An optimal mathematical model for a capacity reservation contract

Abstract

Long-term contracts between suppliers and buyer may secure competitive advantages for both agents if they are used wisely. In this paper, we focus on long-term contracts that incorporate a mechanism called a capacity reservation. Capacity reservation contracts are frequently found in high-tech manufacturing industries, such as the semiconductor industry. In this study, a mathematical model is developed from the buyer’s perspective for a capacity reservation contract. The buyer-supplier interactions are analyzed using the model, and an algorithm to identify the optimal strategy of a hypothetical buyer is proposed. Computational experiments demonstrate that the algorithm is able to detect a global optimal solution within a reasonable amount of time.