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OPTIMAL POLICY FOR A PRODUCTION–INVENTORY SYSTEM WITH SETUP COST AND AVERAGE COST CRITERION

Published online by Cambridge University Press:  30 July 2012

Xiuli Chao ,
Yifan Xu  and
Baimei Yang
Xiuli Chao
Affiliation:
Department of Industrial and Operations Engineering, University of Michigan, Ann Arbor, MI48109 E-mail: xchao@umich.edu
Yifan Xu
Affiliation:
School of Management, Fudan University, Shanghai 200433, China E-mail: yfxu@fudan.edu.cn
Baimei Yang
Affiliation:
School of Management, Fudan University, Shanghai 200433, China E-mail: yfxu@fudan.edu.cn
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Abstract

One of the most fundamental results in inventory theory is the optimality of (s, S) policy for inventory systems with setup cost. This result is established under a key assumption of infinite ordering/production capacity. Several studies have shown that, when the ordering/production capacity is finite, the optimal policy for the inventory system with setup cost is very complicated and indeed, only partial characterization for the optimal policy is possible. In this paper, we consider a continuous review production/inventory system with finite capacity and setup cost. The demand follows a Poisson process and a demand that cannot be satisfied upon arrival is backlogged. We show that the optimal control policy has a very simple structure when the holding/shortage cost rate is quasi-convex. We also develop efficient algorithms to compute the optimal control parameters.

Type
Research Article
Information
Probability in the Engineering and Informational Sciences , Volume 26 , Issue 4 , October 2012 , pp. 457 - 481
Copyright
Copyright © Cambridge University Press 2012

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