Coordination of Outsourcing Operations

A set of manufacturers outsource certain operations to a single third-party. Each available day of production at the third party can be booked at a given cost announced by him. Knowing these costs, manufacturers book available production days in a first-come-first-served (FCFS) order so as to optimize their individual cost. The cost for each manufacturer consists of booking and work-in-progress (WIP) costs as expressed by the weighted flow time. When window booking is completed, the third-party identifies a schedule that minimizes the total cost incurred by all manufacturers. This coordination reduces the total cost but may result to higher costs for a subset of manufacturers. For this reason, the third-party devises a savings sharing scheme with which the monetary benefit for each manufacturer is greater following the coordination. In this article we present algorithms for the problem considered, as well as savings sharing schemes that make coordination a better alternative for all parties involved. The highlight of our experiments is that the costs of the production chain can be reduced by an average of 32% if one-third of the members let the third-party cover their increased WIP cost in exchange for 40-55% of the total savings. ∗Decision Sciences Department, Lundquist College of Business, 1208 University of Oregon, Eugene, OR 974031208, [email protected] †Department of Operations, Weatherhead School of Management, Case Western Reserve University, 10900 Euclid Avenue, Cleveland, OH 44106-7235, [email protected]