Outsourcing of production: the valuation of volume flexibiltiy in decision-making
Journal Title: LogForum - Year 2018, Vol 14, Issue 1
Abstract
Background: Outsourcing remains a central mechanism for improving manufacturing supply chains, with volume flexibility being a frequently targeted objective. However, outsourcing decision-making remains focused on static cost estimations, while the value of volume flexibility is subject to managerial valuation, thus imposing a risk of estimation errors. This paper tests whether decision-makers systematically under- or overvalue volume flexibility when deciding on outsourcing. Methods: Four outsourcing decision made by an OEM operating with seasonality and boom and bust cycles are analyzed to assess if decision-makers’ intrinsic valuation of volume flexibility is biased. This was done by utilizing a previously developed mixed integer linear programming model for tactical planning. The model jointly considers production planning, workforce adjustments and capital investment, while respecting upstream supplier constraints, thereby encompassing both positive and negative effects of production outsourcing on volume flexibility. Combining the model with detailed knowledge of how the production system would be impacted, enabled a quantification of the value from volume flexibility, which could then be compared to the decisions made. Results: Augmenting existing static cost estimations with the value of flexibility did not reveal systematic estimation errors. However, the results suggest that the value of volume flexibility is situational, and on average comparable to direct labor cost. Conclusions: The results emphasize the importance of accurately and case-specific valuation of volume flexibility in cost-driven production outsourcing.
Authors and Affiliations
Jesper N. Asmussen, Jesper Kristensen, Brian V. Wæhrens
Keywords
Related Articles
- EP ID EP508275
- DOI 10.17270/J.LOG.2018.263
- Views 139
- Downloads 0
Factors influencing the decision to implement an RFID system
Background: The RFID (Radio Frequency IDentification) stands for a modern technique of wireless identification of objects, which at the present stage of development is frequently used in automated processes in va...
Smart services for enhancing personal competence in industrie 4.0 digital factory
Background: Adaptive digitalization and networking of machines, working parts, employees and other entities on the plant floor are core of realizing industry 4.0, so that information and instruction will be available...
Logistic aspects of the ecological impact indicators of an agricultural biogas plant
Background: Poland must fulfill its obligations regarding increasing the share in the production of energy from renewable sources. By 2020, this share for Poland is to amount to a minimum of 15% of green energy consum...
Describing the technological scope of Industry 4.0 ? a review of survey publications
Background: The paper addresses common difficulties of understanding the scope and the underlying technologies of “Industry 4.0”. Existing definitions comprise a variety of technologies and applications, p...
Smart factory: The requirements for implementation of the Industry4.0 solutions in FMCG environment ? case study
Background: The Industry 4.0 and Smart Factory concepts have gained recognition in recent years and have caught the attention of many authors, which has been evident in various publications in recent years. However, t...