Base stock policies for production/inventory problems with uncertain capacity levels

Abstract In this paper we consider a single item, stochastic demand production/inventory problem where the maximum amount that can be produced (or ordered) in any given period is assumed to be uncertain. Inventory levels are reviewed periodically. The system operates under a stationary modified base stock policy. The intent of our paper is to present a procedure for computing the optimal base stocl level of this policy under expected average cost per period criterion. This procedure would provide guidance as to the appropriate amount of capacity to store in the form of inventory in the face of stochastic demand and uncertain capacity. In achieving this goal, our main contribution is to establish the analogy between the class of base stock production/inventory policies that operate under demand/capacity uncertainty, and the G/G/1 queues and their associated random walks. We also present example derivations for some important capacity distributions.