Make or Buy Decision Model with Multi-Stage Manufacturing Process to Minimize Manufacturing Cost and Quality Loss

Manufacturing costs and tolerance will affect the price and the quality of a product from every manufacturer company. Companies must produce high-quality products with low manufacturing costs in order to keep their products competitive in the market. However, it is difficult to produce a high-quality product with a low manufacturing cost. Companies have difficulties in determining the components to be produced using their own manufacturing facilities (make) or outsourced to their suppliers (buy). Hence, a make or buy analysis is needed to minimize the manufacturing costs and quality loss and to determine the optimum alternative regarding make or buy decisions. This paper discusses an optimization model of a make or buy decision for a manufacturing company with multi-stage manufacturing process in order to minimize the manufacturing costs and the quality loss in terms of manufacturer and customer quality loss. A numerical example is provided to show the application of the model using a simple assembly product consisting of three components. There are three machines with two stages that can be used to produce the components and two alternatives of suppliers to fulfill the order. Each machine and supplier have different characteristics in terms of manufacturing costs and its tolerance.