A Production-Inventory System with Markovian Capacity and Outsourcing Option

Jian Yang (), Xiangtong Qi () and Yusen Xia ()
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Jian Yang: Department of Industrial and Manufacturing Engineering, New Jersey Institute of Technology, Newark, New Jersey 07102
Xiangtong Qi: Department of Industrial Engineering and Engineering Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, China
Yusen Xia: Department of Managerial Sciences, Georgia State University, Atlanta, Georgia 30303

Operations Research, 2005, vol. 53, issue 2, 328-349

Abstract: We study the optimal production-inventory-outsourcing policy for a firm with Markovian in-house production capacity that faces independent stochastic demand and has the option to outsource. We find very simple optimal policy forms under fairly reasonable assumptions. In addition, when the capacity Markov process is stochastically monotone, the policy parameters decrease in the firm’s current capacity level under additional assumptions. All these results extend to the infinite-horizon and undiscounted-cost cases. We analyze comparative statics and the necessity of some technical conditions, and discuss when the outsourcing option is more valuable.

Keywords: inventory/production: uncertainty; dynamic programming/optimal control: models; probability: Markov processes (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (24)

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