Coordination of Outsourced Operations to Minimize Weighted Flow Time and Capacity Booking Costs
Tolga Aydinliyim,
George L. Vairaktarakis
Decision Sciences Department, Charles H. Lundquist College of Business, University of Oregon, Eugene, Oregon 97403
Department of Operations, Weatherhead School of Management, Case Western Reserve University, Cleveland, Ohio 44106
tolga{at}uoregon.edu
gxv5{at}case.edu
A set of manufacturers outsources certain operations to a single third party following the announcement of a booking price for each available day of production. Knowing these costs, manufacturers book available production days in a first-come-first-serve order to optimize their individual cost. The cost for each manufacturer consists of booking and work-in-progress 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 in 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. 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. 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 work-in-progress cost in exchange for 38%–53% of the total savings.
Key Words: coordination; cooperative games; incentives; outsourcing; supply chain management; production planning and scheduling
History: Received: January 31, 2006;
accepted: April 13, 2009.
Copyright © 2009 by INFORMS.
