A multiperiod stochastic production planning and sourcing problem with service level constraints

Abstract.We study a stochastic multiperiod production planning and sourcing problem of a manufacturer with a number of plants and/or subcontractors. Each source, i.e. each plant and subcontractor, has a different production cost, capacity, and lead time. The manufacturer has to meet the demand for different products according to the service level requirements set by its customers. The demand for each product in each period is random. We present a methodology that a manufacturer can utilize to make its production and sourcing decisions, i.e., to decide how much to produce, when to produce, where to produce, how much inventory to carry, etc. This methodology is based on a mathematical programming approach. The randomness in demand and related probabilistic service level constraints are integrated in a deterministic mathematical program by adding a number of additional linear constraints. Using a rolling horizon approach that solves the deterministic equivalent problem based on the available data at each time period yields an approximate solution to the original dynamic problem. We show that this approach yields the same result as the base stock policy for a single plant with stationary demand. For a system with dual sources, we show that the results obtained from solving the deterministic equivalent model on a rolling horizon gives similar results to a threshold subcontracting policy.