Admission and inventory control of a single-component make-to-order production system with replenishment setup cost and lead time

Eungab Kim, Taeho Park

Research output: Contribution to journalArticlepeer-review

11 Scopus citations

Abstract

We consider the admission control and inventory management problems of a single-component make-to-order production system. Components are purchased from suppliers in batches of fixed size subject to stochastic lead times and setup costs. A control policy specifies when a batch of components is purchased, and whether the demand for each MTO production is accepted upon arrival. We formulate the problem as a Markov decision process (MDP) model, and characterize the structure of optimal admission control and inventory replenishment policies. We show that a state dependent base-stock policy is optimal for the inventory replenishment, although the MDP value function is not necessarily convex. We also show that the optimal admission control can be identified as a lattice dependent policy. A sensitivity analysis is conducted to show how the optimal policy changes as a function of the system parameters. To effectively coordinate admission and inventory control decisions, we propose simple, implementable, and yet effective heuristic policies. Our extensive numerical results suggest that the proposed heuristics can greatly help firms to effectively coordinate their admission and inventory control activities.

Original languageEnglish
Pages (from-to)91-102
Number of pages12
JournalEuropean Journal of Operational Research
Volume255
Issue number1
DOIs
StatePublished - 16 Nov 2016

Bibliographical note

Publisher Copyright:
© 2016 Elsevier B.V. All rights reserved.

Keywords

  • Admission control
  • Inventory
  • Make-to-order system
  • Markov decision processes
  • Setup cost

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