Optimal Joint Inventory and Transshipment Control Under Uncertain Capacity

Xinxin Hu (), Izak Duenyas () and Roman Kapuscinski ()
Additional contact information
Xinxin Hu: Kelley School of Business, Indiana University, Bloomington, Indiana 47405
Izak Duenyas: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109
Roman Kapuscinski: Ross School of Business, University of Michigan, Ann Arbor, Michigan 48109

Operations Research, 2008, vol. 56, issue 4, 881-897

Abstract: In this paper, we address the optimal joint control of inventory and transshipment for a firm that produces in two locations and faces capacity uncertainty. Capacity uncertainty (e.g., due to downtime, quality problems, yield, etc.) is a common feature of many production systems, but its effects have not been explored in the context of a firm that has multiple production facilities. We first characterize the optimal production and transshipment policies and show that uncertain capacity leads the firm to ration the inventory that is available for transshipment to the other location and characterize the structure of this rationing policy. Then, we characterize the optimal production policies at both locations, which are defined by state-dependent produce-up-to thresholds. We also describe sensitivity of the optimal production and transshipment policies to problem parameters and, in particular, explain how uncertain capacity can lead to counterintuitive behavior, such as produce-up-to limits decreasing for locations that face stochastically higher demand. We finally explore, through a numerical study, when the optimal policy is most likely to yield significant benefits compared to simple policies.

Keywords: dynamic programming; application; inventory/production; uncertainty/stochastic; reliability; capacity; uncertainty (search for similar items in EconPapers)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (35)

Downloads: (external link)
http://dx.doi.org/10.1287/opre.1080.0515 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:56:y:2008:i:4:p:881-897

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().