Abstract
In this paper we examine the relationship between manufacturing strategy and cost modeling. Combining activity-based accounting and mathematical programming concepts, we define a structure and specific production cost functions for use in quantitative facility strategy models. The cost functions explicitly consider economies of scale and diseconomies of scope. We incorporate these cost functions into optimal facility network design formulations, and we use the resulting models as a basis for assigning individual facility charters and supply chain network structures. This modeling process has been used extensively at Hewlett-Packard Company. A case study is included.
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