional (nonintegrated) models, and that major savings are obtained by solving the integrated model. We are also able to characterize and evaluate the cost of reliable supplies of raw material. In addition we solve the above problem in the presence of capacity constraints. A procedure which allocates capacity to different products is presented.

Suggested Citation

  • Y. Bassok & R. Akella, 1991. "Ordering and Production Decisions with Supply Quality and Demand Uncertainty," Management Science, INFORMS, vol. 37(12), pages 1556-1574, December.
    • Handle: RePEc:inm:ormnsc:v:37:y:1991:i:12:p:1556-1574
    DOI: 10.1287/mnsc.37.12.1556
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    Citations

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    Cited by:

    1. Song, Dong-Ping & Dong, Jing-Xin & Xu, Jingjing, 2014. "Integrated inventory management and supplier base reduction in a supply chain with multiple uncertainties," European Journal of Operational Research, Elsevier, vol. 232(3), pages 522-536.
    2. Séverine Gaucher & Vincent Hovelaque & Louis-Georges Soler, 2000. "Coordination entre producteurs et maîtrise des aléas de demande," Cahiers d'Economie et Sociologie Rurales, INRA Department of Economics, vol. 57, pages 95-125.
    3. Qing Li & Shaohui Zheng, 2006. "Joint Inventory Replenishment and Pricing Control for Systems with Uncertain Yield and Demand," Operations Research, INFORMS, vol. 54(4), pages 696-705, August.
    4. Song, Yuyue & Wang, Yunzeng, 2017. "Periodic review inventory systems with fixed order cost and uniform random yield," European Journal of Operational Research, Elsevier, vol. 257(1), pages 106-117.
    5. Gurnani, Haresh & Gerchak, Yigal, 2007. "Coordination in decentralized assembly systems with uncertain component yields," European Journal of Operational Research, Elsevier, vol. 176(3), pages 1559-1576, February.
    6. Y. Boulaksil & J. C. Fransoo & T. Tan, 2017. "Capacity reservation and utilization for a manufacturer with uncertain capacity and demand," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 39(3), pages 689-709, July.
    7. Tang, Christopher S., 2006. "Perspectives in supply chain risk management," International Journal of Production Economics, Elsevier, vol. 103(2), pages 451-488, October.
    8. Zikopoulos, Christos & Tagaras, George, 2007. "Impact of uncertainty in the quality of returns on the profitability of a single-period refurbishing operation," European Journal of Operational Research, Elsevier, vol. 182(1), pages 205-225, October.
    9. Lee, Chang Hwan & Rhee, Byong-Duk & Cheng, T.C.E., 2013. "Quality uncertainty and quality-compensation contract for supply chain coordination," European Journal of Operational Research, Elsevier, vol. 228(3), pages 582-591.
    10. Ahiska, S. Sebnem & Appaji, Samyuktha R. & King, Russell E. & Warsing, Donald P., 2013. "A Markov decision process-based policy characterization approach for a stochastic inventory control problem with unreliable sourcing," International Journal of Production Economics, Elsevier, vol. 144(2), pages 485-496.
    11. Burke, Gerard J. & Carrillo, Janice E. & Vakharia, Asoo J., 2007. "Single versus multiple supplier sourcing strategies," European Journal of Operational Research, Elsevier, vol. 182(1), pages 95-112, October.
    12. Wei Xu & Dong-Ping Song, 2022. "Integrated optimisation for production capacity, raw material ordering and production planning under time and quantity uncertainties based on two case studies," Operational Research, Springer, vol. 22(3), pages 2343-2371, July.
    13. H. S. Yan, 2000. "Hierarchical Stochastic Production Planning with Delay Interaction," Journal of Optimization Theory and Applications, Springer, vol. 104(3), pages 659-689, March.
    14. Protopappa-Sieke, Margarita & Seifert, Ralf W., 2010. "Interrelating operational and financial performance measurements in inventory control," European Journal of Operational Research, Elsevier, vol. 204(3), pages 439-448, August.
    15. Hu, Zhengyang & Hu, Guiping, 2016. "A two-stage stochastic programming model for lot-sizing and scheduling under uncertainty," International Journal of Production Economics, Elsevier, vol. 180(C), pages 198-207.

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