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Subcontracting, Coordination, Flexibility, and Production Smoothing in Aggregate Planning


  • Morton I. Kamien

    (J. L. Kellogg Graduate School of Management, Northwestern University, Evanston, Illinois 60208)

  • Lode Li

    (School of Organization and Management, Yale University, New Haven, Connecticut 06520)


We propose a model in which subcontracting can be explicitly considered as a production planning strategy. Possible market and nonmarket subcontracting mechanisms and their costs are discussed. We show that a class of feasible subcontracting mechanisms in which firms coordinate their production via subcontracts Pareto-dominate other mechanisms. We then offer an example with quadratic cost functions and coordination subcontracts; linear decision rules for production, inventory, and subcontracting are derived. In the example, subcontracting reduces the variability in production and inventory. The same interpretation can be used for flexibility of manufacturing resources.

Suggested Citation

  • Morton I. Kamien & Lode Li, 1990. "Subcontracting, Coordination, Flexibility, and Production Smoothing in Aggregate Planning," Management Science, INFORMS, vol. 36(11), pages 1352-1363, November.
  • Handle: RePEc:inm:ormnsc:v:36:y:1990:i:11:p:1352-1363

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    Cited by:

    1. O. Zeynep Akc{s}in & Francis de Véricourt & Fikri Karaesmen, 2008. "Call Center Outsourcing Contract Analysis and Choice," Management Science, INFORMS, vol. 54(2), pages 354-368, February.
    2. Kogan, Konstantin & Tapiero, Charles S., 2009. "Optimal co-investment in supply chain infrastructure," European Journal of Operational Research, Elsevier, vol. 192(1), pages 265-276, January.
    3. Wang, Charles X. & Webster, Scott & Zhang, Sidong, 2011. "A comparison of two sourcing tactics for a new component," European Journal of Operational Research, Elsevier, vol. 211(2), pages 310-317, June.
    4. Olhager, Jan & Rudberg, Martin & Wikner, Joakim, 2001. "Long-term capacity management: Linking the perspectives from manufacturing strategy and sales and operations planning," International Journal of Production Economics, Elsevier, vol. 69(2), pages 215-225, January.
    5. Bertrand, J. W. M. & Sridharan, V., 2001. "A study of simple rules for subcontracting in make-to-order manufacturing," European Journal of Operational Research, Elsevier, vol. 128(3), pages 509-531, February.
    6. Wang, Li Ming & Liu, Li Wen & Wang, Yong Jie, 2007. "Capacity decisions and supply price games under flexibility of backward integration," International Journal of Production Economics, Elsevier, vol. 110(1-2), pages 85-96, October.
    7. Alper Atamtürk & Dorit S. Hochbaum, 2001. "Capacity Acquisition, Subcontracting, and Lot Sizing," Management Science, INFORMS, vol. 47(8), pages 1081-1100, August.
    8. Maike Scherrer-Rathje & Patricia Deflorin & Gopesh Anand, 2010. "Outsourcing and its Impact on Manufacturing Flexibility: Contingencies Matter," Working Papers 0125, University of Zurich, Institute for Strategy and Business Economics (ISU).
    9. Szmerekovsky, Joseph G., 2007. "Single machine scheduling under market uncertainty," European Journal of Operational Research, Elsevier, vol. 177(1), pages 163-175, February.
    10. Thürer, Matthias & Stevenson, Mark & Qu, Ting & Godinho Filho, Moacir, 2014. "The design of simple subcontracting rules for make-to-order shops: An assessment by simulation," European Journal of Operational Research, Elsevier, vol. 239(3), pages 854-864.
    11. Spinler, Stefan & Huchzermeier, Arnd, 2006. "The valuation of options on capacity with cost and demand uncertainty," European Journal of Operational Research, Elsevier, vol. 171(3), pages 915-934, June.
    12. Jan A. Van Mieghem, 1999. "Coordinating Investment, Production, and Subcontracting," Management Science, INFORMS, vol. 45(7), pages 954-971, July.
    13. Boulaksil, Youssef & Fransoo, Jan C., 2009. "Order release strategies to control outsourced operations in a supply chain," International Journal of Production Economics, Elsevier, vol. 119(1), pages 149-160, May.
    14. Sasan Bakhtiari & Robert Breunig, 2017. "New Outsourcing, Demand Uncertainty and Labor Usage," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 50(1), pages 69-90, February.


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