An integrated approach to inventory and flexible capacity management subject to fixed costs and non-stationary stochastic demand

Tan, Tarkan; Alp, Osman

doi:10.1007/s00291-008-0122-y

Cited by 20 publications

(13 citation statements)

References 16 publications

(16 reference statements)

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“…Finally, we note that Hu et al (2004), Tan and Alp (2008) and Yang et al (2005) deal with the characterization of optimal capacity planning and inventory decisions under problem settings in which the capacity level can be increased temporarily by the use of contingent resources, but they do not deal with the problem of optimization of the initial capacity level.…”

Section: Introduction and Related Literaturementioning

confidence: 99%

Tactical capacity management under capacity flexibility

Tan

Alp

2008

IIE Transactions

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In many production systems a certain level of flexibility in the production capacity is either inherent or can be acquired. In that case, system costs may be decreased by managing the capacity and inventory in a joint fashion. In this paper we consider such a maketo-stock production environment with flexible capacity subject to periodic review under non-stationary stochastic demand, where we allow for positive fixed costs both for initiating production and for acquiring external capacity. Our focus is on tactical-level capacity management which refers to the determination of in-house production capacity while the operational-level integrated capacity and inventory management is executed in an optimal manner. We first develop a simple model to represent this relatively complicated problem. Then we elaborate on the characteristics of the general problem and provide the solution to some special cases. Finally, we develop several useful managerial insights as to the optimal capacity level, the effect of operating at a suboptimal capacity level and the value of utilizing flexible capacity.

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Section: Introduction and Related Literaturementioning

confidence: 99%

Tactical capacity management under capacity flexibility

Tan

Alp

2008

IIE Transactions

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“…The latter region can further be divided into five smaller regions in the optimal policy as follows: (i) all ensured capacity is utilized for production, (ii) inventory is raised to a fixed critical order-up-to level where all of the permanent workers and a portion of the contracted workers are used for production, (iii) only all of the permanent workers are used for production, (iv) inventory is raised to another fixed critical order-up-to level where a portion of the permanent workers are used for production, and (v) no production takes place. For the special case of no temporary workers, Tan and Alp (2005) prove that this policy is indeed optimal.…”

Section: Corollary 2 In the Special Case Of V = 0 H(w|x) Is Convex Fmentioning

confidence: 91%

“…Our work is closely related to the problems considered by Tan and Alp (2005), Alp and Tan (2007), and Mincsovics et al (2006). These three papers consider settings similar to ours, ignoring the labor supply uncertainty.…”

Section: Literature Reviewmentioning

confidence: 93%

“…These three papers consider settings similar to ours, ignoring the labor supply uncertainty. Tan and Alp (2005) focus on the operational decisions under the existence of fixed costs for initiating production and for using contingent capacity. Alp and Tan (2007) extend this analysis by including the tactical level decision of determining the permanent capacity levels.…”

Section: Literature Reviewmentioning

confidence: 99%

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Integrated workforce capacity and inventory management under labour supply uncertainty

Pac

Alp

Tan

2009

International Journal of Production Research

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In a manufacturing environment with volatile demand, inventory management can be coupled with dynamic capacity adjustments for handling the fluctuations more effectively. In this study, we consider the problem of integrated capacity and inventory management under non-stationary stochastic demand and capacity uncertainty. The capacity planning problem is investigated from the workforce planning perspective where the capacity can be temporarily increased by utilising contingent workers from an external labour supply agency. The contingent capacity received from the agency is subject to an uncertainty, but the supply of a certain number of workers can be guaranteed through contracts. There may also be uncertainty in the availability of the permanent and contracted workers due to factors such as absenteeism and fatigue. We formulate a dynamic programming model to make the optimal capacity decisions at a tactical level (permanent workforce size and contracted number of workers) as well as the operational level (number of workers to be requested from the external labour supply agency in each period), integrated with the optimal operational decision of how much to produce in each period. We analyse the characteristics of the optimal policies and we conduct an extensive numerical analysis that helps us provide several managerial insights. Corresponding author Abstract:In a manufacturing environment with volatile demand, inventory management can be coupled with dynamic capacity adjustments for handling the fluctuations more effectively. In this study, we consider the problem of integrated capacity and inventory management under non-stationary stochastic demand and flexible capacity uncertainty. The capacity planning problem is investigated from the workforce planning perspective where the capacity can be temporarily increased by utilizing contingent workers from an external labor supply agency. The contingent capacity received from the agency is subject to an uncertainty, but the supply of a certain number of workers can be guaranteed through contracts. We formulate a dynamic programming model to make the optimal capacity decisions at a tactical level (permanent workforce size and contracted number of workers) as well as the operational level (number of workers to be requested from the external labor supply agency in each period), integrated with the optimal operational decision of how much to produce in each period. We analyze the characteristics of the optimal policies and we conduct an extensive numerical analysis that helps us provide several managerial insights.

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“…Bradley and Glynn (2002) provided a Brownian motion approximation to study the joint optimal control of the inventory and the capacity in a make-to-stock system with a subcontracting option. Similarly, Tan and Alp (2009) use stochastic dynamic programming formulations for the integrated capacity and inventory management problem of a make-to-stock system. Tan (2004) and Tan and Gershwin (2004) provide a modelling framework for the production and subcontracting control problem with limited capacity and volatile demand environment.…”

Section: Literature Reviewmentioning

confidence: 99%

Periodic capacity management under a lead-time performance constraint

2011

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In this paper, we study a production system that operates under a leadtime performance constraint which guarantees the completion of an order before a pre-determined lead-time with a certain probability. The demand arrival times and the service requirements for the orders are random. To reduce the capacity-related operational costs, the production system under study has the option to use flexible capacity. We focus on periodic capacity policies and model the production system as a queuing system that can change its capacity periodically and choose to operate in one of the two levels: a permanent capacity level and a permanent plus contingent capacity level. Contingent capacity is supplied if needed at the start of a period, and is available during that period, at a cost rate that is decreasing in period length in different functional forms. Next, we propose a search algorithm that finds the capacity levels and the switching point that minimizes the capacity-related costs for a given period length. The behaviour of the capacity-related costs changes drastically under different period lengths and cost structures. In our computational study, we observe that the periodic capacity flexibility can reduce the capacity-related operational costs significantly (up to 35%). However, in order to achieve these savings, the period length must be chosen carefully depending on ambition level and capacity-related costs. We also observe that the percentage savings are higher for more ambitious lead-time performance constraints. Moreover, we observe that the use of contingent capacity makes the total system costs more insensitive to the lead-time performance requirements.

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An integrated approach to inventory and flexible capacity management subject to fixed costs and non-stationary stochastic demand

Cited by 20 publications

References 16 publications

Tactical capacity management under capacity flexibility

Tactical capacity management under capacity flexibility

Integrated workforce capacity and inventory management under labour supply uncertainty

Periodic capacity management under a lead-time performance constraint

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