THE STRATEGIC USE OF CAPACITY SLACK IN THE ECONOMIC LOT SCHEDULING PROBLEM WITH RANDOM DEMAND

Growing interest in designing systems with capacity slack as one form of flexibility raises many questions about its use and its usefulness. In the framework of the economic lot scheduling problem with stochast ic demand, we develop an optimization-based model that considers capac ity slack, safety stock, and overtime explicitly, and has the objectiv e of minimizing the expected cost per unit time of inventory, overtime , and, where applicable, setup costs. The solution is a continuous-tim e production plan that consists of a time-dependent inventory trajecto ry for each of the parts, including the placement of planned idle time in the schedule. We consider schedule stability to be desirable becau se of potential effects on upstream and downstream operations in multi stage production settings. Thus, the plan also has certain characteris tics that contribute to achieving stability. Our results on the relati ve merits of capacity slack and safety stock indicate that capacity sl ack in the form of planned idle time is not a cost-effective hedge aga inst demand uncertainty in this context. Thus, it is essential that ma nagement carefully identify and evaluate other reasons for including i dle time in a plan, and use the idle time effectively. For managers wh o face situations not fully represented by our model, this paper provi des analytic results that will guide them in the placement of planned idle time and the choice of safety stock levels.