IPA Derivatives for Make-to-Stock Production-Inventory Systems with Backorders

A single-stage Make-to-Stock (MTS) production-inventory system consists of a production facility coupled to an inventory facility, and is subject to a policy that aims to maintain a prescribed inventory level (called base stock) by modulating production capacity. This paper considers a class of single-stage, singleproduct MTS systems with backorders, driven by random demand and production capacity, and subject to a continuous-review base-stock policy. A model from this class is formulated as a stochastic fluid model (SFM), where all flows are described by stochastic rate processes with piecewise< constant sample paths, subject to very mild regularity assumptions that merely preclude accumulation points of jumps with probability 1. Other than that, the MTS model in SFM setting is nonparametric in that it assumes no specific form for the underlying probability law, and as such is quite general. The paper proceeds to derive formulas for the (stochastic) IPA (Infinitesimal Perturbation Analysis) derivatives of the sample-path time averages of the inventory level and backorders level with respect to the base-stock level and a parameter of the production rate. These formulas are comprehensive in that they are exhibited for any initial condition of the system, and include right and left derivatives (when they do not coincide). The derivatives derived are then shown to be unbiased and their formulas are seen to be amenable to fast computation. The generality of the model and comprehensiveness of the IPA derivative formulas hold out the promise of gradient-based applications. More specifically, since the basestock level and production rate are the key control parameters of MTS systems, the results provide the theoretical underpinnings for optimizing the design of MTS systems and for devising prospective on-line adaptive control algorithms that employ IPA derivatives. The paper concludes with a discussion of those issues. Methodol Comput Appl Probab (2006) 8: 191–222 DOI 10.1007/s11009-006-8548-7 Y. Zhao (*) :B. Melamed Department of MSIS, Rutgers Business School – Newark and New Brunswick, Rutgers University, 94 Rockafeller Rd., Piscataway, NJ 08854, USA e-mail: [email protected] B. Melamed e-mail: [email protected]