A Separation Principle for Assemble-to-Order Systems With Expediting

In an assemble-to-order system, a wide variety of products are rapidly assembled from component inventories, in response to customer orders. Orders must be filled within a product-specific target leadtime. In the event that some of the components required to fill an order are out-of-stock, these components are expedited at a high cost per unit. The objective is to minimize the expected infinite horizon discounted cost of nominal component production and expediting. This discounted formulation captures financial inventory holding costs. The levers for control are (1) sequencing orders for assembly (2) component production (3) component expediting. Under the assumption that expedited components have zero leadtime, the multi-dimensional assemble-to-order control problem separates into single-item inventory control problems. The optimal production and expediting policy for each component is independent of all other components. Hence the literature on single-item inventory management with expediting or lost sales is directly relevant to the control of assemble-to-order systems.