Capacity sourcing using a reservation contract

Abstract

In this paper we model a scenario where a buyer reserves capacity from one or more suppliers in the presence of demand uncertainty. We explicitly derive suppliers' capacity reservation price, which is a function of their capacity, amount of capacity reserved by the buyer and other factors. The buyer's decisions are how much capacity to reserve and from how many suppliers. Under conditions of uniformly distributed demand, we derive closed form solutions for the problem and show that the optimal number of suppliers to contract capacity from remains robust to changes in model parameters. © 2007 IEEE.