Management of a high mix production system with interdependent demands : modeling of stochastic demands and the concept of virtual profit as a decomposition tool

Abstract

An optimized framework for the inventory control of a high mix production system has been designed in order to guarantee the optimal mix of items in stock in presence of correlated demands. The Virtual Profit concept was developed to measure the criticality of an item in presence of correlated demands. The introduction of the Virtual Profit in the optimization problem allowed the problem to be decomposed and the optimal control parameters to be computed separately. Demands were modeled based on the stochastic properties of the historical demand so that simulations could be performed using statistically generated orders. The simulations provided a validation of the proposed technique showing that, with the same size of inventory, considering the Virtual Profits instead of the real profits improves the quality of the solution, especially when low levels of inventory are kept.