Capacity and Production Decisions in Stochastic Manufacturing Systems: An Asymptotic Optimal Hierarchical Approach
Production and Operations Management, Vol. 1, No. 4, pp. 367-392, Fall 1992
26 Pages Posted: 12 Feb 2008
We present a new paradigm of hierarchical decision making in production planning and capacity expansion problems under uncertainty. We show that under reasonable assumptions, the strategic level management can base the capacity decision on aggregated information from the shop floor, and the operational level management, given this decision, can derive a production plan for the system, without too large a loss in optimality when compared to simultaneous determination of optimal capacity and The results are obtained via an asymptotic analysis of a manufacturing system with convex costs, constant demand, and with machines subject to random breakdown and repair. The decision variables are purchase time of a new machine at a given fixed cost and production plans before and after the costs of investment, production, inventories, and backlogs. If the rate of change in machine states such as up and down is assumed to be much larger than the rate of discounting costs, one obtains a simpler limiting mean. We develop methods for constructing asymptotically optimal decisions for the original problem from the optimal decisions for the limiting problem. We obtain error estimates for these constructed decisions.
Keywords: Hierarchical Decision Making, Capacity Expansion, Production Planning, Dynamic Progrramming, Markov Processes, Near-Optimal Decisions
JEL Classification: C61,M11
Suggested Citation: Suggested Citation