The Manufacturing versus Outsource Decision in Electronics Manufacturing

1. The Manufacturing versus Outsource Decision in Electronics Manufacturing Michael H. Cole, Scott J. Mason, Tze-Chen Hau University of Arkansas Li Yan Avaya Inc October 29, 2001

2. Outline • What is Contract Manufacturing (CM)? • CM Pros and Cons • Research Problem • Solution Approach • Mixed Integer Program (MIP) model • Conclusion and future research

3. What is Contract Manufacturing? • Outsourcing the manufacturing of product to a third party (who typically doesn’t make any product of their own) • Contract manufacturers can cover the scope of the supply chain process from product development, demand management, manufacturing, material procurement, and customer support. • Major contract manufacturers: Solectron, Celestica, Flextronics, TSMC, and UMC.

4. Advantages • Allows company to concentrate on its core competencies and outsource processes that required high cost capital infrastructure • The advantages of Contract Manufacturing are include but not limited to: • Cost reduction • Greater efficiency • Smaller lots • Lower inventories • Technology access • Reduced time to market • Provide high quality product at any scale

5. Disadvantages • Potential reduction in company manpower and sustaining engineering • Potential loss of • market visibility • manufacturing process control • inventory monitoring • valuable data from manufacturing process • ability to repair your own product

6. Problem Summary • Problem: Given customer demand for multiple products, determine which products to manufacture in house and which to outsource. • The decision will include the status of existing production facilities, the selection of outsourcing partners, the quantity of outsourcing, the inventory balance at the end of each period, and transportation mode selection.

7. Research Contribution • Explicitly considered the manufacturing versus outsource decision in a multi commodity, multi facility and multi period MIP model • Compared regular production planning model versus model with Contract Equipments Manufacturer (CEM) • Experiment and understand the capability and the practical usage of the model

8. Relevant Literature • Multi-facility, multi-commodity, and multi-period production planning model • Wu and Golbasi’s (1999) model • CEM models • Comen and Ronen (2000) ~ Linear Program • Bradley (2001) ~ Stochastic study • Additional factors that must be considered include • Costs associated with hiring/firing of contract manufacturers • Production cost for outsourced products • Dynamic capacity capabilities • Minimum outsource quantity • Comprehension of the implications of contractual agreements

9. MIP Model • Minimize (Production cost + setup cost + Inventory cost + transportation cost + hiring/firing CM cost + facility open cost+ contracting cost) • Subject to: • Capacity constraint • Setup constraint • Facility capability constraint • Demand Satisfaction constraint • Inventory balance constraint • Initial / end period inventory level • CM hire and fire constraint • CM open and close constraint • Minimum production constraint

10. Experimental Design • Size of problem • Number of facilities • Number of end products • Number of periods • BOM level • Inventory level • Initial inventory level • End period inventory level • Cost components • Setup cost • Inventory holding cost • CEM cost

11. Conclusion • Production cost and setup cost are the major cost contributors to our model. • The size of the model and the solution time is heavily depending on the number of end products and length of planning horizon. • Proper initial and end period inventory level is important in order to get good solutions • Trade off between inventory level and CEM related cost

12. Future Research • Determine the aggregate level of data • Structure of production plan • Method of obtaining mixed data from CEM production line • Benchmarking study to determine potential products to outsource • Alternative methods of solving the problem • Improve the model to incorporate global supply chain