This paper presents an analytical, option-based cost model for an integrated production and preventive maintenance decision making with stochastic demand. The determination of preventive maintenance times and their schedule during a production period is converted to an option problem through maximizing the profit of the production per unit time. The optimal number of preventive maintenance actions is obtained and some further discussions on how the cost parameters affect the optimal results are also derived. The resulting option-based model is found to add flexibility to the production system and thus reduce the risk of shortage when the production system is faced with stochastic demand. A comparisons between the basic model (without option) and the option-based preventive maintenance model has shown that the option model is a more flexible under demand uncertainty and results in at least as much profit as the basic one.

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