A stochastic production planning model with a dynamic chance constraint (Q2265942)

This paper deals with the optimal production planning for a single product over a finite horizon. The holding and production costs are assumed quadratic as in the model of \textit{C. C. Holt}, \textit{F. Modigliani}, \textit{J. F. Muth} and \textit{H. A. Simon} [''Planning production, inventories and work force'', Englewood Cliffs (1960)]. The cumulative demand is compound Poisson and a chance constraint is included to guarantee that the inventory level is positive with a probability of at least \(\alpha\) at each time point. The resulting stochastic optimization problem is transformed into a deterministic optimal control problem with control variable and state variable inequality constraints. A discussion of the optimal solution is presented. The form of the optimal control (production rate) is obtained as follows: if there exists a time \(t_ 1\) such that \(t_ 1\in [0,T]\) where T is the end of the planning period, then (i) produce nothing until \(t_ 1\) and (ii) produce at a rate equal to the expected demand plus a 'correction factor' between \(t_ 1\) and T. If \(t_ 1\) is found to be greater than T, then the optimal decision is to produce nothing and always meet the demand from the inventory.