Optimal Aggregate Production Strategies for Plants with Semifixed Operating Costs

Abstract

Many plants have a semifixed operating cost which can be saved when the plant is shutdown. When demand is less than plant capacity production must be reduced to prevent inventory accumulation. Production strategies for matching production to demand are: (1) throttling the production to equal demand or, (2) producing at capacity rates and periodically shutting down to reduce inventories. This paper uses classical optimization techniques to develop optimal strategies for a single production line with semifixed operating costs and linear variable costs.