Manufacturing firms in capital-intensive industries face inherent demand volatility for their products and the inability to change their capacity quickly. To cope with these challenges, manufacturers often enter into contracts with their customers that offer greater certainty of supply in return for more predictable orders. In this paper, we study a "forecast-commitment" contract in which the customer provides a forecast, the supplier makes a production commitment to the customer based on the forecast, and the customer's minimum order quantity is a function of the forecast and committed quantities. We provide a complete analysis of the supplier's decisions when there is a single customer facing uncertain demand. We first show that the supplier has two dominant commitment strategies: committing to the forecast or committing to the production quantity. We then characterize the jointly optimal commitment and production strategy for the supplier and extend the results to consider a capacity constraint. We show that the proposed contract can moderate the supplier's motivation to underproduce, and due to the structure of the contract and the form of the supplier's optimal strategy, also limits the customer's incentive to overforecast. We also provide results for a capacitated two-customer example, which show that the supplier's choice of production quantity for each customer is not necessarily nondecreasing in the total available capacity.supply contracts, information sharing, capacity allocation, quantity flexibility
W e study a ''Forecast-Commitment'' contract motivated by a manufacturer's desire to provide good service in the form of delivery commitments in exchange for reasonable forecasts and a purchase commitment from the customer. The customer provides a forecast for a future order and a guarantee to purchase a portion of it. In return, the supplier commits to satisfy some or all of the forecast. The supplier pays penalties for shortfalls of the commitment quantity from the forecast, and for shortfalls of the delivered quantity from the customer's final order (not exceeding the commitment quantity). These penalties allow differential service among customers.In Durango-Cohen and Yano (2006), we analyzed the supplier's problem for a given customer forecast. In this paper, we analyze the customer's problem under symmetric information, both when the customer is honest and when he strategically orders more than his demand when doing so is advantageous. We show that the customer gains little from lying, so the supplier can use his control over the contract parameters to encourage honesty. When the customer is honest, the contract achieves (near-)coordination of the supply chain in a great majority of instances, and thus provides both excellent performance and flexibility in structuring contracts.
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