Optimal Control of High-Volume Assemble-to-Order Systems

Stanford GSB Research Paper No. 1890

40 Pages Posted: 31 May 2005

See all articles by Erica L. Plambeck

Erica L. Plambeck

Stanford Graduate School of Business

Amy R. Ward

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE)

Date Written: January 2005

Abstract

We consider an assemble-to-order system with a high volume of prospective customers arriving per unit time. Our objective is to maximize expected infinite horizon discounted profit by choosing product prices, component production capacities, and a dynamic policy for sequencing customer orders for assembly. We prove that a myopic discrete review sequencing policy, which allocates scarce components among orders for different products to minimize instantaneous physical and financial holding costs, is asymptotically optimal. Furthermore, we prove that optimal prices and production capacity nearly balance the supply and demand for components (i.e., it is economically optimal to operate the system in heavy traffic), so system performance is characterized by a diffusion approximation. The diffusion approximation exhibits state space collapse: its dimension equals the number of components (rather than the number of components plus the number of products). These results compliment the existing assemble-to-order literature, which focuses on managing component inventory and assumes FIFO sequencing of orders for assembly.

Keywords: Operations management, queuing systems, stochastic modeling, supply chain

Suggested Citation

Plambeck, Erica L. and Ward, Amy R., Optimal Control of High-Volume Assemble-to-Order Systems (January 2005). Stanford GSB Research Paper No. 1890, Available at SSRN: https://ssrn.com/abstract=729249 or http://dx.doi.org/10.2139/ssrn.729249

Erica L. Plambeck (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Amy R. Ward

Georgia Institute of Technology - The H. Milton Stewart School of Industrial & Systems Engineering (ISyE) ( email )

765 Ferst Drive
Atlanta, GA 30332-0205
United States

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