Production Planning Models with Variable
Demand and Capacity1
Yasemin Merzifonluoğlu
Department of Industrial and Systems Engineering
We
consider production planning models from a different perspective, assuming that
both demand and capacity levels are decision variables. Given a set of demands for its output over a
finite planning horizon, a producer must determine the amount of demand it will
satisfy in each period, along with an internal production capacity level in
every period under concave production, holding, and capacity costs. In addition to setting internal production
capacity, we consider model variants in which the producer may draw from
external capacity sources, including the use of overtime and subcontracting
from an external source. We provide
polynomial-time algorithms for each of these model variants when the internal
production capacity level does not vary with time and the amount of available
overtime equals some multiple of the internal capacity level. These models extend traditional aggregate
planning approaches to account for the supplier’s flexibility in setting demand
and capacity levels and can be used for determining capacity and demand levels
that maximize net profit after production costs.
1Joint work with Joseph Geunes and Edwin Romeijn, Department of Industrial and Systems Engineering,