Capacity coordination in a service supply chain

Abstract

In this paper, we study the capacity coordination problem in an outsourcing supply chain consisting of a user company and an outsourcer that does outsourcing work for the user company. Once a service product is delivered to a customer, the user company receives a revenue generated by the served customer and the outsourcer is compensated by the user company. Unlike the traditional inventory supply chain, the service product cannot be inventoried. Therefore, the outsourcer tends to build a service capacity which is lower than the system-wide optimal capacity. To solve such a problem, we are interested in the contracts that could coordinate the supply chain and improve the chain's performance. Using the wholesale price mechanism as a benchmark, we develop a set of option contracts which could coordinate the supply chain. We identify conditions under which the option contracts improve the chain profit. We also figure out the feasible option contracts that improve supply chain member's expected profit and show the degree of improvement that could be achieved through numerical study.