Capacity management in supply chains under risk of supply disruptions: a mathematical model for establishing capacity reservation contracts

Capacity management and supply chain disruptions are the most challenging problems faced in high tech industries. This paper focuses on establishing a capacity reservation contract between a single supplier and two heterogeneous retailers in a two-stage supply chain, wherein the retailers purchase a product from the supplier and sell it to the customers. In this study, a mathematical model is built for all parties involved, incorporating numerous essential elements of a real contract. The proposed model aims to assist in determining the best solutions for the retailers' reserved capacities to the supplier and the supplier's constructed capacity. Analytical results and sensitivity analyses are presented to demonstrate how various cost elements, price, and uncertainty affect the optimal capacity decisions.