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Modeling supplier capacity allocation decisions

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  • Durango-Cohen, Elizabeth J.
  • Li, Chia Hang

Abstract

Understanding the cost effects of offering flexibility in any contractual setting is of considerable importance to suppliers. In this paper, we propose a Strategic Capacity Allocation (SCA) contract to deal with the problem of supplier-capacity allocation in a single-supplier, multiple-buyer system, when bilateral contractual agreements (between the supplier and each buyer) specify bounds of per-period purchase quantities, as well as penalties for deviating from these agreed-upon quantities. We formulate the problem as a stochastic dynamic program, and characterize the structural properties of the optimal allocation scheme in the current and future periods. In addition, we quantify the cost trade-offs of offering more flexibility to customers, which can serve as an input to aid the supplier in negotiating contracts. We also provide insights on the effect of setting contract parameters, i.e., shortage penalties, as a means to align short-term goals (i.e., profit maximization) versus long-term objectives (i.e., maximizing market positioning/growth) via improved customer service to strategically-valuable customers.

Suggested Citation

  • Durango-Cohen, Elizabeth J. & Li, Chia Hang, 2017. "Modeling supplier capacity allocation decisions," International Journal of Production Economics, Elsevier, vol. 184(C), pages 256-272.
    • Handle: RePEc:eee:proeco:v:184:y:2017:i:c:p:256-272
    DOI: 10.1016/j.ijpe.2016.10.013
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    Cited by:

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    2. Rozhin Doroudi & Pedro Sequeira & Stacy Marsella & Ozlem Ergun & Rana Azghandi & David Kaeli & Yifan Sun & Jacqueline Griffin, 2020. "Effects of trust-based decision making in disrupted supply chains," PLOS ONE, Public Library of Science, vol. 15(2), pages 1-21, February.
    3. Deligiannis, Michalis & Liberopoulos, George, 2023. "Dynamic ordering and buyer selection policies when service affects future demand," Omega, Elsevier, vol. 118(C).
    4. Masih Fadaki & Babak Abbasi & Prem Chhetri, 2022. "Quantum game approach for capacity allocation decisions under strategic reasoning," Computational Management Science, Springer, vol. 19(3), pages 491-512, July.

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