Directorate of distance education

Planning of Large Scale Manufacturing of Multiple Products 
Large Scale Manufacturers face the difficulty of planning resources 
for multiple products at the same time. Due to competition and the 
wide range of applications of a new technology, the manufacturer needs 
to produce a variety of generic or custommade products to meet the 
requirements of its customers. Such variety in products adds complexity 
to a manufacturer’s supply chain. Different products might share common 
manufacturing processes or use common components. Because of the 
linkage between the products, the manufacturer needs to plan its capacity 
for producing multiple products together. However, finding the right 
level of capacity for all products at the same time is a large scale problem. 
A manufacturer, therefore, would benefit from efficient and practical 
algorithms for solving large scale capacity planning problems.
Alternative Planning Strategies
Outsourcing Contracts
A manufacturer needs to incorporate outsourcing into its capacity 
planning strategy. Traditionally, a manufacturer acquires capacity by 
building in-house manufacturing facilities. However, this approach has 
several drawbacks. 

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First, a manufacturer needs to bear the risk of the high fixed cost 
associated with building the facilities. Second, a manufacturer needs to 
manage the in-house facilities itself. Third, a manufacturer cannot take 
advantage of the technology developed by the contract suppliers. Fourth, 
the contract suppliers can usually provide the capacity at a lower cost by 
leveraging the benefits of economies of scale. 
Therefore, instead of building the capacity themselves, firms have 
started to outsource their manufacturing processes and ”rent” capacity 
from the suppliers through capacity contracts. Currently, outsourcing 
manufacturing is a common practice in some industries and expected 
to play an increasing role in providing capacity and expertise to 
manufacturers.
For example, in the biopharmaceutical industry, a manufacturer 
can develop the formulation of a drug in-house, use a supplier to test the 
drug, and outsource the mass production of the drug to another supplier. 
In an example, the electronic industry, a manufacturer can outsource 
the design and fabrication of the different components of a product to 
different suppliers and perform the final assembly and testing by itself. 
The top 10 electronic contract manufacturers in 2006 clocked a total 
revenue is 148,255 million dollars. 
When a manufacturer outsources its manufacturing processes, it is 
important for the firm to secure the availability and price of the capacity. 
Some of the major manufacturers, such as Hewlett-Packard, Ford, Cisco, 
and Dell, have suffered serious consequences from lack of supply and 
volatile prices. 
To assure the supply of capacity, a manufacturer can establish 
contracts with its suppliers to specify the price and amount of capacity 
that it will need. However, when the demand is uncertain and the structure 
of the supply chain is complex, it is not obvious how the manufacturer 
should specify these capacity contracts.
Moreover, planning capacity with outsourcing contracts has a 
different structure from that of traditional capacity planning. In the 
traditional approach, after the manufacturer acquires the capacity, it is a 
sunk cost and cannot be reserved. On the other hand, under outsourcing 

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capacity contracts, the manufacturer can rent or reserve the capacity from 
its suppliers for certain time periods. 
Therefore, a manufacturer can temporarily increase or decrease its 
capacity by signing contracts with the right durations. For example, we 
can look at Li & Fung Limited, an export trading company in Hong Kong 
that manages supply chains and capacity for major brands and retailers 
worldwide. 
The company owns just a few production facilities, but has a 
network of nearly 10,000 international suppliers. To fulfill an order 
from its customer, Li & Fung reserves capacity beforehand from selected 
suppliers. The agreements between Li & Fung and its suppliers specify 
the starting time of the use of the capacity, the amount of capacity that is 
required, and the time to deliver.
The capacity planning problem with flexible outsourcing contracts 
like the ones used by Li & Fung has not received much attention in the 
literature.