Dynamic outsourcing to contract manufacturers with different capabilities of reducing the supply cost

Contract manufacturing is a supply chain arrangement. In this paper, we investigate a situation in which a manufacturing company outsources its assembly operations to two contract manufacturers, taking into account time (as a dynamic factor) and processing level (in terms of assembling) simultaneously. Each contract manufacturer is assumed to have a different level of improvement capability of inducing supply cost reduction that, in turn, benefits the manufacturing company. Two types of contract manufacturer are considered: (i) one which offers a cheaper current price for its supply, but having little improvement capability and thus little potential for future supply cost reduction; (ii) the other, although offering a higher price, possesses a higher improvement capability. The decision problem faced by the manufacturing company is twofold: over time, (a) how much should be outsourced to each contract manufacturer (i.e., less capable or more capable); and (b) how processed (in terms of assembling) should the semi-finished units be when returned from the contract manufacturers. An optimal control model helps us develop a set of mathematical results, which can solve the decision problem. Numerical examples are also employed to demonstrate how the analysis can be utilized in a real-world setting. (C) 2003 Elsevier B.V. All rights reserved.