A stochastic production -inventory model with two demand processes of different variability
Abstract
The interaction between two demand-streams sharing a common manufacturing capacity is a commonly observed phenomenon in the business-world. This study aims to analyze the business situations where the two demand-streams differ in their variability. A prime motivation for this study comes from the advent of Efficient Consumer Response (ECR) initiative in the Grocery Industry (see Kurt Salmon Associates, 1993). The main impact of many variability reduction programs offered under the ECR umbrella (such as partial elimination of promotion pricing policies—efficient promotions) is that the grocery manufacturers increasingly see a mixture of order-streams that differ in their variability. Such business situations raise many questions for managers. For example, how can such a manufacturer use its capacity management policy as a tool to encourage the low variability behavior in its retailers? The objective of this study is to develop a model to address such questions and provide managerial insights through exact analysis of the model. The model we develop captures the essential features of the business situations described above. The demands are modeled as stochastic renewal arrival processes. The two demand-streams are served by separate retailer inventories that are managed by individually optimal base-stock policies. The two order-streams from these inventories are superimposed and form a common queue for replenishment at the manufacturer's capacity. Unique features of our model are: (i) the difference in variability of the two demand processes is explicitly modeled in an integrated production-inventory setting, (ii) the lead-times that the two retailers receive are endogenous to the model and (iii) the exact analytical evaluation of two retailers' inventory costs is provided. In addition, we significantly advance the application of stochastic ordering tools to inventory theory and provide results that compare and order the two retailers' inventory costs under different capacity planning policies at the manufacturer.
Degree
Ph.D.
Advisors
Iyer, Purdue University.
Subject Area
Management|Industrial engineering
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