Service capacity coordination in IT services supply chain

Purpose: The purpose of this paper is to investigate capacity coordination in services supply chain (SSC). It provides discussion and application of various contracts in a two-stage single period SSC. Design/methodology/approach: This paper considers a two-stage serial supply chain with demand uncertainty and price insensitivity. A model is developed to represent a global IT SSC incorporating services specific factors like over-capacity cost and higher degree of substitution resulting in flexibility to meet unplanned demand. At first, centralized and competitive solutions of the model are studied. Then, the paper studies coordination in this supply chain using some of widely used contract templates. Findings: This paper finds several key insights for the researchers and practitioners in this area around adverse impact of over-capacity cost on demand, positive effect of delivery team’s exposure to market on contracting terms and better understanding of efficient frontiers for selected contracting mechanism. Research limitations/implications: This paper has limited its analysis to three key and most widely used contracts and made assumptions about risk-neutrality of the firms. Future research can study other contracting templates and/or relax for the model as laid out in this paper. Practical implications: An automated software agent can be built leveraging the closed form equations developed here to help decide on optimal capacity investment and devise coordinating contracts. Originality/value: This paper established that because of higher degree of substitution, perishability and non-trivial over-capacity cost, SSC behave bit differently than the physical goods supply chain and coordination of participating firms needs to be studied in a services specific context for improving system-wide performance.