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A Production-Inventory System with Markovian Capacity and Outsourcing Option

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  • Jian Yang

    (Department of Industrial and Manufacturing Engineering, New Jersey Institute of Technology, Newark, New Jersey 07102)

  • Xiangtong Qi

    (Department of Industrial Engineering and Engineering Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong, China)

  • Yusen Xia

    (Department of Managerial Sciences, Georgia State University, Atlanta, Georgia 30303)

Abstract

We study the optimal production-inventory-outsourcing policy for a firm with Markovian in-house production capacity that faces independent stochastic demand and has the option to outsource. We find very simple optimal policy forms under fairly reasonable assumptions. In addition, when the capacity Markov process is stochastically monotone, the policy parameters decrease in the firm’s current capacity level under additional assumptions. All these results extend to the infinite-horizon and undiscounted-cost cases. We analyze comparative statics and the necessity of some technical conditions, and discuss when the outsourcing option is more valuable.

Suggested Citation

  • Jian Yang & Xiangtong Qi & Yusen Xia, 2005. "A Production-Inventory System with Markovian Capacity and Outsourcing Option," Operations Research, INFORMS, vol. 53(2), pages 328-349, April.
    • Handle: RePEc:inm:oropre:v:53:y:2005:i:2:p:328-349
    DOI: 10.1287/opre.1040.0165
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    12. Zhu, Stuart X., 2015. "Analysis of dual sourcing strategies under supply disruptions," International Journal of Production Economics, Elsevier, vol. 170(PA), pages 191-203.
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    14. Jianfeng Ren & Guo Sun & Yuzhong Zhang, 2017. "The Supplying Chain Scheduling with Outsourcing and Transportation," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 34(02), pages 1-13, April.
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    21. Mayorga, Maria E. & Ahn, Hyun-Soo, 2011. "Joint management of capacity and inventory in make-to-stock production systems with multi-class demand," European Journal of Operational Research, Elsevier, vol. 212(2), pages 312-324, July.
    22. Freeman, Nickolas & Mittenthal, John & Keskin, Burcu & Melouk, Sharif, 2018. "Sourcing strategies for a capacitated firm subject to supply and demand uncertainty," Omega, Elsevier, vol. 77(C), pages 127-142.
    23. Boulaksil, Youssef & Fransoo, Jan C., 2009. "Order release strategies to control outsourced operations in a supply chain," International Journal of Production Economics, Elsevier, vol. 119(1), pages 149-160, May.
    24. Qi Feng & J. George Shanthikumar, 2022. "Applications of Stochastic Orders and Stochastic Functions in Inventory and Pricing Problems," Production and Operations Management, Production and Operations Management Society, vol. 31(4), pages 1433-1453, April.

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