Production and subcontracting policies for assemble-to-order systems with service level constraints

We develop a queuing model to evaluate production and subcontracting policies commonly used in an assembled-to-order manufacturing system with service level constraints. The manufacturer determines production and inventory levels for the components using a base stock policy, and inventory is replenished from suppliers that have stochastic lead times. Customer demands for the assembled products can be satisfied only when all the required components are available and unsatisfied demands are backordered. The manufacturer offers high level of service to the customer and reserves the option, if necessary, to produce components internally at a faster rate and higher cost. Using queuing models we compare the performance of two policies: on-hand inventory based policy and leadtime based policy and compare these policies to obtain the condition where each policy is better than the other.