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Optimal control of a capacitated inventory system with multiple demand classes

Authors

  • Weihua Zhou,

    1. Department of Management Science and Engineering, Zhejiang University, Hangzhou, People's Republic of China
    2. Department of Industrial Engineering and Logistics Management, The Hong Kong University of Science and Technology, Kowloon, Hong Kong
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  • Chung-Yee Lee,

    Corresponding author
    1. Department of Industrial Engineering and Logistics Management, The Hong Kong University of Science and Technology, Kowloon, Hong Kong
    • Department of Management Science and Engineering, Zhejiang University, Hangzhou, People's Republic of China
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  • David Wu

    1. P.C. Rossin College of Engineering, Lehigh University, Bethlehem, Pennsylvania 18015
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Abstract

This article studies the optimal control of a periodic-review make-to-stock system with limited production capacity and multiple demand classes. In this system, a single product is produced to fulfill several classes of demands. The manager has to make the production and inventory allocation decisions. His objective is to minimize the expected total discounted cost. The production decision is made at the beginning of each period and determines the amount of products to be produced. The inventory allocation decision is made after receiving the random demands and determines the amount of demands to be satisfied. A modified base stock policy is shown to be optimal for production, and a multi-level rationing policy is shown to be optimal for inventory allocation. Then a heuristic algorithm is proposed to approximate the optimal policy. The numerical studies show that the heuristic algorithm is very effective. © 2011 Wiley Periodicals, Inc. Naval Research Logistics 58: 43–58, 2011

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