Cost and Shortage Trade‐Offs in Aggregate Production Planning*

Abstract

ABSTRACT It is exceedingly difficult, if not impossible, to measure shortage costs. To bypass this difficulty in aggregate production planning, this paper develops an optimal policy function (piecewise linear or a curve) for trade‐offs between shortages and the sum of production and inventory costs. The optimal management decision is based on this function. It should be of major interest in production planning since similar functions for inventory management have been successfully applied in practice.