A study of simple rules for subcontracting in make-to-order manufacturing

We study a low volume component manufacturing operation facing order arrival rate greater than the service rate, thus necessitating subcontracting of some of the orders, for the case where order lead times are exogenous and highly variable. The major objective of the firm is to maximize capacity utilization and minimize tardiness (so as to minimize cost and maximize delivery reliability). Limiting the focus to operational decisions, we develop four heuristic decision rules with varying informational needs and complexity to determine when and which orders should be subcontracted. The performance of the decision rules over a range of environments is examined first under the assumption of perfect information. Then, we investigate the robustness of the policies for up to ±50% error in parameter estimates. The results show that, compared to simpler rules that do not seek to use the shop-workload information in making the subcontracting decision, the performance of the shop-workload feedback based decision rules (1) produce a superior performance, especially when the target utilization is high, and (2) are robust with up to ±50% error in parameter estimates.