A Decoupling Inventory Problem with Storage Capacity Constraints

This paper presents a model of a two-stage production process in which the output of stage one, and the demand at stage two, are generated by independent stochastic processes. The stages are decoupled by storage of intermediate product, but there are strict limits on the available storage capacity, and the rates of flow of product into, and out of, the decoupling inventory. Product which cannot be stored is wasted. A model is formulated which enables the firm to determine the optimum capacities for the storage facility, and to determine the value of an additional supply of intermediate product. Problems of this type are common in the chemical industry, when the intermediate products are liquid or gaseous. The final part of the paper describes an application of the model in an ethylene gas complex.