Integrated Capacity And Inventory Management With Capacity Acquisition Lead Times

In this paper we consider a make-to-stock production system whose permanent production capacity can be increased temporarily by making use of some contingent resources, while this capacity acquisition has a constant lead time associated with it. We present a model where the capacity management problem is handled in an integrated manner with the inventory management, under non-stationary and stochastic demand. We analyze the characteristics of the optimal policies for the integrated problem. Finally, we evaluate the value of utilizing flexible capacity under different capacity acquisition lead times and other parameter settings, which enable us to develop managerial insights.