A stochastic programming approach for risk management in make-or-buy decisions
Make-or-buy decision-making is a widely discussed topic in literature, because switching to an external supplier is a popular method for cutting costs. Several different models, such as Total Cost of Ownership or Multi-Criteria Decision-Making, have been proposed to guide a manager’s decision-making process, but current methods lack a holistic approach to assess the risks and uncertainties that are involved. For example, information given by the supplier regarding their quality of work is often either incomplete, or subject to change. Based on a case study at one of the major aircraft maintenance companies, make-or-buy risks were analyzed and a stochastic programming model was introduced to include uncertainty aspects in the decision-making process. Using Monte Carlo simulation, the probabilistic financial risk was calculated in order to estimate how likely it is that an at first promising business deal with a supplier turns into a possible regret. The proposed model was applied to the make-or-buy decision-making process of nine different aircraft parts, whereby two cases were examined in detail. Furthermore, the case-study company will implement the proposed method into its procedures and tools for make-or-buy decisions on maintenance jobs for aircraft parts.