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A model for contract evaluation: subcontracting under dynamic deterministic demand environment

Özlen, Melih
This study is about contract evaluation and selection in an environment where there exist two or more parties, namely a producer and one or more outsourcing companies offering different contract options. The producer faces dynamic deterministic demand, which is known at the beginning of the planning horizon, and has to decide on the quantities of production, outsourcing, inventory carrying, and backorder. Among these decisions, the producer has the opportunity of subcontracting from a set of options offered by the subcontractors with possibly distinct contract terms. The contract options are in terms of length of the contract, fixed and variable costs associated with order placed, delivery lead-time and capacity guaranteed for use. A mathematical model is used for the evaluation of available options and for the selection of the ones in order to minimize cost incurred by the producer. The model provides desired quantities of production, inventory carrying and backorder, and also determines how different contract options will beused through the planning horizon. Extensive experimentation is performed using different factors affecting the optimal solution of the model in specific instances. These results are used in order to come up with a framework where various contracting schemes for subcontracting can be obtained. This framework can assist the producer in the decision of alternative courses of actions to be taken by him as a function of contract terms.