October  2013, 9(4): 799-825. doi: 10.3934/jimo.2013.9.799

Optimal capacity reservation policy on innovative product

1. 

School of Management, Huazhong University of Science and Technology, Wuhan, China, China

2. 

School of Management, Xi'an Jiaotong University, Xi'an, China

Received  February 2012 Revised  March 2013 Published  August 2013

We examine the problem of optimal capacity reservation policy on innovative product in a setting of one supplier and one retailer. The parameters of capacity reservation policy are two dimensional: reservation price and excess capacity that the supplier will have in additional to the reservation amount. The above problem is analyzed using a two-stage Stackelberg game. In the first stage, the supplier announces the capacity reservation policy. The retailer forecasts the future demand and then determines the reservation amount. After receiving the reservation amount, the supplier expands the capacity. In the second stage, the uncertainty in demand is resolved and the retailer places a firm order. The supplier salvages the excess capacity and the associated payments are made.
    In the paper, with exogenous reservation price or exogenous excess capacity level, we study the optimal expansion policy and then investigate the impacts of reservation price or excess capacity level on the optimal strategies. Finally, we characterize Nash Equilibrium and derive the optimal capacity reservation policy, in which the supplier will adopt exact capacity expansion policy.
Citation: Jianbin Li, Ruina Yang, Niu Yu. Optimal capacity reservation policy on innovative product. Journal of Industrial and Management Optimization, 2013, 9 (4) : 799-825. doi: 10.3934/jimo.2013.9.799
References:
[1]

V. Araman, J. Kleinknecht and R. Akella, Coordination and risk sharing in e-business, Working paper, Stanford University, California, 2003.

[2]

D. Barnes-Schuster, Y. Bassok and R. Anupindi, Coordination and flexibility in supply contracts with options, Manufacturing and Service Operations Management, 4 (2002), 171-207.

[3]

A. Brown and H. Lee, Optimal "pay-to-delay" capacity reservation with application to the semiconductor industry, Working paper, Vanderbilt University, Nashville, Tennessee, 1998.

[4]

J. Bonser and S. D. Wu, Procurement planning to maintain both short-term adaptiveness and long term perspective, Managment Science, 47 (2001), 769-786.

[5]

G. Cachon, Supply chain coordination with contracts, in "The Handbook of Operations Research and Management Science: Supply Chain Management" (eds. S. Graves and T. de Kok), Elsevier, The Netherlands, 2003.

[6]

G. P. Cachon and M. A. Lariviere, Supply chain coordination with revenue sharing contracts: Strengths and limitations, Management Science, 51 (2005), 30-44.

[7]

G. Eppen and A. Iyer, Backup agreements in fashion buying-the value of upstream flexibility, Managment Science, 43 (1997), 1469-1484.

[8]

X. Gan, S. P. Sethi and H. Yan, Coordination of Supply Chains with Risk-averse Agents, Production and Operations Management, 13 (2004), 135-149.

[9]

X. Gan, S. P. Sethi and H. Yan, Channel coordination with a risk-netural supplier and a down-risk-averse retailer, Production and Operations Management, 14 (2005), 80-89.

[10]

K. Jain and E. A. Silver, The single period procurement problem where dedicated supplier capacity can be reserved, Naval Research Logistics, 42 (1995), 915-934.

[11]

M. Z. Jin and S. Wu, Capacity reservation contracts for high-tech industry, European Journal of Operational Research, 176 (2006), 1659-1677. doi: 10.1016/j.ejor.2005.11.008.

[12]

V. Martinez-de-Albeniz and D. Simchi-Levi, A portfolio approach to procurement contracts, Production and Operations Management, 14 (2005), 90-114.

[13]

Murat Erkoc and S. David Wu, Managing high-tech capacity expansion via reservation contracts, Production and Operations Management, 14 (2005), 232-251. doi: 10.1111/j.1937-5956.2005.tb00021.x.

[14]

O. Ozer and W. Wei, Strategic commitments for an optimal capacity decisions under asymmetric information, Manamgent Scicence, 52 (2006), 1238-1257.

[15]

Qi Fu, Chung-Yee Lee and Chung-Piaw Teo, Procurement risk management using options: Random spot price and the portfolio effect, IIE Transactions, 42 (2010), 793-811.

[16]

Ralf W. Seifert, Ulrich W. Thonemann and Warren H. Hausman, Optimal procurement strategies for online spot market, European Journal of Operational Research, 152 (2004), 781-799. doi: 10.1016/S0377-2217(02)00754-3.

[17]

D. A. Serel, M. Dada and H. Moskowitz, Sourcing decisions with capacity reservation contracts, European Journal of Operational Research, 131 (2001), 635-648.

[18]

S. Spinler, A. Huchzermeier and P. R. Kleindorfer, The valuation of option on capacity, Working paper, Otto-Beisheim Graduate School of Managment, WHU, Germany, 2002.

[19]

D. J. Wu, P. R. Kleindorfer and J. E. Zhang, Optimal bidding and contracting strategies for capital-intensive goods, European Journal of Operational Research, 137 (2002), 657-676. doi: 10.1016/S0377-2217(01)00093-5.

show all references

References:
[1]

V. Araman, J. Kleinknecht and R. Akella, Coordination and risk sharing in e-business, Working paper, Stanford University, California, 2003.

[2]

D. Barnes-Schuster, Y. Bassok and R. Anupindi, Coordination and flexibility in supply contracts with options, Manufacturing and Service Operations Management, 4 (2002), 171-207.

[3]

A. Brown and H. Lee, Optimal "pay-to-delay" capacity reservation with application to the semiconductor industry, Working paper, Vanderbilt University, Nashville, Tennessee, 1998.

[4]

J. Bonser and S. D. Wu, Procurement planning to maintain both short-term adaptiveness and long term perspective, Managment Science, 47 (2001), 769-786.

[5]

G. Cachon, Supply chain coordination with contracts, in "The Handbook of Operations Research and Management Science: Supply Chain Management" (eds. S. Graves and T. de Kok), Elsevier, The Netherlands, 2003.

[6]

G. P. Cachon and M. A. Lariviere, Supply chain coordination with revenue sharing contracts: Strengths and limitations, Management Science, 51 (2005), 30-44.

[7]

G. Eppen and A. Iyer, Backup agreements in fashion buying-the value of upstream flexibility, Managment Science, 43 (1997), 1469-1484.

[8]

X. Gan, S. P. Sethi and H. Yan, Coordination of Supply Chains with Risk-averse Agents, Production and Operations Management, 13 (2004), 135-149.

[9]

X. Gan, S. P. Sethi and H. Yan, Channel coordination with a risk-netural supplier and a down-risk-averse retailer, Production and Operations Management, 14 (2005), 80-89.

[10]

K. Jain and E. A. Silver, The single period procurement problem where dedicated supplier capacity can be reserved, Naval Research Logistics, 42 (1995), 915-934.

[11]

M. Z. Jin and S. Wu, Capacity reservation contracts for high-tech industry, European Journal of Operational Research, 176 (2006), 1659-1677. doi: 10.1016/j.ejor.2005.11.008.

[12]

V. Martinez-de-Albeniz and D. Simchi-Levi, A portfolio approach to procurement contracts, Production and Operations Management, 14 (2005), 90-114.

[13]

Murat Erkoc and S. David Wu, Managing high-tech capacity expansion via reservation contracts, Production and Operations Management, 14 (2005), 232-251. doi: 10.1111/j.1937-5956.2005.tb00021.x.

[14]

O. Ozer and W. Wei, Strategic commitments for an optimal capacity decisions under asymmetric information, Manamgent Scicence, 52 (2006), 1238-1257.

[15]

Qi Fu, Chung-Yee Lee and Chung-Piaw Teo, Procurement risk management using options: Random spot price and the portfolio effect, IIE Transactions, 42 (2010), 793-811.

[16]

Ralf W. Seifert, Ulrich W. Thonemann and Warren H. Hausman, Optimal procurement strategies for online spot market, European Journal of Operational Research, 152 (2004), 781-799. doi: 10.1016/S0377-2217(02)00754-3.

[17]

D. A. Serel, M. Dada and H. Moskowitz, Sourcing decisions with capacity reservation contracts, European Journal of Operational Research, 131 (2001), 635-648.

[18]

S. Spinler, A. Huchzermeier and P. R. Kleindorfer, The valuation of option on capacity, Working paper, Otto-Beisheim Graduate School of Managment, WHU, Germany, 2002.

[19]

D. J. Wu, P. R. Kleindorfer and J. E. Zhang, Optimal bidding and contracting strategies for capital-intensive goods, European Journal of Operational Research, 137 (2002), 657-676. doi: 10.1016/S0377-2217(01)00093-5.

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