Optimization of Capacity Allocation Models with Effort Dependent Demand in Global Supply Chain

Abstract

In a demand driven market, optimal allocation of capacity to the demand has been one of the major issues. In this paper, we consider a single global freight firm allocating its capacity to its own regional sales offices. The firm sells cargo space based on two types of contracts: long-term and spot sales. Regional sales offices utilize their effort to generate more demand in their designated region. In other words, it is assumed that the demand is dependent on their efforts. First, we find a closed-form solution for the optimal level of the efforts of a single sales office in a specific region. Then, we study the case when the firm allocates its limited total capacity to two sales offices. We investigate different methods of capacity allocation: decentralization, centralization, and mixed, by conducting numerical studies. Different from the traditional finding, we suggest that the decentralization method is not always dominated by the centralization method.