Optimal production strategies for announced unit cost increases

Abstract

Abstract This paperpresents optimal production strategies for respondingto an anticipated unit cost increase. Analytical expressions for a special lot-size are developed for the cases where the unit cost increase announcement either coincides with the end of an inventory cycle or falls in the non-production period of an inventory cycle. It is shown that in the latter case the optimal strategy depends on the amount of remnant inventory, i.e. the production of a special lot-size is immediately initiated after the unit cost increase announcement is made when the remnant inventory is low, otherwise no special action is taken. It is also shown that when the unit cost increase announcement falls in the production period of an inventory cycle, the current production run should be extended until a special lot-size is produced. Finally, the model is extended to cover the backorder case, and by using the Lagrange multipliers technique the multi-item case is also considered under a constraint on the total amount tha...