Integrating decisions with advance supply information in an assemble‐to‐order system

Abstract We study a periodic‐review assemble‐to‐order (ATO) system with multiple components and multiple products, in which the inventory replenishment for each component follows an independent base‐stock policy and stochastic product demands are satisfied according to a First‐Come‐First‐Served rule. We assume that the replenishment for various component suffers from lead time uncertainty. However, the decision maker has the so‐called advance supply information (ASI) associated with the lead times and thus can take advantage of the information for system optimization. We propose a multistage stochastic integer program that incorporates ASI to address the joint optimization of inventory replenishment and component allocation. The optimal base‐stock policy for the inventory replenishment is determined using the sample average approximation algorithm. Also, we provide a modified order‐based component allocation (MOBCA) heuristic for the component allocation. We additionally consider a special case of the variable lead times where the resulting two‐stage stochastic programming model can be characterized as a single‐scenario case of the proposed multistage model. We carry out extensive computational studies to quantify the benefits of integrating ASI into joint optimization and to explore the possibility of employing the two‐stage model as a relatively efficient approximation scheme for the multistage model.