Optimal policies for two-stage, pull-type production/inventory systems

The authors consider a two-stage, pull-type production/inventory system with a known service mechanism at the first stage. Set-ups and start-ups are involved in the operation of the second stage. It is assumed that the first stage has always raw material to process. Between the two stages, there is an intermediate storage of work-in-process inventory that operates with the base-stock policy. Under this policy, the first stage produces as long as the intermediate buffer is not full. The second stage produces to store in the finished-product warehouse and operates with the continuous-review (R,r) policy. This policy implies that if the inventory is below or equal to the reorder level r, then a request for production is placed at stage 2. The production continues until the warehouse inventory reaches the capacity limit R. A semi-Markov decision model is used to obtain an optimal policy for the operation of the second stage. The structure of the optimal policy suggests use of a suboptimal look-back policy that delays the set-up at the second stage if the buffer lacks sufficient material