Title

Simultaneous Capacity and Production Management of Short-Life-Cycle, Produce-to-Stock Goods under Stochastic Demand

Publication Type

Journal Article

Publication Date

3-2002

Abstract

This paper derives the optimal simultaneous capacity and production plan for a short-life-cycle, produce-to-stock good under stochastic demand. Capacity can be reduced as well as added, at exogenously set unit prices. In both cases studied, with and without carry-over of unsold units, a target interval policy is optimal: There is a (usually different) target interval for each period such that capacity should be changed as little as possible to bring the level available into that interval. The contribution in the case of no carry-over, is a detailed characterization of the target intervals, assuming demands increase stochastically at the beginning of the life cycle and decrease thereafter. In the case of carry-over, the general result is established and it is shown that capacity and inventory are economic substitutes: The target intervals decrease in the initial stock level and the optimal unconstrained base stock level decreases in the capacity level. In both cases, optimal service rates are not necessarily constant over time. A numerical example illustrates the results.

Discipline

Business

Research Areas

Operations Management

Publication

Management Science

Volume

48

Issue

3

First Page

399

Last Page

413

ISSN

0025-1909

Identifier

10.1287/mnsc.48.3.399.7726

Publisher

INFORMS

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