Optimal MTS and MTO Hybrid Production System for a Single Product Under the Cap-And-Trade Environment

This paper studies the optimal production planning in a hybrid Make-To-Stock (MTS) and Make-To-Order (MTO) production system for a single product under the cap-and-trade environment. The manufacturer aims to minimize the total cost in production, inventory and emissions allowances trading. The decisions include the selection of production mode (pure MTS, pure MTO or hybrid MTS/MTO), the inventory and emissions trading quantity. We derive the optimal solution analytically. We show that the cost of optimal MTO/MTS hybrid production strategy is remarkably less than that of either pure MTO or pure MTS production strategy alone. Compared with the no initial carbon quota and trading environment, there are significant differences in the optimal production decisions under trading environment. When the emissions cost is a source of costs, the manufacturer has to face more costs pressure even if there is no emissions allowance trading. In particular, the results show that the initial emissions allowance determines the optimal production decision and emissions allowance trading decision in cases where the difference between the inventory cost for per unit product and the delayed delivery cost for per unit order is between the minimum and the maximum emissions cost and has no effect on production mode and emissions allowances trading decision in other cases. These conclusions will provide optimal production decision and carbon trading decision for the manufacture under a cap-and-trade environment.