Due to the mismatch between the order of costumers and the production capacity resulting from demand uncertainty, product shortages or wastes of production capacity occur. In response, the subcontracting of production among the plants occurs to diminish the influence of this mismatch on expected profits. Using a small-and medium-sized firm industrial district, the decentralized decision-making process for flexibility investment is studied using the cooperative subcontracting mechanism based on a contract net protocol and is compared with centralized decision making on the flexibility investment problem. Through simulation, it is concluded that although flexibility can increase the opportunities to obtain additional orders, the distributed decision-making mechanism increases the competition among plants during the bidding process. Plants should tradeoff these two aspects to make decisions about investments in flexibility.
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