We study sourcing in a supply chain with three levels: a manufacturer, tier 1 suppliers, and tier 2 suppliers prone to disruption from, e.g., natural disasters such as earthquakes or floods. The ...manufacturer may not directly dictate which tier 2 suppliers are used but may influence the sourcing decisions of tier 1 suppliers via contract parameters. The manufacturer’s optimal strategy depends critically on the degree of overlap in the supply chain: if tier 1 suppliers share tier 2 suppliers, resulting in a “diamond-shaped” supply chain, the manufacturer relies less on direct mitigation (procuring excess inventory and multisourcing in tier 1) and more on indirect mitigation (inducing tier 1 suppliers to mitigate disruption risk). We also show that while the manufacturer always prefers less overlap, tier 1 suppliers may prefer a more overlapped supply chain and hence may strategically choose to form a diamond-shaped supply chain. This preference conflict worsens as the manufacturer’s profit margin increases, as disruptions become more severe, and as unreliable tier 2 suppliers become more heterogeneous in their probability of disruption; however, penalty contracts—in which the manufacturer penalizes tier 1 suppliers for a failure to deliver ordered units—alleviate this coordination problem.
This paper was accepted by Yossi Aviv, operations management
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We consider a retailer that sells a product with uncertain demand over a finite selling season. The retailer sets an initial stocking quantity and, at some predetermined point in the season, ...optimally marks down remaining inventory. We modify this classic setting by introducing three types of consumers: myopic consumers, who always purchase at the initial full price; bargain-hunting consumers, who purchase only if the discounted price is sufficiently low; and strategic consumers, who strategically choose when to make their purchase. A strategic consumer chooses between a purchase at the initial full price and a later purchase at an uncertain markdown price. In equilibrium, strategic consumers and the retailer make optimal decisions given their rational expectations regarding future prices, availability of inventory, and the behavior of other consumers. We find that the retailer stocks less, takes smaller price discounts, and earns lower profit if strategic consumers are present than if there are no strategic consumers. We find that a retailer should generally avoid committing to a price path over the season (assuming such commitment is feasible)—committing to a markdown price (or to not mark down at all) is often too costly (inventory may remain unsold) even in the presence of strategic consumers; the better approach is to be cautious with the initial quantity and then mark down optimally. Furthermore, we discuss the value of quick response (the ability to procure additional inventory after obtaining updated demand information, albeit at a higher unit cost than the initial order). We find that the value of quick response to a retailer is generally much greater in the presence of strategic consumers than without them: on average 67% more valuable and as much as 558% more valuable in our sample. In other words, although it is well established in the literature that quick response provides value by allowing better matching of supply with demand, it provides more value, often substantially more value, by allowing a retailer to control the negative consequences of strategic consumer behavior.
We address the value of quick response production practices when selling to a forward-looking consumer population with uncertain, heterogeneous valuations for a product. Consumers have the option of ...purchasing the product early, before its value has been learned, or delaying the purchase decision until a time at which valuation uncertainty has been resolved. Whereas individual consumer valuations are uncertain ex ante, the market size is uncertain to the firm. The firm may either commit to a single production run at a low unit cost prior to learning demand, or commit to a quick response strategy that allows additional production after learning additional demand information. We find that the value of quick response is generally lower with strategic (forward-looking) customers than with nonstrategic (myopic) customers in this setting. Indeed, it is possible for a quick response strategy to decrease the profit of the firm, though whether this occurs depends on various characteristics of the market; specifically, we identify conditions under which quick response increases profit (when prices are increasing, when dissatisfied consumers can return the product at a cost to the firm) and conditions under which quick response may decrease profit (when prices are constant or when consumer returns are not allowed).
This paper was accepted by Martin Lariviere, operations and supply chain management.
We analyze the sourcing decision of a buyer choosing between two supplier types: responsible suppliers are costly but adhere to strict social and environmental responsibility standards, whereas risky ...suppliers are less expensive but may experience responsibility violations. A segment of the consumer population, called socially conscious, is willing to pay a higher price for a product sourced from a responsible supplier and may not purchase in the event of a responsibility violation from a risky supplier. We identify four possible sourcing strategies that a buyer might employ: low cost sourcing (sourcing from the risky supplier), dual sourcing, responsible niche sourcing (sourcing from a responsible supplier and selling only to socially conscious consumers), and responsible mass market sourcing (sourcing responsibly and selling to all consumers). We determine when each strategy is optimal and show that efforts to improve supply chain responsibility that focus on consumers (by increasing their willingness to pay for responsibility or increasing the number of consumers that are socially conscious) or increasing supply chain transparency may lead to unintended consequences, such as an increase in risky sourcing. Efforts that focus on enforcement and penalizing the buyer, however, never backfire and always lead to more responsible sourcing and less risky sourcing.
This paper was accepted by Yossi Aviv, operations management
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Contracting with suppliers prone to default is an increasingly common problem in some industries, particularly automotive manufacturing. We model this phenomenon as a two-period contracting game with ...two identical suppliers, a single buyer, deterministic demand, and uncertain production costs. The suppliers are distressed at the start of the game and do not have access to external sources of capital; hence, revenues from the buyer are crucial in determining whether default occurs. The production cost of each supplier is the sum of two stochastic components: a common term that is identical for both suppliers (representing raw materials costs, design specifications, etc.) and an idiosyncratic term that is unique to a given supplier (representing inherent firm capability). The buyer chooses a supplier and then decides on a single- or two-period contract. Comparing models with and without the possibility of default, we find that, without the possibility of supplier failure, the buyer always prefers short-term contracts over long-term contracts, whereas this preference is typically reversed in the presence of failure. Neither of these contracts coordinates the supply chain. We also consider dynamic contracts, in which the contract price is partially tied to some index representing the common component of production costs (e.g., commodity prices of raw materials such as steel or oil), allowing the buyer to shoulder some of the risk from cost uncertainty. We find that dynamic long-term contracts allow the buyer to coordinate the supply chain in the presence of default risk. We also demonstrate that our results continue to hold under a variety of alternative assumptions, including stochastic demand, allowing the buyer the option of subsidizing a bankrupt supplier via a contingent transfer payment or loan and allowing the buyer to unilaterally renegotiate contracts. We conclude that the possibility of supplier default offers a new reason to prefer long-term contracts over short-term contracts.
In many industries, product design and manufacturing lead times are sufficiently long that both the quality level of a product and the amount of inventory produced must be determined before a firm ...knows what the actual demand will be. In this paper, we conduct a theoretical analysis of such a setting. We first consider a centralized channel and characterize the optimal decisions by establishing relationships that must hold between the elasticity of cost of quality and the elasticity of revenue and show that quality and inventory are strategic substitutes. Next, we consider a decentralized channel with a wholesale price contract, in which a manufacturer determines quality and wholesale price, while a retailer determines inventory and retail price. We find that, different from the case without endogenous inventory, product quality can be higher in a decentralized channel compared to a centralized channel, and this is because a wholesale price contract shields the manufacturer from inventory risk. For both centralized and decentralized channels, we find that as demand uncertainty increases, quality decreases, while, different from the case without endogenous quality, inventory can be U-shaped. Interestingly, to mitigate the impact of demand uncertainty on profit, quality can be a more effective lever than inventory in a centralized channel; however, in a decentralized channel, quality is less responsive and inventory is more responsive to demand uncertainty than in a centralized channel.
The online appendix is available at
https://doi.org/10.1287/mksc.2017.1041
.
In rewards‐based crowdfunding, entrepreneurs solicit donations from a large number of individual contributors. If total donations exceed a prespecified funding target, the entrepreneur distributes ...nonmonetary rewards to contributors; otherwise, their donations are refunded. We study how to design such campaigns when contributors choose not just whether to contribute, but also when to contribute. We show that strategic contribution behavior—when contributors intentionally delay until campaign success is likely—can arise from the combination of nonrefundable (potentially very small) hassle costs and the risk of campaign failure, and can explain pledging patterns commonly observed in crowdfunding. Furthermore, such delays do not hurt the entrepreneur if contributors are perfectly rational, but they do if contributors are distracted, that is, if they might fail to return to the campaign after an intentional delay. To mitigate this, we find that an entrepreneur can use a simple menu of rewards with a fixed number of units sold at a low price, and an unlimited number sold at a higher price; this segments contributors over time based on the information they observe upon arrival. We show that, despite its simplicity, such a menu performs well compared to a theoretically optimal menu consisting of an infinite number of different rewards and price levels under many conditions.
A fast fashion system combines quick response production capabilities with enhanced product design capabilities to both design "hot" products that capture the latest consumer trends and exploit ...minimal production lead times to match supply with uncertain demand. We develop a model of such a system and compare its performance to three alternative systems: quick-response-only systems, enhanced-design-only systems, and traditional systems (which lack both enhanced design and quick response capabilities). In particular, we focus on the impact of each of the four systems on "strategic" or forward-looking consumer purchasing behavior, i.e., the intentional delay in purchasing an item at the full price to obtain it during an end-of-season clearance. We find that enhanced design helps to mitigate strategic behavior by offering consumers a product they value more, making them less willing to risk waiting for a clearance sale and possibly experiencing a stockout. Quick response mitigates strategic behavior through a different mechanism: by better matching supply to demand, it reduces the chance of a clearance sale. Most importantly, we find that although it is possible for quick response and enhanced design to be either complements or substitutes, the complementarity effect tends to dominate. Hence, when both quick response and enhanced design are combined in a fast fashion system, the firm typically enjoys a greater incremental increase in profit than the sum of the increases resulting from employing either system in isolation. Furthermore, complementarity is strongest when customers are very strategic. We conclude that fast fashion systems can be of significant value, particularly when consumers exhibit strategic behavior.
This paper was accepted by Yossi Aviv, operations management.
We analyze the competitive capacity investment timing decisions of both established firms and start-ups entering new markets, which have a high degree of demand uncertainty. Firms may invest in ...capacity early (when uncertainty is high) or late (when uncertainty has been resolved), possibly at different costs. Established firms choose an investment timing and capacity level to maximize expected profits, whereas start-ups make those choices to maximize the probability of survival. When a start-up competes against an established firm, we find that when demand uncertainty is high and costs do not decline too severely over time, the start-up takes a leadership role and invests first in capacity, whereas the established firm follows; by contrast, when two established firms compete in an otherwise identical game, both firms invest late. We conclude that the threat of firm failure significantly impacts the dynamics of competition involving start-ups.
This paper was accepted by Yossi Aviv, operations management.
This dissertation addresses the impact of strategic customer purchasing behavior on the value operational flexibility. Strategic customers anticipate future purchasing opportunities for a product ...(e.g., at a lower price during a sale, or at some time at which better information about the product is known) and choose to purchase at the time which gives them greatest utility. We consider two types of operational flexibility: production flexibility (the ability to rapidly produce inventory in order to match uncertain demand during a selling season) and design flexibility (the ability to quickly modify product design to suit changing consumer trends), both of which are of particular relevance to the fashion apparel industry. To analyze the impact of strategic behavior on such flexibility, we create theoretical models in which a firm (that chooses inventory levels and prices) plays a game against a strategic customer population (wherein each consumer chooses when to purchase the product). Our results are presented in three parts. In the first part, we focus on the value of production flexibility when selling a product that declines in price over two periods to a strategic customer population of uncertain size with heterogeneous valuations for the good. In the second part, we consider the value of production flexibility when selling a good at a constant price for which consumers possess uncertain value. In the third part, we consider the value of design flexibility when selling a product that declines in price to consumers with known value for the good, and we examine the differences between design flexibility and production flexibility in influencing consumer purchasing behavior. We find that operational flexibility of either type generally benefits the firm when consumers behave strategically (though this is not always the case), and in fact the value of flexibility is typically greater when consumers are strategic than when they are non-strategic.
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