Optimal Control of an Assembly System with Demand for the End-Product and Intermediate Components

Posted: 26 Dec 2010  

Oben Ceryan

Department of Decision Sciences, Lebow College of Business, Drexel University

Izak Duenyas

University of Michigan, Stephen M. Ross School of Business

Yoram Koren

University of Michigan at Ann Arbor - Department of Mechanical Engineering

Date Written: September 19, 2010

Abstract

We consider the production and admission control of a two-stage manufacturing system where intermediate components are produced to stock in the first stage and an end-product is assembled from these components through a second stage assembly operation which may allow backorders. The manufacturing firm faces two types of demand. The one directed at the end-product is satisfied immediately if there are available products in inventory, and the firm has the option to accept the order for later delivery or to reject the order if no inventory is available. The second type of demand is for any of the intermediate components and the firm again has the option to accept the order or reject it to keep the components available for assembly purposes. We provide structural results for the demand admission, component production and product assembly decisions. We also extend the model to take into account multiple customer classes based on revenue and a more general revenue collecting scheme where only an upfront partial payment for an item is received if a customer demand is accepted for future delivery with the remaining revenue received upon delivery. Since the optimal policy structure is rather complex and defined by switching surfaces in a multidimensional space, we also propose a simple heuristic policy for which the computational load grows linearly with the number of products and test its performance under a variety of example problems.

Keywords: Admission Control, Revenue Management, Assembly Systems, Queueing Theory, Stochastic Optimization

JEL Classification: C61, M11

Suggested Citation

Ceryan, Oben and Duenyas, Izak and Koren, Yoram, Optimal Control of an Assembly System with Demand for the End-Product and Intermediate Components (September 19, 2010). Ross School of Business Paper . Available at SSRN: https://ssrn.com/abstract=1509307 or http://dx.doi.org/10.2139/ssrn.1509307

Oben Ceryan (Contact Author)

Department of Decision Sciences, Lebow College of Business, Drexel University ( email )

Philadelphia, PA 19103
United States

Izak Duenyas

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Yoram Koren

University of Michigan at Ann Arbor - Department of Mechanical Engineering ( email )

Ann Arbor, MI 48109
United States

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