Published online by Cambridge University Press: 28 May 2015
The paper studies the production inventory problem of minimizing the expected discounted present value of production cost control in manufacturing systems with degenerate stochastic demand. We have developed the optimal inventory production control problem by deriving the dynamics of the inventory-demand ratio that evolves according to a stochastic neoclassical differential equation through Ito's Lemma. We have also established the Riccati based solution of the reduced (one- dimensional) HJB equation corresponding to production inventory control problem through the technique of dynamic programming principle. Finally, the optimal control is shown to exist from the optimality conditions in the HJB equation.