Solving a Fabrication Lot-Size and Shipping Frequency Problem with an Outsourcing Policy and Random Scrap

Operating in unstable and competitive globalized markets, management of today’s transnational enterprises continually searches for different alternatives to maintain product quality, streamline production activities, and reduce overall operating costs, particularly in their internal supply chain system. With the aim of revealing and offering insight information to support managerial decision making, this study explores the optimal replenishment lot-size and shipping frequency problem for an intra-supply chain system with a partial outsourcing policy and random scrap. In this study, the demand of a product is partially outsourced and partially fabricated by the production units, to release the workload of machine and smooth production schedule. During the fabrication process, a portion of random scrap items is produced, and finished products are distributed to sales locations using a multiple-shipment policy. The objective is to simultaneously determine an optimal fabrication lot-size and shipping frequency decisions that minimize the overall expected costs for such an intra-supply chain system. Mathematical modeling and optimization methods are used to solve the problem. Moreover, through the use of a numerical example and sensitivity analyses, various important insights with regard to the joint effects of the partial outsourcing policy and random scrap on the optimal solutions are revealed to support managerial decision making.

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