Optimal Control Of A Make-To-Stock System With Adjustable Service Rate

Authors:
Maria E. Mayorga;Hyun-Soo Ahn;J. George Shanthikumar
Affiliations:
Department of Industrial Engineering and Operations Research, University of California at Berkeley, Berkeley, CA 94720;Ross School of Business, University of Michigan, Ann Arbor, MI 48109, E-mail: hsahn@umich.edu;Department of Industrial Engineering and Operations Research, University of California at Berkeley, Berkeley, CA 94720
Venue:
Probability in the Engineering and Informational Sciences
Year:
2006

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Abstract

We consider a multiclass make-to-stock system served by a single server with adjustable capacity (service rate). At any point in time, the decision-maker must determine the capacity level, make a production decision (i.e., whether to produce an item to stock or to satisfy a backorder), and make a rationing decision (i.e., whether to satisfy a new order from stock or place it on backorder). In this article we characterize the structure of optimal capacity adjustment, production, and stock rationing policy for both finite- and infinite-horizon problems. We show that an optimal policy is monotone in current inventory and backorder levels, and we characterize its properties. In a numerical study we compare the optimal policy with heuristic policies and show that the savings from using an optimal policy can be significant.