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Production and Inventory Control of a Single Product Assemble-to-Order System with Multiple Customer Classes

Author

Listed:
  • Saif Benjaafar

    (Industrial and Systems Engineering, Department of Mechanical Engineering, University of Minnesota, Minneapolis, Minnesota 55455)

  • Mohsen ElHafsi

    (The A. Gary Anderson Graduate School of Management, University of California, Riverside, California 92521-0203)

Abstract

We consider the optimal production and inventory control of an assemble-to-order system with m components, one end-product, and n customer classes. A control policy specifies when to produce each component and, whenever an order is placed, whether or not to satisfy it from on-hand inventory. We formulate the problem as a Markov decision process and characterize the structure of an optimal policy. We show that a base-stock production policy is optimal, but the base-stock level for each component is dynamic and depends on the inventory level of all other components (more specifically, it is nondecreasing). We show that the optimal inventory allocation for each component is a rationing policy with different rationing levels for different demand classes. The rationing levels for each component are dynamic and also nondecreasing in the inventory level of all other components. We compare the performance of the optimal policy to heuristic policies, including the commonly used base-stock policy with fixed base-stock levels, and find them to perform surprisingly well, especially for systems with lost sales.

Suggested Citation

  • Saif Benjaafar & Mohsen ElHafsi, 2006. "Production and Inventory Control of a Single Product Assemble-to-Order System with Multiple Customer Classes," Management Science, INFORMS, vol. 52(12), pages 1896-1912, December.
    • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:12:p:1896-1912
    DOI: 10.1287/mnsc.1060.0588
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    References listed on IDEAS

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