We study capacity reservation contracts between a high‐tech manufacturer (supplier) and her OEM customer (buyer). The supplier and the buyer are partners who enter a ‘design‐win” agreement to develop the product, and who share the stochastic demand information. To encourage the supplier for more aggressive capacity expansion, the buyer reserves capacity upfront by paying a deductible fee. As capacity expansion demonstrates diseconomy of scale in this context, we assume convex capacity costs. We show that as the buyer's revenue margin decreases, the supplier faces a sequence of four profit scenarios with decreasing desirability. We examine the effects of market size and demand variability to the contract conditions. We propose two channel coordination contracts, and discuss how such contracts can be tailored for situations where the supplier has the option of not complying with the contract, and when the buyer's demand information is only partially updated during the supplier's capacity lead‐time.

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This article surveys a new generation of analytical tools for capacity planning and management, especially in high-tech industries such as semiconductors, electronics and bio-techs. The objectives of the article are to (1) identify fundamental theory driving current research in capacity management, (2) review emerging models in operations research, game theory, and economics that address strategic, tactical and operational decision models for high-tech capacity management, and (3) take an in-depth look at capacity-optimization models developed in the specific context of semiconductor manufacturing. The goal of this survey is to go beyond typical production-planning and capacity-management literature and to examine research that can potentially broaden capacity-planning research.

Abstract:We consider a decentralized distribution channel where demand depends on the manufacturer-chosen quality of the product and the selling effort chosen by the retailer. The cost of selling effort is private information for the retailer. We consider three different types of supply contracts in this article: price-only contract where the manufacturer sets a wholesale price; fixed-fee contract where manufacturer sells at marginal cost but charges a fixed (transfer) fee; and, general franchise contract where manufacturer sets a wholesale price and charges a fixed fee as well. The fixed-fee and general franchise contracts are referred to as two-part tariff contracts. For each contract type, we study different contract forms including individual, menu, and pooling contracts. In the analysis of the different types and forms of contracts, we show that the price only contract is dominated by the general franchise menu contract. However, the manufacturer may prefer to offer the fixed-fee individual contract as compared to the general franchise contract when the retailer's reservation utility and degree of information asymmetry in costs are high.