Joint Inventory Replenishment and Component Allocation Optimization in an Assemble-to-Order System

Management Science, Vol. 50, pp. 99-116, January 2004

Posted: 21 Nov 2011

See all articles by Yalcin Akcay

Yalcin Akcay

Koc University

Susan H. Xu

Pennsylvania State University, University Park - Department of Supply Chain and Information Systems

Abstract

This paper considers a multicomponent, multiproduct periodic-review assemble-to-order (ATO) system that uses an independent base-stock policy for inventory replenishment. Product demands in each period are integer-valued correlated random variables, with each product being assembled from multiple units of a subset of components. The system quotes a prespecified response time window for each product and receives a reward if the demand for that product is filled within its response time window. We formulate a two-stage stochastic integer program with recourse to determine the optimal base-stock policy and the optimal component allocation policy for the ATO system. We show that the component allocation problem is a general multidimensional knapsack problem (MDKP) and is NP-hard. We propose a simple, order-based component allocation rule and show that it can be solved in either polynomial or pseudopolynomial time. We also use the sample average approximation method to determine the optimal base-stock levels and compare it with two variations of the equal fractile heuristic. Intensive testing indicates that our solution method for each stage of the stochastic program is robust, effective, and that it significantly outperforms existing methods. Finally, we discuss several managerial implications of our findings.

Keywords: assemble to order, stochastic programming, inventory management, order-based component allocation, multidimensional knapsack problems, sample average approximation, heuristics

Suggested Citation

Akcay, Yalcin and Xu, Susan H., Joint Inventory Replenishment and Component Allocation Optimization in an Assemble-to-Order System. Management Science, Vol. 50, pp. 99-116, January 2004. Available at SSRN: https://ssrn.com/abstract=1962403

Yalcin Akcay

Koc University ( email )

Rumelifeneri Yolu
34450 Saryer
Istanbul, 34450
Turkey

Susan H. Xu (Contact Author)

Pennsylvania State University, University Park - Department of Supply Chain and Information Systems ( email )

University Park
State College, PA 16802
United States

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