Two-stage optimization model for process/supplier selection, component allocation, and quality improvement

A company has to produce a product that gives better value than its competitors. It means the company has to produce a better quality product with lower manufacturing cost. Outsourcing has become a common practice in manufacturing where a company outsources some of their needed components to the suppliers. Supplier selection is not an easy task since it will determine the manufacturing cost and quality of the product. In this research, we develop a two-stage optimization model to help decision maker in determining the optimal suppliers which will give least manufacturing cost and how to improve the quality of the components. In the first stage, a process/supplier selection model was developed to determine the optimal tolerance and component allocation to minimize manufacturing cost and quality loss. In the second stage, investment allocation model was developed to improve the quality of the components. The objective function of the second model is to maximize the return on investment (ROI). The implementation and analysis of the proposed model were demonstrated using a simple assembly product which consists of three components and solved using Oracle Crystal Ball software.