A net present value assessment of make-to-order and make-to-stock manufacturing systems

This paper shows the impact of using the net present value (NPV) on parameter selection in the ordering policy of a production planning and control system. Using a well understood and documented model, the net present value is used as an objective function to determine the discounted future variance costs resulting from the model's dynamics. The NPV of the variance (NPVv) is defined and applied to the model under make-to-order and make-to-stock conditions. We show that the cost structure of the manufacturing system defines the NPVv and hence aids in identifying the most appropriate control strategy to apply.