Production control of a pull system with production and demand uncertainty

We consider a continuous material-flow manufacturing system with an unreliable production system and a variable demand source which switches randomly between zero and a maximum level. The failure and repair times of the production system and the switching times of the demand source are assumed to be exponentially distributed random variables. The optimal production flow control policy that minimizes the expected average inventory carrying and backlog costs is characterized as a double-hedging policy. The optimal hedging levels are determined analytically by minimizing the closed-form expression of the cost function. We investigate two approximate single hedging policies. It is empirically shown that an approximate policy that uses a single hedging level which is the sum of a production uncertainty term and a demand uncertainty term gives accurate results for the expected average cost.