Subcontracting, Coordination, Flexibility, and Production Smoothing in Aggregate Planning

We propose a model in which subcontracting can be explicitly considered as a production planning strategy. Possible market and nonmarket subcontracting mechanisms and their costs are discussed. We show that a class of feasible subcontracting mechanisms in which firms coordinate their production via...

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Bibliographic Details
Published in:Management science 1990-11, Vol.36 (11), p.1352-1363
Main Authors: Kamien, Morton I, Li, Lode
Format: Article
Language:English
Subjects:
Aggregate
aggregate planning
Applied sciences
Commercial production
Coordination
Cost efficiency
Decision theory
Dynamic programming
Exact sciences and technology
Inventory management
linear decision rules
Operational research and scientific management
Operational research. Management science
Operations management
Planning. Forecasting
Production costs
Production planning
production smoothing
Subcontracting
Subcontractors
Subcontracts
Technology
Total costs
Transaction costs
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Summary:We propose a model in which subcontracting can be explicitly considered as a production planning strategy. Possible market and nonmarket subcontracting mechanisms and their costs are discussed. We show that a class of feasible subcontracting mechanisms in which firms coordinate their production via subcontracts Pareto-dominate other mechanisms. We then offer an example with quadratic cost functions and coordination subcontracts; linear decision rules for production, inventory, and subcontracting are derived. In the example, subcontracting reduces the variability in production and inventory. The same interpretation can be used for flexibility of manufacturing resources.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.36.11.1352