Capacity allocation and outsourcing in a process industry

In this paper we consider a production facility producing a uniform product that ships a number of different package sizes to a (number of) stockpoint(s). The packaging capacity owned by the facility is finite and the actually used capacity must be reserved sometime before actual use. Furthermore, the packaging capacity must be allocated among the different package sizes, such that a target fill rate for each package size is achieved. We propose two different capacity reservation strategies, both derived from a periodic review order-up-to-policy. One strategy assumes that excess capacity needs compared with the owned capacity cannot be filled and are postponed to the future. The other strategy assumes that excess capacity needs are outsourced. The objective of the paper is to find cost-optimal policies within each of the two classes of policies and then select the best capacity reservation policy. We present some managerial insights into the impact of various process and cost parameters and the choice of the capacity reservation strategy.