Tactical capacity management under capacity flexibility

Abstract

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.

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

“…This decision is kept out of the scope of this study since we focus only on the operational decisions. We refer the reader to Alp and Tan (2008) for the problem of determining the optimal permanent capacity level.…”

Integrated capacity and inventory management with capacity acquisition lead times

“…The problem that is addressed in this paper is closely related to the problems considered by Tan and Alp (in press), Alp and Tan (2008), and Yang et al (2005). Tan and Alp (in press) deal with a similar problem environment where the lead time for capacity acquisitions is neglected and only the operational decisions are considered.…”

Scheduling with subcontracting options

“…In contrast, very few works have quantitatively evaluated the value of subcontracting. Alp and Tan (2008) have evaluated the value of contingent capacity (which can be viewed as subcontracting) in the context of an integrated capacity and inventory planning model. However, no quantitative study in subcontracting has appeared in the context of detailed operations scheduling.…”

“…Yang et al (2005) studied a similar production-inventory-outsourcing model with Markovian in-house production capacity. Alp and Tan (2008) considered an integrated capacity management and inventory planning model where in addition to permanent capacity, contingent capacity can be acquired by hiring temporary workers (which can be viewed as some type of subcontracting). Lee et al (1997), Logendran and Puvanunt (1997), and Logendran and Ramakrishna (1997) considered subcontracting jointly with production planning decisions in the context of cellular and flexible manufacturing systems.…”