Economic consequences of a production and inventory control policy

Abstract

The economic performance of a generalized Order-Up-To policy is investigated in response to an Auto Regressive stochastic demand process. Focus is on the case where the physical production/distribution lead time is one period and where demand is forecasted with simple exponential smoothing. Two sets of convex piece-wise linear costs are considered. The first set is the traditional inventory holding and backlog costs. The second set of costs is piece-wise linear and increasing convex costs associated with the production order rate within and above a capacity constraint. Numerical investigations reveal that the classical Order-Up-To policy is no longer optimal when a broader range of costs is considered in the objective function.

Acknowledgments

The authors thank Professor Denis Towill (Cardiff University, UK), Professor Marc Lambrecht (Leuven University, Belgium), Professor Frank Chen (Chinese University of Hong Kong), Professor Mohamed Naim (Cardiff University), Wim van de Velde and Ingrid Farasyn (Procter and Gamble, Belgium) and Jeroen Dejonckheere (GE Control Systems, Belgium) who helped to formulate the understanding of some of the techniques exploited in the present paper. The authors also thank Cardiff University's Young Researcher Initiative for sponsoring this research.