Optimal strategies in a production inventory control model

DOI10.1007/S11009-023-10024-3zbMATH Open1520.91211arXiv2008.06016OpenAlexW3048502504MaRDI QIDQ6164875FDOQ6164875

Nora Muler, Pablo Azcue, Esther Frostig

Publication date: 4 July 2023

Published in: Methodology and Computing in Applied Probability (Search for Journal in Brave)

Abstract: We consider a production-inventory control model with finite capacity and two different production rates, assuming that the cumulative process of customer demand is given by a compound Poisson process. It is possible at any time to switch over from the different production rates but it is mandatory to switch-off when the inventory process reaches the storage maximum capacity. We consider holding, production, shortage penalty and switching costs. This model was introduced by Doshi, Van Der Duyn Schouten and Talman in 1978. Our aim is to minimize the expected discounted cumulative costs up to infinity over all admissible switching strategies. We show that the optimal cost functions for the different production rates satisfy the corresponding Hamilton-Jacobi-Bellman system of equations in a viscosity sense and prove a verification theorem. The way in which the optimal cost functions solve the different variational inequalities gives the switching regions of the optimal strategy, hence it is stationary in the sense that depends only on the current production rate and inventory level. We define the notion of finite band strategies and derive, using scale functions, the formulas for the different costs of the band strategies with one or two bands. We also show that there are examples where the switching strategy presented by Doshi et al. is not the optimal strategy.

Full work available at URL: https://arxiv.org/abs/2008.06016

zbMATH Keywords

Hamilton-Jacobi-Bellman equationsviscosity solutionsscale functionscompound Poisson processoptimal switching strategiesinventory/production model

Mathematics Subject Classification ID

Production theory, theory of the firm (91B38) Viscosity solutions to Hamilton-Jacobi equations in optimal control and differential games (49L25) Inventory, storage, reservoirs (90B05) Production models (90B30)

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Cited In (8)

• Robust Inventory Management: An Optimal Control Approach
• Title not available (Why is that?)
• Optimal policies for a finite-horizon production inventory model
• Optimizing a production-inventory system under a cost target
• Title not available (Why is that?)
• Optimal strategies for an inventory system with cost functions of general form
• Title not available (Why is that?)
• Production planning and inventories optimization with a general storage cost function.

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