Seasonal fluctuations in demand can cause difficulties in scheduling production for a firm. One particular problem which arises is to determine the optimal inventory level of low demand season under capacity limitation. In low demand season, a firm must stock certain amount of inventory for high demand season. But, the trade-off relationship between inventory holding cost and capacity utilization make the problem uncomfortable.
In this paper, we focus on production strategy of manufacturing firm with seasonal demand. First, we conduct a case study on two manufacturing firms with seasonal demand. And we formulate a mathematical model (linear programming) reflecting the trade-off relationship between inventory holding cost and capacity utilization. Using this model, we conduct numerical analysis and scenario analysis to get managerial implications. Additionally, we extend the basic model to investigate capacity allocation mechanism between products and the value of flexible capacity.
Major findings and results of this study are summarized as follows. First, a model for manufacturing scheduling and capacity allocation on two products is developed for real manufacturing firm. Second, we find that flexible capacity make a firm overcome the trade-off relationship between inventory and capacity investment. In other words, firms can achieve both lower level of inventory and higher level of capacity utilization simultaneously by using of flexible capacity. Finally, we realized the importance of coordination between managers and integrated decision making.
We expect our results give insight for managers to make a production plan and play a role of a guideline in strategic decision making and problem solving.
