Optimal integrated production and inventory control of an assemble-to-order system with multiple non-unitary demand classes

Abstract

We study a pure assemble-to-order system subject to multiple demand classes where customer orders arrive according to a compound Poisson process. The finished product is assembled from m different components that are produced on m distinct production facilities in a make-to-stock fashion. We show that the optimal production policy of each component is a state-dependent base-stock policy and the optimal inventory allocation policy is a multi-level state-dependent rationing policy. Using numerical experimentation, we first study the system behavior as a function of order size variability and order size. We show that the optimal average cost rate is more sensitive to order size variability than to order size. We also compare the optimal policy to the first-come first-serve policy and show that there is great benefit to inventory rationing. We also propose two simple heuristics and show that these can effectively mimic the optimal policy which is generally much more difficult to determine and, especially, to implement.