The Make-Buy Decision and Capacity

In the earlier sections, we considered how to improve performance by splitting capacity or tailoring access to capacity. We expand the notion of providing different paths for orders to a supply chain by examining the choice of the mix of orders a company may choose to make vs. the orders that they may subcontract in a supply chain. 

A procurement manager has access to both capacity within the company as well as capacity at a subcontractor. All orders accepted have to be satisfied per company policy. Thus revenue is fixed, and maximizing profit implies minimizing cost. With each order the manager has to decide how much the company should make and how much it should buy, so as 

Company Makebuy has just received an order for making three different kinds of products A, B, and C. Each product must be processed on two machines X and Y. Table 4.5 summarizes the requirements for the three models. 

However, the company has only limited capacity on machines X and Y, given prior commitments. The available capacity during lead time for machine X is 6,000 hours, while the capacity for machine Y is 3,000 hours. The company has the option to buy the products from an outside contractor, who charges the following and can deliver within the lead time. Table 4.6 summarizes the costs for the company. 

How should the order be produced what mix of make vs. buy should be used to minimize costs This decision can be made by framing the problem as a linear program and using available solution packages, e.g., the Solver package in Excel. To frame the problem, we define a set of decisions X, i = 1, 2, 3 as the amount of products 1, 2, and 3 that are made in house and Xj2, i = 1, 2, 3 as the amount of products 1, 2, and 3 that are subcontracted. Let Q, i = 1, 2, 3 andy =1,2 refer to the costs associated with each of the decisions (Table 4.6) and dj refer to the quantity of product i demanded. 

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