The Make-or-Buy Decision In The Presence Of Demand Uncertainty

With the development of market diversification,the market demand faced by enterprises has become increasingly complex and changeable.The uncertainty of demand has become one of the main problems affecting the revenue of enterprises.In response to this phenomenon,more enterprises take the strategy that forecasting the market demand before the start of the selling season.However,for enterprises enter the industry continually,they may understand market quotations differently and have various degrees of demand forecasting ability.Therefore,under the demand uncertainty,there usually exists some information communication within supply chains,which most likely leads to information leakage to retailer's competitors by their common supplier.On the other hand,due to the development of economic globalization,all kinds of resources are allocated globally.For enterprises with production capacity,they usually face the choice of make-or-buy decision.Enterprises can adopt the mode of making products by themselves at a lower cost,or buy the goods directly from independent suppliers at a higher price.The make-or-buy decision can be influenced by concerns about disclosure of proprietary information.Although information leakage may damage the benefits of supply chain members to some extent,but for new entrant to an industry,it can obtain its rival's more accurate demand information.Through this strategic means of competition,the enterprise weighs the benefits between lower production cost and more accurate information,maximizing its own profits.From the perspective of the new entrant into a certain industry,this paper studies the make-or-or-buy decisions of enterprises based on the uncertain demand of the market.We consider a new manufacturing retailer and a mature supply chain composed of an upstream supplier and a downstream competitive retailer.Based on the actual situation and the balance between cost and information accuracy,we describe the demand uncertainty and define the make-or-buy decision mathematically.Then we discuss the equilibrium quantities of the retailers,wholesale price of the supplier,and the expected profit of each participant under different sourcing decisions,taking into account the influence of cost,market demand,information accuracy and coupling degree.Finally,on the basis of the above research,we consider further that the enterprise has more accurate prediction of market demand,and then analyze the impact of various factors on its earnings,optimizing its equilibrium sourcing strategy.The research of this paper shows that when both retailers don't obtain market demand information,they always choose the self-making strategy.When two retailers hold information with different accuracy,the retailer's make or outsourcing strategy is affected by the production cost,the market deterministic demand,the fluctuation of market demand in random,the accuracy and correlation of two competitors' demand information.After the trade-off between the cost and information,retailers do not always adopt the self-make strategy of low production cost.Under certain conditions,they would rather spend a higher purchase cost to obtain the information of competitive retailers through outsourcing strategy.However,when the cost of acquiring the other party's information is too high to increase the revenue,the retailer will give up the outsourcing strategy and choose to make production himself again.These results can be used as a reference for new entrants in the industry to formulate optimal production and operation strategies in a competitive environment.It is hoped that this study can help decision-makers solve similar conflicts and problems in actual operation and management,and provide certain ideas for the realization of revenue maximization.