Managing a single-product assemble-to-order system with technology innovations

We consider a multicomponent, single-product assemble-to-order (ATO) system that faces frequent, component-based technology innovations. For each component, there are two technologies with overlapping life cycles coexisting in the market. All cost parameters associated with each technology (procurement cost, salvage value, etc.) evolve dynamically. We investigate two technology-inventory coordination schemes, one is at the strategic level, where technology and inventory decisions are sequentially made using partial information, and another is at the operational level, where technology and inventory decisions are jointly made using full information. The performance gap between the two coordination schemes quantifies the value of incorporating dynamic inventory information in technology management. We develop effective solution techniques and approximation methods and characterize their policy structures. Our numerical study indicates that the strategic-level technology-inventory coordination is generally sufficient, but the operational-level coordination becomes necessary when demand variability is high and salvage loss is heavy. We also propose a hybrid technology-inventory coordination scheme, whereby the firm adopts a technology management plan using the strategic-level coordination scheme, but executes it dynamically by adapting to inventory information, using a heuristic proposed in this paper. Our numerical study suggests that the hybrid strategy can virtually achieve the performance of the optimal operational level coordination. Our analysis provides guidelines for the effective technology-adoption and inventory-control coordination strategies in the ATO system with rapid innovations. © 2007 INFORMS.