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Production Quotas as Bounds on Interplant JIT Contracts

Author

Listed:
  • Izak Duenyas

    (Department of Industrial and Operations Engineering, University of Michigan, Ann Arbor, Michigan 48109)

  • Wallace J. Hopp

    (Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208)

  • Yehuda Bassok

    (Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208)

Abstract

We consider the situation of a supplier plant whose customer plants desire just-in-time (JIT) deliveries. Randomness in both the production and demand processes make satisfying every demand that might occur in true JIT fashion impossible. Therefore, supplier plants typically negotiate bounds on JIT contracts with their customers. In this paper, we focus on the use of "quotas" or "target inventory levels" as a mechanism for establishing such bounds. That is, the supplier firm is responsible for meeting periodic demands up to the quota, but not beyond. In this paper, we consider the problem of setting an appropriate quota from the perspective of the supplier plant and interpret our results in the context of the negotiation process between the supplier and its customers. Under the assumption that "safety capacity" (i.e., overtime or a vendoring option) is available, we develop two models that address this problem. The first model assumes that quota shortfalls cannot be carried over to the next regular time production period and are made up with overtime/vendoring, which incurs fixed plus variable costs. The second model assumes that shortages can be backlogged to the next regular time production period at a cost. We use numerical examples to demonstrate how the models we developed were used by a clutch supplier to a large auto manufacturer to negotiate its JIT contracts.

Suggested Citation

  • Izak Duenyas & Wallace J. Hopp & Yehuda Bassok, 1997. "Production Quotas as Bounds on Interplant JIT Contracts," Management Science, INFORMS, vol. 43(10), pages 1372-1386, October.
    • Handle: RePEc:inm:ormnsc:v:43:y:1997:i:10:p:1372-1386
    DOI: 10.1287/mnsc.43.10.1372
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    Citations

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    Cited by:

    1. Xinxin Hu & Izak Duenyas & Roman Kapuscinski, 2007. "Existence of Coordinating Transshipment Prices in a Two-Location Inventory Model," Management Science, INFORMS, vol. 53(8), pages 1289-1302, August.
    2. Bradley, James R., 2005. "Optimal control of a dual service rate M/M/1 production-inventory model," European Journal of Operational Research, Elsevier, vol. 161(3), pages 812-837, March.
    3. Süleyman Demirel & Izak Duenyas & Roman Kapuscinski, 2015. "Production and Inventory Control for a Make-to-Stock/Calibrate-to-Order System with Dedicated and Shared Resources," Operations Research, INFORMS, vol. 63(4), pages 823-839, August.
    4. Weidong Chen & Cong Shi & Izak Duenyas, 2020. "Optimal Learning Algorithms for Stochastic Inventory Systems with Random Capacities," Production and Operations Management, Production and Operations Management Society, vol. 29(7), pages 1624-1649, July.
    5. Eric Logan Huggins & Tava Lennon Olsen, 2010. "Inventory Control with Generalized Expediting," Operations Research, INFORMS, vol. 58(5), pages 1414-1426, October.
    6. Long Gao & Susan H. Xu & Michael O. Ball, 2012. "Managing an Available-to-Promise Assembly System with Dynamic Short-Term Pseudo-Order Forecast," Management Science, INFORMS, vol. 58(4), pages 770-790, April.
    7. Xinxin Hu & Izak Duenyas & Roman Kapuscinski, 2008. "Optimal Joint Inventory and Transshipment Control Under Uncertain Capacity," Operations Research, INFORMS, vol. 56(4), pages 881-897, August.
    8. Eric Logan Huggins & Tava Lennon Olsen, 2003. "Supply Chain Management with Guaranteed Delivery," Management Science, INFORMS, vol. 49(9), pages 1154-1167, September.
    9. Harish Krishnan & Roman Kapuscinski & David A. Butz, 2004. "Coordinating Contracts for Decentralized Supply Chains with Retailer Promotional Effort," Management Science, INFORMS, vol. 50(1), pages 48-63, January.
    10. Scott Carr & Izak Duenyas, 2000. "Optimal Admission Control and Sequencing in a Make-to-Stock/Make-to-Order Production System," Operations Research, INFORMS, vol. 48(5), pages 709-720, October.

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