A Dynamic Lot-Size Model with Make-or-Buy Decisions

This paper considers a dynamic lot-size model with make-or-buy decisions. In each period, the production level may not exceed a given capacity, but the purchase is unrestricted. The costs for production, purchase and inventory are concave. The problem is to find a minimum-cost production and purchase schedule that satisfies known demands over T periods. After characterizing the form of an optimal solution, we present an O(T⁵) algorithm when the production capacities are stationary. The algorithm is extended to the case where the capacities are integer multiples of a constant. The results are further extended to the cases of backlogging, bounded inventory, and capacitated purchase.