Scheduling with subcontracting options

Motivated by a problem commonly faced by time-sensitive product manufacturers, an analytical model to study the joint decisions of subcontracting and detailed job scheduling is proposed. In the proposed model, a manufacturer operates in a make-to-order fashion and receives a set of orders from its customers at the beginning of the planning horizon. The orders can be either processed by the manufacturer in-house or subcontracted to one of several available subcontractors, possibly at a higher cost. The manufacturer needs to determine which orders should be produced in-house and which orders should be subcontracted. Furthermore, it needs to determine a production schedule for the orders to be produced in-house. The objective is to minimize the total production and subcontracting cost, subject to a constraint on the maximum completion time of the orders. We analyze the computational complexity of the model, develop a heuristic for solving it and analyze worst-case and asymptotic performances of the heuristic. We also study the value of subcontracting by comparing our model and a model where no subcontracting option is available to the manufacturer. Computational results demonstrate that the subcontracting option gives the manufacturer a significant performance improvement. Related managerial insights are also provided.