Product Flexibility Strategy Under Supply and Demand Risk

2021 ◽  
Author(s):  
Yimin Wang ◽  
Scott Webster
Keyword(s):  
Supply Chain ◽  
Supply And Demand ◽  
Problem Definition ◽  
Base Case ◽  
Supply Network ◽  
Aggregation Effect ◽  
Risk Aggregation ◽  
Managerial Implications ◽  
Product Flexibility ◽  
Global Uncertainty

Problem definition: With heightened global uncertainty, supply chain managers are under increasing pressure to craft strategies that accommodate both supply and demand risks. Although product flexibility is a well-understood strategy to accommodate risk, there is no clear guidance on the optimal flexibility configuration of a supply network that comprises both unreliable primary suppliers and reliable backup suppliers. Academic/practical relevance: Existing literature examines the value of flexibility with primary and backup suppliers independently. For a risk-neutral firm, research shows that (a) incorporating flexibility in a primary supplier by replacing two dedicated ones (in absence of backup supply) is always beneficial and that (b) adding flexibility to a reliable backup supplier (in absence of product flexibility in primary suppliers) is always valuable. It is unclear, however, how flexibility should be incorporated into a supply network with both unreliable primary suppliers and reliable backup suppliers. This research studies whether flexibility should be incorporated in a primary supplier, a backup supplier, or both. Methodology: We develop a normative model to analyze when flexibility benefits and when it hurts. Results: Compared with a base case of no flexibility, we prove that incorporating flexibility in either primary or backup suppliers is always beneficial. However, incorporating flexibility in both primary and backup suppliers can be counterproductive because the supply chain performance can decline with saturated flexibility, even if flexibility is costless. A key reason is that the risk-aggregation effect of consolidating flexibility in an unreliable supplier becomes more salient when flexibility is already embedded in a backup supplier. Managerial implications: This research refines the existing understanding of flexibility by illustrating that flexibility is not always beneficial. When there is a choice, a firm should prioritize incorporating flexibility in a reliable backup supplier.

Strategic Inventories Under Supply Chain Competition

2021 ◽  
Author(s):  
Xi Li ◽  
Yanzhi Li ◽  
Ying-Ju Chen
Keyword(s):  
Supply Chain ◽  
Supply Chains ◽  
Distribution Channel ◽  
Problem Definition ◽  
Supply Chain Competition ◽  
Managerial Implications ◽  
Holding Cost ◽  
Inventory Holding ◽  
Period Model

Problem definition: We consider the effects of strategic inventory (SI) in the presence of chain-to-chain competition in a two-period model. Academic/practical relevance: Established findings suggest that SI may alleviate double marginalization and improve the efficiency of a decentralized distribution channel. However, no studies consider the role of SI under chain-to-chain competition. Methodology: We build a two-period model consisting of two competing supply chains, each with an upstream manufacturer and an exclusive retailer. The retailers compete on either price or quantity. We characterize the firms’ strategies under the concept of perfect Bayesian equilibrium. We consider cases where contracts are either observable or unobservable across supply chains. Results: (1) SI still exists under chain-to-chain competition. Retailers may carry more inventory when the competition becomes fiercer, which further intensifies the supply chain competition. (2) Different from the existing findings, SI may backfire and hurt all firms. Interestingly, firms may benefit from a higher inventory holding cost. (3) Under supply chain competition, the prisoner’s dilemma can arise if competition intensity is intermediate; in other words, manufacturers are better off without strategic inventory, and yet they cannot help allowing strategic inventory, which is the unique equilibrium. Managerial implications: Despite its appeal among firms of a single supply chain, the role of SI is altered or even reversed by chain-to-chain competition. Conventional wisdom on SI should be applied with caution.

Supply Chain Thinking in Healthcare: Lessons and Outlooks

2020 ◽  
Author(s):  
Lidia Betcheva ◽  
Feryal Erhun ◽  
Houyuan Jiang
Keyword(s):  
Supply Chain ◽  
Supply Chain Management ◽  
Supply Chains ◽  
Healthcare Delivery ◽  
Healthcare Services ◽  
Lessons Learned ◽  
Problem Definition ◽  
Healthcare Organizations ◽  
Chain Management ◽  
Managerial Implications

Problem definition: The lessons learned over decades of supply chain management provide an opportunity for stakeholders in complex systems, such as healthcare, to understand, evaluate, and improve their complicated and often inefficient ecosystems. Academic/practical relevance: The complexity in managing healthcare supply chains offers opportunities for important and impactful research avenues in key supply chain management areas such as coordination and integration (e.g., new care models), mass customization (e.g., the rise in precision medicine), and incentives (e.g., emerging reimbursement schemes), which might, in turn, provide insights relevant to traditional supply chains. We also put forward new perspectives for practice and possible research directions for the supply chain management community. Methodology: We provide a primer on supply chain thinking in healthcare, with a focus on healthcare delivery, by following a framework that is customer focused, systems based, and strategically orientated and that simultaneously considers clinical, operational, and financial dimensions. Our goal is to offer an understanding of how concepts and strategies in supply chain management can be applied and tailored to healthcare by considering the sector’s unique challenges and opportunities. Results: After identifying key healthcare stakeholders and their interactions, we discuss the main challenges facing healthcare services from a supply chain perspective and provide examples of how various supply chain strategies are being and can be used in healthcare. Managerial implications: By using supply chain thinking, healthcare organizations can decrease costs and improve the quality of care by uncovering, quantifying, and addressing inefficiencies.

Private Information and Dynamic Bargaining in Supply Chains: An Experimental Study

2020 ◽  
Author(s):  
Andrew M. Davis ◽  
Kyle Hyndman
Keyword(s):  
Supply Chain ◽  
Private Information ◽  
Human Subjects ◽  
Problem Definition ◽  
Bargaining Solution ◽  
Additional Experiment ◽  
Cost Information ◽  
Private Cost ◽  
Managerial Implications ◽  
Verifiable Disclosure

Problem definition: We conduct a controlled human-subjects experiment in a two-tier supply chain where a supplier’s per-unit production cost may be private information while bargaining with a buyer. Academic/practical relevance: Academically, supply chain studies often assume full-information or highly structured bargaining. We consider private information with dynamic, unstructured bargaining. In practice, a buyer may not know its supplier’s cost exactly and interact with its supplier in a back-and-forth bargaining environment. Thus, understanding how a supplier’s private cost information affects both supply chain outcomes and bargaining is new to the literature and relevant to practice. Methodology: We employ insights from mechanism design to generate restrictions on the space of agreements and solve for a specific bargaining solution under private information to generate precise predictions. These predictions are then tested through a human-subjects experiment. Results: In our experiment, theory predicts that all supplier types should earn at least 50% of total profits when their cost information is private. However, we find that high-cost suppliers earn a disproportionately low share of total profits under private information, 20.16%. We show that this is because buyers, under private information, act as if they are bargaining with the lowest-cost supplier and suppliers do not appear to blame buyers for behaving this way. Based on these findings, we conduct an additional experiment where suppliers have the ability to communicate their private costs to buyers and observe that verifiable disclosure significantly increases profits for high-cost suppliers. Managerial implications: High-cost suppliers actually suffer from having their costs as private information, which runs counter to theory. However, if high-cost suppliers can credibly disclose their costs to buyers, they can significantly increase profits. Lastly, although private information does not lead to more disagreements, negotiations do take longer, which can be costly to firms.

Artificial Shortage in Agricultural Supply Chains

2021 ◽  
Author(s):  
Retsef Levi ◽  
Somya Singhvi ◽  
Yanchong Zheng
Keyword(s):  
Supply Chain ◽  
Dynamic Game ◽  
Consumer Welfare ◽  
Problem Definition ◽  
Theoretic Model ◽  
Government Interventions ◽  
Behavioral Game ◽  
Managerial Implications ◽  
The Government ◽  
Preemptive Effect

Problem definition: Price surge of essential commodities despite inventory availability, due to artificial shortage, presents a serious threat to food security in many countries. To protect consumers’ welfare, governments intervene reactively with either (i) cash subsidy, to increase consumers’ purchasing power by directly transferring cash; or (ii) supply allocation, to increase product availability by importing the commodity from foreign markets and selling it at subsidized rates. Academic/practical relevance: This paper develops a new behavioral game-theoretic model to examine the supply chain and market dynamics that engender artificial shortage as well as to analyze the effectiveness of various government interventions in improving consumer welfare. Methodology: We analyze a three-stage dynamic game between the government and the trader. We fully characterize the market equilibrium and the resulting consumer welfare under the base scenario of no government intervention as well as under each of the interventions being studied. Results: The analysis demonstrates the disparate effects of different interventions on artificial shortage; whereas supply allocation schemes often mitigate shortage, cash subsidy can inadvertently aggravate shortage in the market. Furthermore, empirical analysis with actual data on onion prices in India shows that the proposed model explains the data well and provides specific estimates on the implied artificial shortage. A counterfactual analysis quantifies the potential impacts of government interventions on market outcomes. Managerial implications: The analysis shows that reactive government interventions with supply allocation schemes can have a preemptive effect to reduce the trader’s incentive to create artificial shortage. Although cash subsidy schemes have recently gained wide popularity in many countries, we caution governments to carefully consider the strategic responses of different stakeholders in the supply chain when implementing cash subsidy schemes.

Unraveling Behavioral Ordering: Relative Costs and the Bullwhip Effect

2021 ◽  
Author(s):  
Brent B. Moritz ◽  
Arunachalam Narayanan ◽  
Chris Parker
Keyword(s):  
Supply Chain ◽  
Information Sharing ◽  
Human Behavior ◽  
Bullwhip Effect ◽  
Problem Definition ◽  
Supply Chain Costs ◽  
Cost Impact ◽  
Managerial Implications ◽  
The Cost ◽  
The Impact

Problem definition: We study the bullwhip effect and analyze the impact of human behavior. We separate rational ordering in response to increasing incoming orders from irrational ordering. Academic/practical relevance: Prior research has shown that the bullwhip effect occurs in about two-thirds of firms and impacts profitability by 10%–30%. Most bullwhip mitigation efforts emphasize processes such as information sharing, collaboration, and coordination. Previous work has not been able to separate the impact of behavioral ordering from rational increases in order quantities. Methodology: Using data from a laboratory experiment, we estimate behavioral parameters from three ordering models. We use a simulation to evaluate the cost impact of bullwhip behavior on the supply chain and by echelon. Results: We find that cost increases are not equally shared. Human biases (behavioral ordering) at the retailer results in higher relative costs elsewhere in the supply chain, even as similar ordering by a wholesaler, distributor, or factory results in increased costs within that echelon. These results are consistent regardless of the behavioral models that we consider. The cognitive profile of the decision maker impacts both echelon and supply chain costs. We show that the cost impact is higher as more decision makers enter a supply chain. Managerial implications: The cost of behavioral ordering is not consistent across the supply chain. Managers can use the estimation/simulation framework to analyze the impact of human behavior in their supply chains and evaluate improvement efforts such as coordination or information sharing. Our results show that behavioral ordering by a retailer has an out-sized impact on supply chain costs, which suggests that upstream echelons are better placed to make forecasting and replenishment decisions.

Contract Unobservability and Downstream Competition

2020 ◽  
Author(s):  
Xi Li ◽  
Qian Liu
Keyword(s):  
Supply Chain ◽  
Multiple Equilibria ◽  
Alternative Explanation ◽  
Common Knowledge ◽  
Wholesale Price ◽  
Problem Definition ◽  
Supply Chain Performance ◽  
Supply Chain Contracts ◽  
Managerial Implications ◽  
The Right

Problem definition: In this paper, we consider a supply chain with a manufacturer and two retailers who are contracted through wholesale prices or two-part tariffs. We depart from the existing literature by assuming that contract terms between the manufacturer and a retailer are not observed by the rival retailer. Academic/practical relevance: Although the existing literature typically assumes that they are common knowledge in the market, contract terms may not be observed by rival retailers under certain circumstances. This paper contributes to the literature by studying the effect of contract unobservability on supply chain performance. Methodology: We use game-theoretical methods to find the equilibrium. When there are multiple equilibria, we adopt passive beliefs as an equilibrium-refinement criterion. Results: We find that certain established results regarding observable supply chain contracts do not always apply when those contracts become unobservable to competing retailers. In particular, compared with when using two-part tariff contracts, the manufacturer may benefit from using wholesale-price contracts when contract terms are unobservable. Moreover, the total industry profit may increase under wholesale-price contracts. Managerial implications: Our results offer an alternative explanation for the popularity of wholesale-price contracts and suggest that members of the supply chain must take unobservability into account when selecting the right contracts. We also offer new insights into buyback contracts and downstream mergers under unobservable contracts.

scholarly journals Motivating Supplier Social Responsibility Under Incomplete Visibility

2020 ◽  
Vol 22 (6) ◽  
pp. 1268-1286 ◽  
Author(s):  
Tim Kraft ◽  
León Valdés ◽  
Yanchong Zheng
Keyword(s):  
Supply Chain ◽  
Social Responsibility ◽  
Investment Decision ◽  
Problem Definition ◽  
Third Party ◽  
Theoretic Model ◽  
Practical Relevance ◽  
Managerial Implications ◽  
Game Theoretic ◽  
Game Theoretic Model

Problem definition: We examine how a profit-driven firm (she) can motivate better social responsibility (SR) practices by a supplier (he) when these practices cannot be perfectly observed by the firm. We focus on the firm’s investment in the supplier’s SR capabilities. To capture the influence of consumer demands, we incorporate the potential for SR information to be disclosed by the firm or revealed by a third party. Academic/practical relevance: Most firms have limited visibility into the SR practices of their suppliers. However, there is little research on how a firm under incomplete visibility should (i) invest to improve a supplier’s SR practices and (ii) disclose SR information to consumers. We address this gap. Methodology: We develop a game-theoretic model with asymmetric information to study a supply chain with one supplier and one firm. The firm makes her investment decision given incomplete information about the supplier’s current SR practices. We analyze and compare two settings: the firm does not disclose versus she discloses SR information to the consumers. Results: The firm should invest a high (low) amount in the supplier’s capabilities if the information she observes suggests the supplier’s current SR practices are poor (good). She should always be more aggressive with her investment when disclosing (versus not disclosing). This more aggressive strategy ensures better supplier SR practices under disclosure. When choosing between disclosing and not disclosing, the firm most likely prefers not to disclose when the supplier’s current SR practices seem to be average. Managerial implications: (i) Greater visibility helps the firm to better tailor her investment to the level of support needed. (ii) Better visibility also makes the firm more “truthful” in her disclosure, whereas increased third-party scrutiny makes her more “cautious.” (iii) Mandating disclosure is most beneficial for SR when the suppliers’ current practices seem to be average.

Centralized or Decentralized Transfer Prices: A Behavioral Approach for Improving Supply Chain Coordination

2021 ◽  
Author(s):  
Elena Katok ◽  
Sebastián Villa
Keyword(s):  
Supply Chain ◽  
Supply And Demand ◽  
Supply Chain Coordination ◽  
Transfer Price ◽  
Problem Definition ◽  
Behavioral Approach ◽  
Critical Ratio ◽  
Selling Price ◽  
Price Setting ◽  
Transfer Prices

Problem definition: We study supply chain coordination in a setting with transshipment. We use centralized and decentralized transfer prices as a way to increase supply chain coordination. Academic/practical relevance: The ability to transship can improve channel efficiency by improving the match between supply and demand. We study how human decision makers behave in this setting and provide clear insights to improve coordination. Methodology: We use controlled laboratory experiments with financially incentivized human subjects. We study a broad set of critical ratios under both decentralized and centralized transfer-price settings. In the decentralized transfer-price setting, retailers negotiate a transfer price. In the centralized transfer-price setting, we use two different approaches: theoretical and behavioral transfer price. Both approaches suggest opposite recommendations. Results: Analytically, the optimal transfer price should depend on the critical ratio; but results from the decentralized setting show that participants set prices as if they ignore the critical ratio and instead focus on splitting potential profit from transshipped units in half. However, there is a positive relationship between transfer prices and ordering decisions. Moreover, generalizing the pull-to-center effect, we find that subjects do not place orders that coordinate the supply chain. For the centralized setting, we find that using the theoretical approach does not coordinate ordering decisions and does not improve decisions compared with the decentralized setting. The behavioral approach suggests a transfer price close to product selling price for a high critical ratio and a transfer price below product cost for a low critical ratio. These recommendations lead to coordinating ordering decisions. Managerial implications: We draw two practical conclusions from our research. First, transshipments are unambiguously beneficial, resulting in higher profitability, and, when feasible, should be encouraged. Second, when possible, transfer prices should be set centrally but taking into account subjects’ behavior. Otherwise, price negotiation might lead to better performance.

Competition Between Two-Sided Platforms Under Demand and Supply Congestion Effects

2020 ◽  
Author(s):  
Fernando Bernstein ◽  
Gregory A. DeCroix ◽  
N. Bora Keskin
Keyword(s):  
Service Providers ◽  
Supply And Demand ◽  
Relative Number ◽  
Sharing Economy ◽  
Problem Definition ◽  
Ride Sharing ◽  
Managerial Implications ◽  
The Impact ◽  
Number Of Customers ◽  
Congestion Effects

Problem definition: This paper explores the impact of competition between platforms in the sharing economy. Examples include the cases of Uber and Lyft in the context of ride-sharing platforms. In particular, we consider competition between two platforms that offer a common service (e.g., rides) through a set of independent service providers (e.g., drivers) to a market of customers. Each platform sets a price that is charged to customers for obtaining the service provided by a driver. A portion of that price is paid to the driver who delivers the service. Both customers’ and drivers’ utilities are sensitive to the payment terms set by the platform and are also sensitive to congestion in the system (given by the relative number of customers and drivers in the market). We consider two possible settings. The first one, termed “single-homing,” assumes that drivers work through a single platform. In the second setting, termed “multihoming” (or “multiapping,” as it is known in practice), drivers deliver their service through both platforms. Academic/practical relevance: This is one of the first papers to study competition and multihoming in the presence of congestion effects typically observed in the sharing economy. We leverage the model to study some practical questions that have received significant press attention (and stirred some controversies) in the ride-sharing industry. The first involves the issue of surge pricing. The second involves the increasingly common practice of drivers choosing to operate on multiple platforms (multihoming). Methodology: We formulate our problem as a pricing game between two platforms and employ the concept of a Nash equilibrium to analyze equilibrium outcomes in various settings. Results: In both the single-homing and multihoming settings, we study the equilibrium prices that emerge from the competitive interaction between the platforms and explore the supply and demand outcomes that can arise at equilibrium. We build on these equilibrium results to study the impact of surge pricing in response to a surge in demand and to examine the incentives at play when drivers engage in multihoming. Managerial implications: We find that raising prices in response to a surge in demand makes drivers and customers better off than if platforms were constrained to charge the same prices that would arise under normal demand levels. We also compare drivers’ and customers’ performance when all drivers either single-home or multihome. We find that although individual drivers may have an incentive to multihome, all players are worse off when all drivers multihome. We conclude by proposing an incentive mechanism to discourage multihoming.

scholarly journals Impacts of Counterfeiting on a Global Supply Chain

2020 ◽  
Author(s):  
Zelong Yi ◽  
Man Yu ◽  
Ki Ling Cheung
Keyword(s):  
Supply Chain ◽  
Supply Chains ◽  
Wholesale Price ◽  
Consumer Surplus ◽  
Global Supply Chain ◽  
Problem Definition ◽  
Network Externality ◽  
Global Supply Chains ◽  
Economic Implications ◽  
Managerial Implications

Problem definition: This paper investigates how counterfeits influence a global supply chain and how the supply chain should effectively take anticounterfeit actions. Academic/practical relevance: The impacts of counterfeiting have been increasingly profound on global supply chains. It is critical to understand how counterfeiting impacts supply chains when supply chain members act in their own interests, and how supply chains can effectively combat counterfeiting when all the members can contribute to it. This is the first paper that offers insights into these important questions. In particular, we examine who among the supply chain members is in the best position to perform counteracting activities, how these members can cooperate in anticounterfeiting, and what economic implications the anticounterfeit actions have to the supply chain, individual firms, consumer surplus, and social welfare. Methodology: We consider a supply chain consisting of a manufacturer and a retailer, and analyze a game-theoretical framework to derive the equilibrium. Results: The manufacturer prefers to induce the retailer to combat counterfeits rather than to combat itself. Contrary to conventional wisdom, counterfeits can increase the supply chain’s profit even in the absence of network externality effects. The crux is that the manufacturer lowers wholesale price to incentivize the retailer’s counteraction and, consequently, the threat of counterfeits can mitigate double marginalization and benefit the supply chain. Managerial implications: Our results demonstrate that a sustainability risk can trigger collaborative endeavors of supply chain members and thus be advantageous to the supply chain. The findings also underscore the important role that retailers should play in anticounterfeiting. Particularly, it can be in the supply chain’s interest that the manufacturer does not execute the counteraction, either jointly with the retailer or by itself.

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