Real Time Revision of Order Quantities with Capacity Constraint: A Single Period Model

Manufacturing firms would like to maximize customer satisfaction by providing them with what they need when they need it. This, however, would mean continual variations in production quantities, and component orders from suppliers. A flexible manufacturing system can help alleviate costs related to modification of production quantities. The capacity of such a system, however, has to be limited because of high investment cost. Further, unless there is a long-term relationship, suppliers may levy a high surcharge for last minute changes in order size. We model a hybrid control policy comprising an advance (pre-production) order size agreed upon with suppliers, and a provision for real time order revision at a given rate of surcharge. We show that a rank-order of products can be used for real time revisions, and that a strong buyer-supplier relationship that keeps these surcharges low can actually help increase profits for both parties. We study issues such as compatibility between JIT and flexibility, and the impact of market conditions on overall profitability. 1