Production under periodic demand update prior to a single selling season: A decomposition approach

This paper focuses on dynamic, continuous-time production control problems in the fashion industry. Similar to the classical news-vendor problem, we consider a single product-type and the cumulative demand for items is not known until the end of the production horizon and therefore must be forecasted. Since there are periodic updates before a single selling season, actual demand during a period of time can only be determined by the end of the period. If the overall demand is overestimated, excessive inventory holding and production costs are paid and surpluses are sold at low prices at the end of the production horizon. If it is under-estimated, then sales are lost. The objective is to dynamically determine production orders which minimize overall expected costs. Since the optimal feedback for such a problem is characterized by thresholds evolving with time and system states, there is a significant computational burden in determining them. With the aid of the variational analysis and a decomposition, we derive a closed-form solution for the thresholds. A numerical study carried out to compare the decomposition and straightforward simulation-based solutions indicates the high accuracy of the suggested approach while the computational burden is dramatically reduced. 2006 Elsevier B.V. All rights reserved.