Coordinating supply chains with competition: Capacity allocation in semiconductor manufacturing

Abstract This paper, motivated by the experiences of a major US-based semiconductor manufacturer, presents an integrated model of incentive problems arising in forecasting and capacity allocation. Our model involves multiple product managers and multiple manufacturing managers who forecast the means of their respective demand and capacity distributions. A central coordinator is responsible for allocating capacities to product lines. When these distributions are unknown to the central coordinator and capacity is scarce, the managers misrepresent their forecasts. A product manager inflates his forecast to gain a greater allocation of the capacity; a manufacturing manager deflates his forecast to cover for the uncertainties in production. We propose a game theoretic model and design a mechanism (a bonus scheme for all managers and an allocation rule to allocate realized capacity to the product managers) that elicits truthful reporting by all managers. The results herein show that the structure of the truth-eliciting bonus schemes is rather simple with easily calculable parameters. We also show that large classes of allocation rules, including the current allocation practice of the firm, are manipulable. A bonus is often required for elicitation of truthful information. We synthesize the implications of our results for the practitioners.