Inventory management in assemble-to-order system with two correlated products

A single period assemble-to-order system consisting of a manufacturer and three suppliers was considered. The manufacturer produces two different types of correlated end products, each product needs a different mix of a common set of component parts, which belong to two types, one type is specific components and the other is common components. How to manage inventories of components in such a system is of managerial interest. The inventory management problem for the system was formulated as a two-stage stochastic nonlinear integer program. The decomposition of total expected profit function was proved and two algorithms were given. We solve the first stage of the problem to determine the optimal stock levels of the components by algorithm 2 and solve the second stage problem by algorithm 1, where the component allocation decisions are made. At last, a numerical example is given.