Optimal Control of a Failure Prone Manufacturing System With the Possibility of Temporary Increase in Production Capacity

Manufacturers have two general strategies to guard against uncertainties in the production or demand process: (a) building inventory to hedge against periods in which the production capacity is not suÆcient to satisfy demand, and (b) temporarily increasing the production capacity, for example, by hiring temporary workers, adding overtime and/or extra shifts, or outsourcing part of the production. A production control problem is to strike a balance between the costs of building inventory, \buying" extra capacity, and backlogged demand. In this paper, we address this problem in the context of a single failure prone machine that produces a single part-type and show that the optimal control control policy is a switching policy that is generally characterized by three switching levels.