Excerpt from Subcontracting, Coordination, Flexibility, and Production Smoothing in Aggregate Planning

Subcontracting is the procurement of an item or service which is normally capable of economic production in the prime contractors own facilities and which requires the prime contractor to make specifications available to the supplier (j. S. Day Despite a high degree of both vertical and horizontal integration, it is very doubtful whether any modern business enterprise can be self - sufficient in all its activities. Even ignoring the purchase of raw materials and the use of distribution systems to dispose of final products. Most companies appear to depend upon other producers for performance of at least. Some work and services. Reflecting the extent of this dependence, the extremely important. Role that subcontracting plays in industry has been recognized in the past few years as never before (sammet. And Kelley In particular, many observers (williamson I'iore and Sabel point out. That subcontracting is more extensively used in the industries and/or industrial districts (japanese tool makers, Italian textile firms, etc.) where manufacturing technologies have greater flexibility. Because flexibility increases the feasibility of subcontracting while subcontracting helps to realize greater value of flexibility.

It has also been long recognized that subcontracting is an important option among strategies for aggregate production and capacity planning (schroeder In particular, subcontracting can be used as a substitute for other production smoothing strategies such as, holding inventory, adjustment of labor force size, pricing and promotions. Despite the enormous work on aggregate planning (holt et al. Manne Sobel Thomas Hax and Meal Eitran and Hax etc), little. Has been said about. How to formallyincorporate subcontracting into the production planning models. Unlike the alternatives such as inventory and adjustment of production capacity, the feasibility of subcontracting depends not only on the decision of the firm itself, but also 011 the willingness of other. Possibly competing. Firms who may have conflicting interests. The shift from in-plant-production to outside sources indicates a major shift in the economic institutions employed by firms to markets and/or relational contracting.

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