When and How To Subcontract

Subcontracting is “the procurement of an item or service which is normally capable of economic production in the prime contractor's own facilities and which requires the prime contractor to make specifications available to the supplier”. Subcontracting plays an extremely important role in an industry (p.6). It is extensively used in manufacturing industries where manufacturing technologies are flexible. Subcontracting is an important option among strategies for aggregate production and capacity planning. “Subcontracting is a means of reallocating production requirements among firms to achieve production smoothing. Subcontracting usually lowers total production costs, and hence, increases producers' profits” (p.1362). Subcontracting is traditionally regarded as an opportunity to pay a fixed‐cost or premium for items produced by an outside supplier. This leads us to the topic of when to subcontract.