Integrated capacity and inventory decisions

This paper deals with the simultaneous acquisition of capacity and material in a situation with uncertain demand, with non-zero lead-times for the supply of both material and capacity. Although there is a lot of literature on the time-phased acquisition of capacity and material, most of this literature focuses on one of the two decisions. By using a dynamic programming formulation, we describe the optimal balance between using safety stocks and contingent workforce for various lead-time situations. We compare the cost ingredients of the optimal strategy with the standard inventory approach that neglects capacity restrictions in the decision. The experimental study shows that co-ordination of both decisions in the optimal strategy leads to cost reductions of around 10%. We also derive characteristics of the optimal strategy that we expect to provide a thorough basis for operational decision making.