Analytical study on multi‐product production planning with outsourcing

This paper studies a problem on multi‐product capacitated production planning with outsourcing. The context of the problem is about an enterprise that manufactures multiple products in multiple periods for stochastic demands. Manufacturers usually have two alternative modes for the production: one is to outsource parts from outside suppliers and then assemble them; the other is to in‐house manufacture parts and then assemble them. Each mode has its relative merits. In addition, the capacity constraint by in‐house manufacturing is also taken into account. This paper investigates how to balance the trade‐off between the two modes. An analytical approach is proposed to study the optimal decision on the above two modes for all products during each planning period. Some findings are drawn out from this analytical study. Numerical experiments show the significant cost reduction can be obtained using the proposed decision model.