Seminar Series: Youyi Feng

“Production/Ordering, Pricing, and Transshipment Management of Two Manufacturing Facilities: Dynamics, Efficient Optimal Policy and Characteristics (joint work with Jianjun Xu, David Yao and Shaohui Zheng)”

Abstract

We study the optimal production/inventory, pricing and transshipment policy of a finite horizon, periodic review inventory/production system of two manufacturing facilities that replenishes the same product to fulfill respective stochastic demands they face. At the beginning of each period the system plans to produce the product at both facilities and the production will be completed at the end of the period. The system then will post a price in each facility to price-sensitive demand. After the realized demands at both facilities have been fulfilled with available inventories, the leftover inventory of any facility can be transferred into the other facility. We discuss two legitimate lateral transshipment modes: (1) partial transshipment, i.e., transshipment is only allowed from one inventory to another but not vice versa; and (2) complete transshipment, i.e., transshipment is allowed from both inventories. We show that the dynamics of optimal production decisions in both facilities are specified by three switching curves and in addition, the three switching curves can be modified to conduct optimal transshipment decisions. All optimal decisions based on the three-curve rules are monotone and thus efficient. These well-behaved controlling characteristics are determined by the structural properties of the optimal value function, which has been dynamically preserved with a minor restriction by all operations. Finally, we present a sensitivity analysis to quantify the impact of the modeling inputs on optimal decisions.