Designing a Firm's Coordinated Manufacturing and Supply Decisions with Short Product Life Cycles

In this paper we consider a problem of joint coordination between a firm's manufacturing and supply departments. The manufacturing department is responsible for meeting random demand of a product with a short life cycle. The supply department's responsibility is to provide the sufficient amount of raw materials so that the required production level can be achieved. When coordination prevails, both departments' decisions are jointly made; otherwise, decisions are made independently without an exchange of information. If the random demand exceeds the amount produced, a second production run can be expedited at a substantially higher cost. Our analysis yields insightful results to such a coordination problem between the two departments. We provide conditions under which it is desirable to coordinate, resulting in a significant increase in expected profit. If coordination is optimal, then the supply department would purchase additional reserved material for the second run. Under this scenario, we analyze the effects of joint coordination on the expected profit. We also find explicit conditions for which joint coordination is not beneficial, i.e., the supply department should only order sufficient material to meet the first production run requirements. We provide a detailed set of numerical examples and generate response surfaces indicating the desirability of coordination for different pairs of parameter combinations.