Capacity and Inventory Management in the Presence of a Long-term Channel and a Spot Market

Manufacturers often sell their products both to customers acquired over time and sustained through contractual agreements and to new businesses through electronic markets. These two sales channels (contract markets and exchanged based sales and procurement) coexist for several capitalintensive industries such as the semiconductor and chemical industries (Kleindorfer and Wu 2003). The two sales channels can enable the manufacturer to better utilize the available capacity if the manager can optimally allocate resources. In this paper, we establish an optimal production and inventory allocation policy for a periodic-review, finite-horizon, capacity-constrained manufacturing system. In particular, we show that a policy with two thresholds, produce-up-to and sell-downto/buy-up-to is optimal. We also provide some insights into the manufacturer’s dynamic pricing policy for the long-term channel.