Effect of shortage level constraint on finite production rate model with rework

Abstract

Long run average costs for finite production rate model with backlogging is less than or equal to that of the same model without backlogging. An equation for calculating intangible backorder cost is proposed for situation when required service level is not attainable. By incorporating this intangible backorder cost in mathematical analysis, one can derive a new optimal lot-size policy that minimizes expected total costs as well as satisfies the shortage level constraint.