Publication Type

Journal Article

Publication Date

2-2017

Abstract

We consider the problem of managing production in a production-inventory system where a firm is subject to an allowance (a limit) on either the amount of input it can use or the amount of output it can produce over a specified compliance period (in addition to being subject to a constraint on the production capacity). Examples of such settings are numerous and include those where limits are placed on the use of scarce natural resources as input or on the amount of waste or harmful pollution generated by production as output. We study the structure of the optimal production policy for such systems and show that it is determined by dynamic thresholds that depend only on the sum of the on-hand inventory level and the remaining allowance. We provide an effective approximate solution approach that can compute these thresholds efficiently while retaining their essential properties. We examine the differences between how an allowance constraint and a constraint on production capacity affect production decisions and show that they exhibit opposite effects over time. We also examine, in the context of an extended version of the problem where both the allowance amount and the production capacity are endogenous, optimal investments in allowance and production capacity and the impact of both on firm profit.We also consider the optimal demand fulfillment policy in settings where the firm can decide whether to back-order or to reject demand that cannot be satisfied from on-hand inventory.

Keywords

Production-inventory systems, Natural resources and the environment, Allowance constraints, Capacity constraints, Stochastic optimal control, Demand fulfillment and rationing

Discipline

Business | Operations and Supply Chain Management

Research Areas

Operations Management

Publication

Manufacturing and Service Operations Management

Volume

19

Issue

2

First Page

216

Last Page

229

ISSN

1523-4614

Identifier

10.1287/msom.2016.0603

Publisher

INFORMS

Embargo Period

2-26-2018

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

msom.2016.0603-sm.pdf (204 kB)
Supplement with proof of lemma

Additional URL

http://doi.org/10.1287/msom.2016.0603

Available for download on Monday, February 26, 2018

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