The Simultaneous Planning of Production, Capacity, and Inventory in Seasonal Demand Environments

Manufacturing managers often address capacity and inventory decisions separately, thus ignoring the interaction between capacity and inventory within a manufacturing system. The separation of these two decisions can lead to an imbalance of capacity and inventory investment. We develop a model that simultaneously plans capacity investment, inventory investment, and the production schedule using return on assets as the objective to maximize. An algorithm is developed that optimizes a fractional objective function for a mixed-integer program. The model was applied at an electronics manufacturer and at a manufacturer of office supplies.