Journal
IIE TRANSACTIONS
Volume 41, Issue 6, Pages 511-523Publisher
TAYLOR & FRANCIS INC
DOI: 10.1080/07408170801975040
Keywords
Production control; backlog-dependent demand; optimal flow control; hedging point policy; production systems; customer defection; manufacturing systems analysis; stochastic control; inventory control
Funding
- TUBITAK
- TUBA
- National Science Foundation [DMI-9713500]
- Lean Aircraft Initiative
- Xerox Foundation
- Singapore-MIT Alliance
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A manufacturing firm that builds a product to stock to meet a random demand is studied. Production time is deterministic, so that if there is a backlog, customers are quoted a lead time that is proportional to the backlog. In order to represent the customers' response to waiting, a defection functionthe fraction of customers who choose not to order as a function of the quoted lead timeis introduced. Unlike models with backorder costs, the defection function is related to customer behavior. Using a continuous flow control model with linear holding cost and Markov modulated demand, it is shown that the optimal production policy has a hedging point form. The performance of the system under this policy is evaluated, allowing the optimal hedging point to be found. [Supplementary materials are available for this article. Go to the publisher's online edition of IIE Transactions for the following free supplemental resource: Appendix].
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