Optimal control of a continuous-review integrated production — Forecasting system with stock-dependent demand and deteriorating items

We consider in this paper a manufacturing system where the demand rate during a certain period depends on the demand rate of the previous period and on the inventory level, items in inventory are subject to deterioration, and the firm adopts a continuous-review policy. In contrast to most of the existing research which uses time series forecasting models, we propose a new model, the dependent demand rate, which integrates the forecasting component into the production planning problem. We use optimal control theory to derive the optimal production rate. Simulations are conducted in order to show the performance of the obtained solution. The theoretical and the simulations results allow gaining insights into operational issues and demonstrating the scope for improving stock control systems.