Integrated workforce capacity and inventory management under labour supply uncertainty

In a manufacturing environment with volatile demand, inventory management can be coupled with dynamic capacity adjustments for handling the fluctuations more effectively. In this study, we consider the problem of integrated capacity and inventory management under non-stationary stochastic demand and capacity uncertainty. The capacity planning problem is investigated from the workforce planning perspective where the capacity can be temporarily increased by utilising contingent workers from an external labour supply agency. The contingent capacity received from the agency is subject to an uncertainty, but the supply of a certain number of workers can be guaranteed through contracts. There may also be uncertainty in the availability of the permanent and contracted workers due to factors such as absenteeism and fatigue. We formulate a dynamic programming model to make the optimal capacity decisions at a tactical level (permanent workforce size and contracted number of workers) as well as the operational level (number of workers to be requested from the external labour supply agency in each period), integrated with the optimal operational decision of how much to produce in each period. We analyse the characteristics of the optimal policies and we conduct an extensive numerical analysis that helps us provide several managerial insights.