On the Interaction between Demand Substitution and Production Changeovers

Manufacturing, Services and Operations Management, Vol. 12, No. 4, , pp. 682-691, Fall 2010

16 Pages Posted: 6 Mar 2009 Last revised: 27 Oct 2010

See all articles by Milind Dawande

Milind Dawande

University of Texas at Dallas - Department of Information Systems & Operations Management

Srinagesh Gavirneni

Cornell University - Samuel Curtis Johnson Graduate School of Management

Yinping Mu

University of Science and Technology of China (USTC)

Suresh Sethi

University of Texas at Dallas - Naveen Jindal School of Management

Chelliah Sriskandarajah

Texas A&M University

Date Written: March 5, 2009

Abstract

This paper analyzes the tradeoff between (demand) substitution costs and (production) changeover costs in a discrete-time production-inventory setting using a two-product dynamic lot-sizing model with changeover, inventory carrying, and substitution costs. We first show that the problem is poly-nomially solvable and then develop several insights into the behavior of such systems and identify strategies for electively managing them. A key driver for the extent of substitution is the ratio of changeover cost to the substitution cost associated with mean demand. The interaction between changeovers and substitution is most prominent when this ratio is neither too high nor too low.

Furthermore, the value of this ratio also in°uences the length of an appropriate rolling horizon; an increase in the value of the ratio signals an increase in the length of a near-optimal rolling horizon. We identify a complementary relationship between substitution and changeover costs: when the changeover cost is large, it is better to invest in reducing the substitution cost and vice-versa. As the holding cost of the substitutable product increases, substitution is (resp., changeovers are) utilized more when the changeover (resp., substitution) cost is large.

Keywords: Multiperiod Problems; Forecast Horizons; Rolling Horizons, Decision Horizons, Planning Horizons, Solution Horizons, Forecasting, Dynamic Lot Size Models, Operations Management, Production changeover, demand substitution, downward substitution, product substitution, polynomial algorithm

JEL Classification: M11, C61, C63, C53, M30

Suggested Citation

Dawande, Milind and Gavirneni, Srinagesh and Mu, Yinping and Sethi, Suresh and Sriskandarajah, Chelliah, On the Interaction between Demand Substitution and Production Changeovers (March 5, 2009). Manufacturing, Services and Operations Management, Vol. 12, No. 4, , pp. 682-691, Fall 2010 , Available at SSRN: https://ssrn.com/abstract=1354309

Milind Dawande

University of Texas at Dallas - Department of Information Systems & Operations Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Srinagesh Gavirneni

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Yinping Mu

University of Science and Technology of China (USTC) ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China

Suresh Sethi (Contact Author)

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

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

Chelliah Sriskandarajah

Texas A&M University ( email )

Langford Building A
798 Ross St.
77843-3137

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