INTEGRATING VERTICAL AND HORIZONTAL CAPACITY COORDINATION FOR RISK MANAGEMENT IN THE SEMICONDUCTOR SUPPLY CHAIN

Abstract

We address triadic coordination of the semiconductor supply chain consisting of a set-maker, an Integrated Device Manufacturer (IDM) and a foundry. To mitigate the supply chain disruption risk, the set-maker often imposes the IDM to secure the second source with an α-contract. In the α-contract for 0＜α＜1, the IDM must allocate α fraction of the uncertain demand to the foundry. As a result, both the IDM and foundry need to invest to secure capacity in advance to demand realization. Hence, the capacity investment risk associated with uncertain demand exists and is shared by the IDM and foundry. In the literature, such dyadic coordination schemes between the two are developed that lead to coordinating contracts under the α-contract. In this paper, we develop a triadic coordination scheme in which the set-maker also shares the capacity investment risk with the IDM and foundry. We show that the scheme leads to a coordinating α-contract with an added condition on the capacity investment levels of the IDM and foundry.