A Production-Inventory Problem under an Energy Buy-Back Program

IEEE Transactions on Automation Science and Engineering, Vol. 4, No. 3, pp. 395-406, July 2007

26 Pages Posted: 22 Jan 2009 Last revised: 31 Oct 2014

See all articles by Frank Chen

Frank Chen

City Univ. of Hong Kong - Dept of Management Scienes; City University of Hong Kong - Dept of Management Sciences

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Hanqin Zhang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Sciences

Date Written: January 22, 2009

Abstract

This paper considers a production-inventory problem in which the manufacturer participates in an energy buy-back program, which offers him probabilistic opportunities with rewards for not using electricity. That is, the manufacturer will get paid for stopping production to save on electricity. The amount rewarded in a period will depend on the electricity market condition at that time. The market condition in any given period is represented by three states: normal (i.e., non-peak), semi-peak, or peak, and the reward amount in the period will be 0, K1; and K2, respectively. The occurrence of each state in a period is dictated by a known probability distribution. The objective is to determine from the manufacturer's perspective, whether to take such an offer when it arises. Under a mild assumption, we show that in the normal market condition, the production decision is partly a base-stock policy, whereas under semi-peak and peak conditions, the manufacturer, upon accepting the offer, produces according to (s1; S) and (s2; S) policies, corresponding to K1 and K2; respectively. Two variants of the model are also discussed.

Keywords: Production-inventory model, (s; S) policy, dynamic programming, electricity use in production, energy buy-back program

JEL Classification: C61, M11, Q40, Q41

Suggested Citation

Chen, Frank Y. and Sethi, Suresh and Zhang, Hanqin, A Production-Inventory Problem under an Energy Buy-Back Program (January 22, 2009). IEEE Transactions on Automation Science and Engineering, Vol. 4, No. 3, pp. 395-406, July 2007. Available at SSRN: https://ssrn.com/abstract=1331293 or http://dx.doi.org/10.2139/ssrn.1331293

Frank Y. Chen (Contact Author)

City Univ. of Hong Kong - Dept of Management Scienes ( email )

Kowloon Tong
Hong Kong

City University of Hong Kong - Dept of Management Sciences ( email )

Kowloon Tong
Hong Kong

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management ( email )

800 W. Campbell Road, SM30
Richardson, TX 75080-3021
United States

Hanqin Zhang

Chinese Academy of Sciences (CAS) - Academy of Mathematics and Systems Sciences ( email )

Zhong-Guan-Cun-Dong-Lu 55, Haidian District
Beijing, Beijing 100080
China

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