Response time reduction in make-to-order and assemble-to-order supply chain design

Abstract

Make-to-order and assemble-to-order systems are successful business strategies in managing responsive supply chains, characterized by high product variety, highly variable customer demand and short product life cycles. These systems usually spell long customer response times due to congestion. Motivated by the strategic importance of response time reduction, this paper presents models for designing make-to-order and assemble-to-order supply chains under Poisson customer demand arrivals and general service time distributions. The make-to-order supply chain design model seeks to simultaneously determine the location and the capacity of distribution centers (DCs) and allocate stochastic customer demand to DCs by minimizing response time in addition to the fixed cost of opening DCs and equipping them with sufficient assembly capacity and the variable cost of serving customers. The problem is setup as a network of spatially distributed M/G/1 queues, modeled as a non-linear mixed-integer program, and linearized using a simple transformation and a piecewise linear approximation. An exact solution approach is presented that is based on the cutting plane method. Then, the problem of designing a two-echelon assemble-to-order supply chain comprising of plants and DCs serving a set of customers is considered. A Lagrangean heuristic is proposed that exploits the echelon structure of the problem and uses the solution methodology for the make-to-order problem. Computational results and managerial insights are provided. It is empirically shown that substantial reduction in response times can be achieved with minimal increase in total costs in the design of responsive supply chains. Furthermore, a supply chain configuration that considers congestion is proposed and its effect on the response time can be very different from the traditional configuration that ignores congestion.