Trade-off between capacity invested and inventory needed

Abstract

A multi-item capacitated make-to-order production system with considerable demand fluctuations is discussed. The relationship between the available capacity and the inventory needed to meet customer requirements with a pre-defined service level is modeled. Furthermore, the total cost for both capacity and inventory is minimized and it is shown that, assuming negligible change-over times, the double of the surplus inventory cost has to be equal to the excess capacity cost to ensure minimum total cost.