Capacity Management and Contract Engineering

In many industry sectors companies are faced with significant (demand) uncertainties, which may trans-late into financial risk if handled improperly. Firms may try to address this situation by shifting as much risk as possible to its supply chain partners (e.g. suppliers) through contractual design. However this may come at the cost of less favorable financial terms of the contract as the supplier will generally not be will-ing to take risk without compensation. Thus, sometimes uncertainties have to be absorbed internally, i.e. through appropriate operational planning. In this context the exploitation of production flexibilities plays an important role for an efficient capacity management of the plants. Moreover, particularly in in-dustries with complex production environments the appropriate evaluation of the operational planning strategy is crucial for understanding the cost/risk drivers. This knowledge can then be used to design better contracts. The mediation of the financial performance based on a given contract portfolio through operational planning is schematically summarized in Figure 1