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Optimal Component Stocking Policy for Assemble-to-Order Systems with Lead-Time-Dependent Component and Product Pricing

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  • Vernon Ning Hsu

    (School of Management, George Mason University, Fairfax, Virginia 22030)

  • Chung Yee Lee

    (Department of Industrial Engineering and Logistics Management, Hong Kong University of Science and Technology, Hong Kong, China)

  • Kut C. So

    (The Paul Merage School of Business, University of California, Irvine, California 92697-3125)

Abstract

Short delivery time and the efficient management of component inventories are two crucial elements that determine the competitiveness of many contract assembly manufacturers, especially in the electronics industry. In this paper, we develop and analyze an optimization model to determine the optimal stocking quantities for components of an assemble-to-order product in an environment where demand is uncertain and the price for the final product and the costs of components depend on their delivery lead times. We provide an efficient solution procedure to solve the problem in which the manufacturer must deliver the full order quantity possibly in multiple shipments. We further extend our model to the situation where the manufacturer has the option of not delivering the full quantity but instead takes the penalty for a delivery shortage. We derive some analytical results that illustrate how different model parameters affect the optimal solution and provide useful insights for managing components in the assemble-to-order environment.

Suggested Citation

  • Vernon Ning Hsu & Chung Yee Lee & Kut C. So, 2006. "Optimal Component Stocking Policy for Assemble-to-Order Systems with Lead-Time-Dependent Component and Product Pricing," Management Science, INFORMS, vol. 52(3), pages 337-351, March.
    • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:3:p:337-351
    DOI: 10.1287/mnsc.1050.0438
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    References listed on IDEAS

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    Cited by:

    1. Ke Fu & Vernon N. Hsu & Chung-Yee Lee, 2009. "Note--Optimal Component Acquisition for a Single-Product, Single-Demand Assemble-to-Order Problem with Expediting," Manufacturing & Service Operations Management, INFORMS, vol. 11(2), pages 229-236, December.
    2. Vernon Ning Hsu & Chung Yee Lee & Kut C. So, 2007. "Managing components for assemble‐to‐order products with lead‐time‐dependent pricing: The full‐shipment model," Naval Research Logistics (NRL), John Wiley & Sons, vol. 54(5), pages 510-523, August.
    3. Xiang Fang & Kut C. So & Yunzeng Wang, 2008. "Component Procurement Strategies in Decentralized Assemble-to-Order Systems with Time-Dependent Pricing," Management Science, INFORMS, vol. 54(12), pages 1997-2011, December.
    4. Changwen Li & Bin Cao & Yong-Wu Zhou & T. C. Edwin Cheng, 2023. "Pricing, coalition stability, and profit allocation in the pull assembly supply chains under competition," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 45(3), pages 977-1011, September.
    5. Yeu-Shiang Huang & Hau-Wen Lo & Jyh-Wen Ho, 2021. "Effects of component commonality and perishability on inventory control in assemble-to-order systems," Operational Research, Springer, vol. 21(1), pages 205-229, March.
    6. Kai Huang, 2014. "Benchmarking non-first-come-first-served component allocation in an assemble-to-order system," Annals of Operations Research, Springer, vol. 223(1), pages 217-237, December.
    7. Yuhong He & Shuya Yin, 2015. "Joint Selling of Complementary Components Under Brand and Retail Competition," Manufacturing & Service Operations Management, INFORMS, vol. 17(4), pages 470-479, October.
    8. Xiao, Yongbo & Chen, Jian & Lee, Chung-Yee, 2010. "Optimal decisions for assemble-to-order systems with uncertain assembly capacity," International Journal of Production Economics, Elsevier, vol. 123(1), pages 155-165, January.
    9. Zhai, Yue & Hua, Guowei & Cheng, Meng & Cheng, T.C.E., 2023. "Production lead-time hedging and order allocation in an MTO supply chain," European Journal of Operational Research, Elsevier, vol. 311(3), pages 887-905.
    10. Fu, Ke & Xu, Jiayan & Miao, Zhaowei, 2013. "Newsvendor with multiple options of expediting," European Journal of Operational Research, Elsevier, vol. 226(1), pages 94-99.
    11. Fei Zhang & Zailin Guan & Li Zhang & Yanyan Cui & Pengxing Yi & Saif Ullah, 2019. "Inventory management for a remanufacture-to-order production with multi-components (parts)," Journal of Intelligent Manufacturing, Springer, vol. 30(1), pages 59-78, January.
    12. Ke Fu & Vernon Ning Hsu & Chung-Yee Lee, 2006. "Inventory and Production Decisions for an Assemble-to-Order System with Uncertain Demand and Limited Assembly Capacity," Operations Research, INFORMS, vol. 54(6), pages 1137-1150, December.
    13. Susan H. Xu & Zhaolin Li, 2007. "Managing a Single-Product Assemble-to-Order System with Technology Innovations," Management Science, INFORMS, vol. 53(9), pages 1467-1485, September.
    14. Gunasekaran, Angappa & Ngai, Eric W.T., 2009. "Modeling and analysis of build-to-order supply chains," European Journal of Operational Research, Elsevier, vol. 195(2), pages 319-334, June.
    15. Atan, Zümbül & Ahmadi, Taher & Stegehuis, Clara & Kok, Ton de & Adan, Ivo, 2017. "Assemble-to-order systems: A review," European Journal of Operational Research, Elsevier, vol. 261(3), pages 866-879.
    16. Zhan Pang & Frank Y. Chen & Youyi Feng, 2012. "Technical Note---A Note on the Structure of Joint Inventory-Pricing Control with Leadtimes," Operations Research, INFORMS, vol. 60(3), pages 581-587, June.
    17. Shen, Houcai & Pang, Zhan & Cheng, T.C.E., 2011. "The component procurement problem for the loss-averse manufacturer with spot purchase," International Journal of Production Economics, Elsevier, vol. 132(1), pages 146-153, July.
    18. Zhang, Guoquan & Shang, Jennifer & Li, Wenli, 2011. "Collaborative production planning of supply chain under price and demand uncertainty," European Journal of Operational Research, Elsevier, vol. 215(3), pages 590-603, December.

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