An Analysis on Make-or-Buy Decision Making in Serial Production System

We construct a make-or-buy decision-making model for a serial manufacturing system considering internal making cost and external purchasing cost. Internal making costs consist of fixed costs and variable costs, while external purchasing costs are exhaustively determined by outside suppliers. Since decision-making in previous stage affects decision making in successive stage, the model becomes quite complicated. In this paper, we introduce a binary switching variable to each production process so that to control material flow in the manufacturing system, consequently, have a solution to the make-or-buy decision making observing the value of the switching variables. We prove some characteristics of the model associated with the switching variable and develop an easy algorithm to find optimal solution.