The effect of production smoothing in a capacitated production-inventory system with backlogging

This paper considers a decentralized two-echelon supply chain: a single retailer holds finished goods inventory to meet customer demand and a single manufacturer produces the retailer’s replenishment orders for a single item on a make-to-order basis. Finite production capacity in each period and backordering of excessive demand is considered. The manufacturer operates close to his production capacity. In this setting the retailer’s order decision has direct impact on the manufacturer’s production utilization. Most inventory-focused literature research control inventory levels and allow production levels to vary substantially each period. The manufacturer, however, prefers stable level of production, i.e. smooth order pattern from the retailer. In this paper we explore the effects of production smoothing on total system per-unit costs while considering inventory related costs as well as production related costs