Production control policies to maintain service levels in different seasons

• We analyze how manufacturers could leverage flexibility in their resources to address seasonality in demands.
• Customers differ in their valuations for the product and service level expectations.
• We characterize the optimal policy as a season dependent inventory threshold vector.
• We show that the service level constraints distinctly affect the optimal policy.
• Under certain conditions, the optimal policy is to reserve inventory and not satisfy demands of any customer.

We analyze a manufacturing system that produces a single type of product to serve multiple classes of customers with seasonal demands. The manufacturer has the flexibility to vary production rates to adapt to seasonal demands. We model the seasonal demand using a Markov modulated Poisson process, and analyze the underlying Markov decision problem to derive optimal production and inventory control policies for the manufacturer. We show that the optimal policy is characterized by a season dependent inventory threshold vector for adjusting production rates and rationing inventory. Further, we impose service level constraints according to the customer classes in each season, and analyze the impact of the service level constraints on the optimal policy and cost under different seasonal demand conditions.