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Capacity and Production Managment in a Single Product Manufacturing System

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  • J.Q. Hu
  • Pirooz Vakili
  • Lei Huang

Abstract

In planning and managing production systems, manufacturers have two main strategies for responding to uncertainty: they build inventory to hedge against periods in which the production capacity is not sufficient to satisfy demand, or they temporarily increase the production capacity by “purchasing” extra capacity. We consider the problem of minimizing the long-run average cost of holding inventory and/or purchasing extra capacity for a single facility producing a single part-type and assume that the driving uncertainty is demand fluctuation. We show that the optimal production policy is of a hedging point policy type where two hedging levels are associated with each discrete state of the system: a positive hedging level (inventory target) and a negative one (backlog level below which extra capacity should be purchased). We establish some ordering of the hedging levels, derive equations satisfied by the steady-state probability distribution of the inventory/backlog, and give a more detailed analysis of the optimal control policy in a two state (high and low demand rate) model. Copyright Kluwer Academic Publishers 2004

Suggested Citation

  • J.Q. Hu & Pirooz Vakili & Lei Huang, 2004. "Capacity and Production Managment in a Single Product Manufacturing System," Annals of Operations Research, Springer, vol. 125(1), pages 191-204, January.
    • Handle: RePEc:spr:annopr:v:125:y:2004:i:1:p:191-204:10.1023/b:anor.0000011191.49933.04
    DOI: 10.1023/B:ANOR.0000011191.49933.04
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    Cited by:

    1. Barış Tan, 2019. "Production Control with Price, Cost, and Demand Uncertainty," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 41(4), pages 1057-1085, December.
    2. Bouslah, Bassem & Gharbi, Ali & Pellerin, Robert, 2013. "Joint optimal lot sizing and production control policy in an unreliable and imperfect manufacturing system," International Journal of Production Economics, Elsevier, vol. 144(1), pages 143-156.

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