A multi-stage supply chain network design problem with in-house production and partial product outsourcing

• Published in: Applied Mathematical Modelling Vol. 70; pp. 572 - 594
• Main Authors: Cortinhal, M.J., Lopes, M.J., Melo, M.T.
• Format: Journal Article
• Language: English
• Published: New York Elsevier Inc 01.06.2019; Elsevier BV
• Subjects: Customer services; Formulations; In-house production; Integer programming; Linear programming; Mixed-integer linear programming; Modal choice; Network design; Outsourcing; Product outsourcing; Single-assignment; Supply chain network design; Supply chains; Transportation mode selection; Warehouses; In-house production; Supply chain network design; Single-assignment; Transportation mode selection; Mixed-integer linear programming; Product outsourcing
• ISSN: 0307-904X; 1088-8691; 0307-904X
• DOI: 10.1016/j.apm.2019.01.046

•Study of a 4-stage supply chain network design problem combining in-house production and product outsourcing.•MILP model for facility location, procurement, production, distribution, transportation mode choice, and external sourcing.•Analysis of the value of product outsourcing through modeling two alternative strategies for network design.•Discussion of extensive numerical results, including useful managerial insights on network design and logistics functions. We propose a mixed-integer linear programming model for a novel multi-stage supply chain network design problem. Our model integrates location and capacity choices for plants and warehouses with supplier and transportation mode selection, and the distribution of multiple products through the network. The aim is to identify the network configuration with the least total cost subject to side constraints related to resource availability, technological conditions, and customer service level requirements. In addition to in-house manufacturing, end products may also be purchased from external sources and consolidated in warehouses. Therefore, our model identifies the best mix between in-house production and product outsourcing. To measure the impact of this strategy, we further present two additional formulations for alternative network design approaches that do not include partial product outsourcing. Several classes of valid inequalities tailored to the problems at hand are also proposed. We test our models on randomly generated instances and analyze the trade-offs achieved by integrating partial outsourcing into the design of a supply chain network against a pure in-house manufacturing strategy, and the extent to which it may not be economically attractive to provide full demand coverage.