Decentralizing semiconductor capacity planning via internal market coordination

Semiconductor capacity planning is a cross-functional decision that requires coordination between the marketing and manufacturing divisions. We examine the main issues of a decentralized coordination scheme in a setting observed at a major US semiconductor manufacturer: marketing managers reserve capacity from manufacturing based on product demands, while attempting to maximize profit; manufacturing managers allocate capacity to competing marketing managers so as to minimize operating costs while ensuring efficient resource utilization. This cross-functional planning problem has two important characteristics: (i) both demands and capacity are subject to uncertainty; and (ii) all decision entities own private information while being self-interested. To study the issues of coordination we first formulate the local marketing and the manufacturing decision problem as separate stochastic programs. We then formulate a centralized stochastic programming model (JCA), which maximizes the firm's overall profit. JCA establishes a theoretical benchmark for performance, but is only achievable when all planning information is public. If local decision entities are to keep their planning information private, we submit that the best achievable coordination corresponds to an alternative stochastic model (DCA). We analyze the relationship and the theoretical gap between (JCA) and )DCA), thereby establishing the price of decentralization. Next, we examine two mechanisms that coordinate the marketing and manufacturing decisions to achieve (DCA) using different degrees of information exchange. Using insights from the Auxiliary Problem Principle (APP), we show that under both coordination mechanisms the divisional proposals converge to the global optimal solution of (DCA). We illustrate the theoretic insights using numerical examples as well as a real world case.