Optimal decisions for assemble-to-order systems with uncertain assembly capacity

In this paper we study a single-product, single-period assemble-to-order (ATO) model with uncertain assembly capacity. To reduce the risk/cost, the manufacturer may need to assemble in advance. Also, when the demand is realized, he/she may need to place emergency component orders. We present a profit-maximization model that makes optimal inventory and production decisions. We establish structural properties of the optimal solutions, and identify the sufficient and necessary condition under which assemble-in-advance strategy should be adopted. We further extend the model to the situation where assembly outsourcing can be used to make up for the capacity shortage. Numerical experiments are conducted to show the impact of uncertainties associated with demand and capacity.