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Quick response for customer order with low cost is the key competitive factor for the contract manufacturer who assembles the customized capital device. We consider a problem for the contract manufacturer who receives forecast information from his customer before achieving the firm order. The firm order may be cancelled with some probability. The components have high probability of depreciation, they are all purchased for the current order. And the purchase lead times of the components are stochastic. The contract manufacturer must determine when to place the order for components. We present the total expected cost minimization model, including the components procurement costs, the holding cost, the tardiness penalty cost and the order cancellation cost. We establish structural properties of the optimal policy and prove that in some particular situation there is no need to purchase components before the order is confirmed. Numerical analysis illustrates how the model parameters affect the purchase lead times, the probability of delivery-on-time and total expected cost.
Date of Conference: 8-10 Aug. 2011