PRODUCTION QUOTAS AS BOUNDS ON INTERPLANT JIT CONTRACTS

We consider the situation of a supplier plant whose customer plants de sire just-in-time (JIT) deliveries. Randomness in both the production and demand processes make satisfying every demand that might occur in true JIT fashion impossible. Therefore, supplier plants typically nego tiate bounds on JIT contracts with their customers. In this paper, we focus on the use Of ''quotas'' or ''target inventory levels'' as a mec hanism for establishing such bounds. That is, the supplier firm is res ponsible for meeting periodic demands up to the quota, but not beyond. In this paper, we consider the problem of setting an appropriate quot a from the perspective of the supplier plant and interpret our results in the context of the negotiation process between the supplier and it s customers. Under the assumption that ''safety capacity'' (i.e., over time or a vendoring option) is available, we develop two models that a ddress this problem. The first model assumes that quota shortfalls can not be carried over to the next regular time production period and are made up with overtime/vendoring, which incurs fixed plus variable cos ts. The second model assumes that shortages can be backlogged to the n ext regular time production period at a cost. We use numerical example s to demonstrate how the models we developed were used by a clutch sup plier to a large auto manufacturer to negotiate its JIT contracts.