Optimal Joint Inventory and Transshipment Control Under Uncertain Capacity

In this paper, we address the optimal joint control of inventory and transshipment for a firm that produces in two locations and faces capacity uncertainty. Capacity uncertainty (e.g., due to downtime, quality problems, yield, etc.) is a common feature of many production systems but its effects have not been explored in the context of a firm that has multiple production facilities. We first characterize the optimal production and transshipment policies and show that uncertain capacity leads the firm to ration the inventory that is available for transshipment to the other location and characterize the structure of this rationing policy. Then we characterize the optimal production policies at both locations which are defined by state-dependent produceup-to thresholds. We also describe sensitivity of the optimal production and transshipment policies to problem parameters and, in particular, explain how uncertain capacity can lead to counterintuitive behavior, such as produce-up-to limits...

• Type: Journal
• Year: 2008
• Where: IOR
• Authors: Xinxin Hu, Izak Duenyas, Roman Kapuscinski
• Keywords: Capacity Uncertainty, IOR 2008, Optimal Production, Transshipment