A production-inventory model for a push-pull manufacturing system with capacity and service level constraints

We study a hybrid push-pull production system with a two-stage manufacturing process, which builds and stocks tested components for just-in-time configuration of the final product when a specific customer order is received. The first production stage (fabrication) is a push process where parts are replenished, tested, and assembled into components according to product-level build plans. The component inventory is kept in stock ready for the final assembly of the end products. The second production stage (fulfillment) is a pull-based assemble-to-order process where the final assembly process is initiated when a customer order is received and no finished goods inventory is kept for end products. One important planning issue is to find the right trade-off between capacity utilization and inventory cost reduction that strives to meet the quarter-end peak demand. We present a nonlinear optimization model to minimize the total inventory cost subject to the service level constraints and the production capacity constraints. This results in a convex program with linear constraints. An efficient algorithm using decomposition is developed for solving the nonlinear optimization problem. Numerical results are presented to show the performance improvements achieved by the optimized solutions along with managerial insights provided. © 2012 Production and Operations Management Society.