Integral capacity and inventory decision making in a simple production system

Abstract. This paper deals with the integral acquisition of capacity and material in a situation with uncertain demand, with non zero lead-times for the supply of both materials and capacity. Although there is a lot of literature on the time-phased acquisition of capacity and materials, most of this literature focuses on one of the two decisions. By using a dynamic programming formulation, we will describe the optimal balance between using safety stocks and contingent labor force for various lead time situations. We will compare the cost ingredients of the optimal strategy with the standard inventory approach that neglects capacity restrictions in the decision. Next to that, we derive characteristics of the optimal strategy that can provide a thorough basis for operational decision making.