A demand partitioning framework to reserve production for small enterprises

Abstract

The reservation of goods to be produced in the micro, small, and medium enterprises (MSME) sector, in the early years after India's independence, addressed the dual needs of development of the industrial sector and production of goods. However, these industrial policies created an incentive for firms to remain small so that they can continue to avail of the benefits provided by the Government. On the positive side, the MSMEs typically employ more labor intensive production processes and consequently contribute significantly to the provision of employment opportunities, generation of income, and poverty reduction. But, on the negative side, the policies have also partly facilitated the creation of a divide in terms of productivity between the MSMEs and large sized firms. In particular the policy raises important questions for a firm auctioning supply contracts among suppliers with a significant cost differential. In this paper we propose an idea to allocate supply contracts wherein a manufacturing firm partitions the stochastic demand into mutually exclusive portions and awards each portion to a different supplier. We characterize such an optimal procurement mechanism when there are two types of suppliers and an arbitrary number of demand portions. We show that the optimal procurement may require the manufacturer to intentionally withhold some demand portion, and this arises when one type of supplier is considerably inefficient in serving a demand portion. We extend our analysis to the cases with multiple types with two suppliers and two types with multiple suppliers. The optimal partition is composed of at most six contiguous demand portions, and it may include a detrimental demand portion that only generates a negative expected payoff to both supplier types. Our demand partitioning mechanism leads to a strictly higher manufacturer's expected payoff than the conventional winner-take-all case unless one supplier type completely dominates the other. We present numerical experiments that indicate when such a mechanism holds the greatest advantage for the buyer.

Demand Prediction of Production Materials and Simulation of Production Management

“…Let xl and x2 be the certain and uncertain types of material demand, respectively; y1 and y2 be the certain and uncertain quantities of material demand, respectively; f1 and f2 be the certain and uncertain equipment of material demand, respectively; gl and g2 be the certain and uncertain time of material demand, respectively. Then, the specific scenario of production material demand with multiple uncertainties in the actual production process includes: (1) x1→y1→f1→g1; (2) x1→y1→f1→g2; (3) x1→y1→f2→g1; (4) x1→y1→f2→g2; (5) x1→y2→f1→g1; (6) x1→y2→f1→g2; (7) x1→y2→f2→g1; (8) x1→y2→f2→g2; (9) x2→y2→f2→g2…”

“…With the progress of the manufacturing industry and the improvement of consumer demand for consumption quality and individualization, enterprises must pursue the diversification and intellectualization of product demand and production process, and production management must quickly respond to the fluctuations in the demand for production materials by production equipment oriented to different orders [1][2][3][4][5][6][7][8][9]. Facing different orders, the production material guarantees for production equipment involves the purchase, deployment, transportation and storage of materials.…”

Introduction to the special issue on OR models for developmental studies

“…Ying‐Ju Chen, Sridhar Seshadri, and Milind G. Sohoni propose “A Demand Partitioning Framework to Reserve Production for Small Enterprises” (Chen et al, 2020). Since gaining independence in 1947, India's industrial policy has tried to address the dual needs of developing the industrial sector and producing industrial items.…”