Optimal finite-horizon production control in a defect-prone environment

In this note, we consider a single-machine, single-part-type production system, operating in a defect-prone environment. It is assumed that there is a random yield proportion of nondefective parts, with known probability distribution. Over each production cycle, it is assumed that there is a single realization of the yield random variable. Furthermore, it is assumed that the system is operated under a periodic-review policy. Thus, the particular realization of the yield proportion cannot be determined prior to the end of the production horizon. The optimal production control, that minimizes a linear combination of expected surplus and shortage costs over the planning horizon is shown to be piecewise constant, and the appropriate production levels and control break-points are determined as functions of the yield rate distribution.