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Production and Subcontracting Strategies for Manufacturers with Limited Capacity and Volatile Demand

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Abstract

We study a manufacturing firm that builds a product to stock to meet a random demand. If there is a positive surplus of finished goods, customers make their purchases without delay and leave. If there is a backlog, the customers are sensitive to the quoted lead time and some choose not to order if they feel that the lead time is excessive. A set of subcontractors, who have different costs and capacities, are available to supplement the firm's production capacity. We derive a feedback policy that determines the production rate and the rate at which the subcontractors are requested to deliver products. The performance of the system, when it is managed according to this policy, is evaluated.

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Authors and Affiliations

  1. Graduate School of Business, Koç University, Rumeli Feneri Yolu, Sarıyer, Istanbul, Turkey

    Barış Tan

  2. Department of Mechanical Engineering, Massachusetts Institute of Technology, Cambridge, MA, 02139-4307, USA

    Stanley B. Gershwin

Authors
  1. Barış Tan
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  2. Stanley B. Gershwin
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Tan, B., Gershwin, S.B. Production and Subcontracting Strategies for Manufacturers with Limited Capacity and Volatile Demand. Annals of Operations Research 125, 205–232 (2004). https://doi.org/10.1023/B:ANOR.0000011192.23903.7f

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  • DOI: https://doi.org/10.1023/B:ANOR.0000011192.23903.7f

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