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Inventory and Production Decisions for an Assemble-to-Order System with Uncertain Demand and Limited Assembly Capacity

Lingnan College, Sun Yat-sen University, Guangzhou, China 510275
School of Management, George Mason University, Fairfax, Virginia 22030
Department of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, China
fuke{at}lingnan.net
vhsu{at}gmu.edu
cylee{at}ust.hk

This paper considers an inventory and production-planning problem for a contract manufacturer who anticipates an order of a single product, but with uncertain quantity. To meet the challenges of long component procurement lead times and limited assembly capacity, which may render production time insufficient to assemble total order quantity, the manufacturer may need to procure components or even assemble some quantities of the final product before receiving the confirmation of the actual order quantity. We present profit-maximization models that make optimal inventory and production decisions in the above assemble-to-order environment. We also consider the option of outsourcing, so that the manufacturer can outsource part of his production to an external facility that also has limited capacity. We establish structural properties of optimal solutions and develop efficient solution procedures for the proposed problems. We also provide sensitivity analysis of the optimal decisions, and some managerial insights.

Subject classifications: inventory/production: assemble-to-order systems; component procurement lead times; demand uncertainty; capacity management; outsourcing.
History: Received May 2004; revision received September 2005; accepted November 2005.

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