With a capacity reservation contract, the manufacturer has the option of reserving a certain amount of future capacity with the supplier.
Capacity reservation contract and quantity flexibility contract are defined as the risk sharing mechanisms which are required to encourage the manufacturer to expand the capacity and improve the overall performance of the supply chain.
When supply chain coordination is not achieved, capacity reservation contract can bring more system profit than other contracts with less flexibility.
Capacity reservation contracts make the supply chain management a very easy process and can be used convineintly. In this a specific fees is charged.
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