Integrated production and logistics planning: Contract manufacturing and choice of air/surface transportation

We study the operational problem of a make-to-order contract manufacturer seeking to integrate production scheduling and transportation planning for improved performance under commit-to-delivery model. The manufacturer produces customer orders on a set of unrelated parallel lines/processors, accounting for release dates and sequence dependent setup times. A set of shipping options with different costs and transit times is available for order delivery through the third party logistics service providers. The objective is to manufacture and deliver multiple customer orders by selecting from the available shipping options, before preset due dates to minimize total cost of fulfilling orders, including tardiness penalties. We model the problem as a mixed integer programming model and provide a novel decomposition scheme to solve the problem. An exact dynamic programming model and a heuristics approach are presented to solve the subproblems. The performance of the solution algorithm is tested through a set of experimental studies and results are presented. The algorithm is shown to efficiently solve the test cases, even the complex instances, to near optimality.