Outsourcing and Capacity planning in an uncertain global environment
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 seminar class Active In SP Posts: 5,361 Joined: Feb 2011 22-02-2011, 12:14 PM submitted by: Arjyajyoti Goswami Rachna Chawla   FINAL operation research ppt.ppt (Size: 174.5 KB / Downloads: 46) Outsourcing and Capacity planning in an uncertain global environment DECISION : to select between a domestic supplier and an offshore supplier to fulfill a certain demand and also to determine the optimum capacity sizes DECISION MAKER : a firm , which is single expected utility maximiser DECISION MAKING STAGES: Stage 1 – determining the capacity sizes to be reserved with the two firms Stage 2 – determining the production quantities with the 2 firms Need for the decision The domestic supplier has much higher production cost than the offshore supplier, but it does not involve any risk of fluctuating exchange rates The overseas supplier has much less production cost than the domestic supplier but involves risks of fluctuating exchange rates Also it has been proved that if a firm secures order from two suppliers rather than one in a global environment, then the profit incurred is higher than securing the order from a single supplier ASSUMPTIONS WHILE MODELLING THE PROBLEM Supplier capacity is not an issue, and both the suppliers are capable of supplying the desired quantity of items to the firm The capacity reservation cost is in direct proportion to the quantity of the goods reserved i.e capacity size The unit capacity reservation cost for both the suppliers, is same in domestic currency In the solution of the model capacity investment expansion is not considered, and focus is only in fulfilling the current demand rather than thinking of long term strategies MODEL FOR STAGE 1: Max U (K) = E [ π ( K;x,y)] – γ/2 Var [π ( K;x,y)], π ( K;x,y) = πT (K;x,y) – (cK 1) T K The objective function is a mean variance utility function of π i.e the net profit over two stages. The second equation indicates that the net profit over 2 stages is equal to the sales profit in stage 2 minus the capacity reservation cost in stage 1, and it If γ = 0 , the firm is risk neutral If γ > 0 , the firm is risk averse MODEL FOR STAGE 2 In the second stage when the exchange rate and demand are realized as (x,y) the firm makes production decisions of q1(<= K1) and q2(<= K1), respectively with the two suppliers Max πT = qT ( p1 – c.[1,x]T) Subject to, 0<= q<= K 1Tq<= y Objective function is to maximize the profit, which is selling price minus the production cost The first constraint signifies that the production quantity should be less than the reserved capacities and the second constraint signifies that the total production must not exceed the realized demand Also, p – c1 > cK , so that the domestic supplier is not ruled out of consideration Risk-neutral newsvendors Deterministic Demand Uncertain Demand DETERMINISTIC DEMAND We divide the capacity space in 5 regions, because if K is located in different regions, the corresponding shadow prices will be different λ1, λ2 are the shadow prices associated with K1 and K2. Whenever the λ1 >= λ2 the off shore supplier is preferred Whenever λ2 >=λ1 the domestic supplier is preferred.