An optimal ordering strategy for a third-party managed supply chain

Damodar Y. Golhar, Snehamay Banerjee

Research output: Contribution to journalArticlepeer-review

4 Scopus citations

Abstract

The rapid pace of new product introduction and global sourcing of raw materials and manufacturing facilities have created a complex and fragmented supply chain. Retailers in many consumer product industries are relying on third-party supply-chain managers (SCMs) to manage the global supply chain cost-effectively with short production lead times. To meet delivery requirements, the SCM must start the production process before receiving a firm order from retailers. We assume a two-stage production process where, in stage 1, a base product is produced. In stage 2, the base product is customised. The SCM absorbs the penalties associated with over- or underestimating retailers demand. Hence, the SCM has to decide on (a) the optimal production quantity of the base products and (b) the number of base products to be customised without delay. We develop a profit maximisation model for this strategy using a nonlinear objective function with two decision variables and one constraint. Applying Kuhn-Tucker conditions, closed-form solutions are obtained for the two decision variables. Also, formulations are given for two additional strategies: postpone customisation of all products and produce customised products only. An example illustrates the use of our model. We also examine the impact of demand variability on the effectiveness of the three strategies. Results show that postponement may not always be the best strategy for an SCM.

Original languageEnglish (US)
Pages (from-to)2969-2980
Number of pages12
JournalInternational Journal of Production Research
Volume51
Issue number10
DOIs
StatePublished - May 1 2013

All Science Journal Classification (ASJC) codes

  • Strategy and Management
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

Keywords

  • Decision-support system
  • Order splitting
  • Product-customisation postponement
  • Supply-chain management
  • Supply-chain manager

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