A production-inventory system with markovian capacity and outsourcing option

Document Type

Article

Publication Date

3-1-2005

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. © 2005 INFORMS.

Identifier

18744383359 (Scopus)

Publication Title

Operations Research

External Full Text Location

https://doi.org/10.1287/opre.1040.0165

ISSN

0030364X

First Page

328

Last Page

349

Issue

2

Volume

53

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