Heuristic Production and Sale Policy for a Two-Product-Type Manufacturing System With Downward Substitution

In this paper, we study a manufacturing system with downward substitution in sales, i.e., selling superior products as inferior ones when the demand for the latter cannot be met immediately, in order to reduce the backlog cost. However, downward substitution in sales also causes profit loss. Therefore, controlling a manufacturing system with downward substitution in sales in order to minimize total production cost is a problem worthy of investigation. In this paper, we focus on the production and sale control problem for a two-product-type manufacturing system with downward substitution in sales and time-delay between the releasing of raw materials and the output of final goods. The system is decomposed into two subsystems. In the first subsystem, the state variables are total production surpluses (i.e., the sum of work-in-process and final goods surpluses), and a hedging point policy with a new structure is constructed to control the raw material releasing rates of the two product-types. In the second subsystem, the state variables are the final goods surpluses, and a new switching curve policy is constructed to control the downward substitution rate in sales. Numerical experiments show that downward substitution in sales contributes to the reduction of total production cost, especially when the time-delay is large.