Option model for joint production and preventive maintenance system

Traditionally, optimal preventive maintenance strategies are derived under deterministic and constant rate demand. Using "option", a powerful financial derivative tool to tackle optimization problem under uncertain environment, this paper presents an analytical, option-based cost model for scheduling joint production and preventive maintenance when demand is uncertain. The manufacturing enterprise can balance the tradeoff between reduced risk from uncertainty that options afford and the increased price premium paid to invest preventive maintenance resources. The optimal number of preventive maintenance work-orders is obtained and numerical examples are included to validate the importance and the effectiveness of the proposed methodology. The comparison with the conventional periodic preventive maintenance policy is also analytically performed. The proposed option-based model is found to add flexibility to the production system and thus reduce the risk of shortage or overage of demand when conventional assumption of constant rate demand is released to stochastic demand.