Maximizing supply chain profits with effective order management: integration of activity-based costing and theory of constraints with mixed-integer modelling

Abstract

The development of a profitable-to-promise order management model in a make-to-order manufacturing environment is presented. The primary objective is to maximize profitability while ensuring that the firm has adequate resources to satisfy demand. The effectiveness of Activity-Based Costing and Theory of Constraints-based approaches is compared to assess order profitability. This order management model uses a mixed-integer program to consider simultaneously capacity, the relevant costs of supply chain resources and profitability. The results suggest that a close examination of cost structures is necessary for choosing an effective framework for a profitable-to-promise application. In manufacturing environments where direct manufacturing costs constitute a relatively small percentage of the total manufacturing cost, it would be beneficial to consider an Activity-Based Costing approach. On the other hand, in environments where direct costs are large, a Theory of Constraints-based approach would suffice.