Production outsourcing: A linear programming model for the theory-of-constraints

This paper presents an analysis of the outsourcing problem. Pertinent variables are identified and the relationships between them are defined. We formulate the outsourcing problem as a Linear-Programming (LP) problem and identify an analytical solution. We proceed with an example examining three decision models: standard cost accounting, standard Theory-Of-Constraints (TOC) and our own solution. The model enables managers to determine which products to manufacture and which to outsource. The solution of the LP formulation enables managers to apply the model by computing an operational ratio, without having to solve a linear programming problem. The final model is simpler to apply and requires the computation of fewer variables than other prevalent models.