Optimal outsourcing strategy: A stochastic optimization approach

Abstract

As the production capacity of a company over a certain period of time is limited, enterprises must carefully consider product line development or outsourcing options. Unlike traditional studies that use static or comparative static analyses to determine optimal production strategies, this paper proposes a stochastic optimization model that can be used to determine optimum quantities of multiphase development or outsourcing. The proposed model can be used as a decision framework for future production allocation in high-tech industries that face uncertain demands. It can also be used as a financial projection tool.