Strategic Sourcing Under Severe Disruption Risk: Learning Failures and Under-Diversification Bias

2020 ◽  
Author(s):  
Kyle Goldschmidt ◽  
Mirko Kremer ◽  
Douglas J. Thomas ◽  
Christopher W. Craighead
Keyword(s):  
Risk Mitigation ◽  
Problem Definition ◽  
Diversification Strategy ◽  
Strategic Sourcing ◽  
Supply Disruptions ◽  
Ex Post ◽  
Sourcing Strategy ◽  
Daunting Task ◽  
Disruption Risk ◽  
Managerial Implications

Problem definition: We study sourcing behavior in severe conditions where supply disruptions are rare but carry the potential of wiping out several rounds worth of a firm’s profit. Academic/practical relevance: The tradeoff between scale economies from supplier consolidation and risk mitigation from supplier diversification is at the core of firms’ sourcing strategy and one that is empirically understudied. Methodology: We study supplier diversification through a behavioral lens and test theoretically derived predictions under controlled laboratory conditions. Results: Our data provide strong evidence for under-diversification. We posit that this pattern is partly because of the fact that investing in supplier diversification involves an upfront cost to achieve a delayed, and rarely encountered, benefit. Managerial implications: Under-diversification bias is costly, and its causes are difficult to overcome, presenting firms with the daunting task of devising debiasing mechanisms that reinforce a supplier diversification strategy when the rarity of disruptions almost always render supplier consolidation the ex post preferred strategy.

scholarly journals An enactment theory model of supplier financial disruption risk mitigation

2017 ◽  
Vol 22 (5) ◽  
pp. 442-457 ◽  
Author(s):  
Marcos Paulo Valadares de Oliveira ◽  
Robert Handfield
Keyword(s):  
Supply Chain ◽  
Information Exchange ◽  
Risk Mitigation ◽  
Financial Ratios ◽  
Financial Health ◽  
Supply Chain Disruptions ◽  
Content Type ◽  
Supply Disruptions ◽  
Disruption Risk ◽  
The Impact

Purpose The purpose of this study is to examine supplier financial risk through the lens of Enactment Theory, to explore the role of transparency and communication on buyers’ perceptions of supplier default risk. The authors develop a theoretical model proposing that buyer communication with suppliers leads to preemptive actions that may prevent supplier financial default and fewer supply disruptions. The results suggest that reducing equivocality in buyers through communication with suppliers leads to understanding of financial factors not captured through third-party financial indicators, leading to proactive risk mitigation activities that prevent disruptions during recessionary economic cycles. This research proposes that transparency and communication reduces equivocality in buyers, spurring them to take contractual actions that reduces, financial default in key suppliers, which leads to fewer supply disruptions. Design/methodology/approach Survey data collected from 175 firms in the North America and Brazil during a period of the global recession is used to test the impact of communication with suppliers on supply chain disruptions in periods of economic crisis. This relationship is mediated by proactive contract renegotiation and supplier financial health, supporting a model grounded in Enactment Theory. Findings Results show that buyers who regularly assess and develop an understanding of their key suppliers’ financial conditions are more likely to re-negotiate contracts that revise payment terms, leading to improved supplier working capital and fewer supply chain disruptions. Research limitations/implications Validation of industry-specific financial ratios and figures could provide a richer set of insights and some quantitative measures for establishing baseline on what levels of financial ratios actually result in disruptions. However, future research should consider using a cross-sectional sample and, in addition, a qualitative approach to capture risk from a greater variety of industries and supply chain dynamics. Originality/value The notion of effective communication flows as a means for reduction of supplier disruption risk is aligned with Enactment Theory views that emphasize the benefits of risk reduction. Equivocality is reduced in buyers through information exchange and formal assessments in complex environments. This research suggests that while such communication does not have a direct effect on supply disruption risk, it is mediated through proactive buyer actions to improve supplier financial health and contract re-negotiation mechanisms that may preempt financial distress. These are important lessons learned that provide guidelines for supply chain executives in future economic recessions that may occur in the coming years.

Partial Completion as a Nonprofit Strategy

2021 ◽  
Author(s):  
Can Zhang ◽  
Atalay Atasu ◽  
Karthik Ramachandran
Keyword(s):  
Nonprofit Organizations ◽  
Service Provision ◽  
Problem Definition ◽  
Product Service ◽  
Service Portfolio ◽  
Wide Range ◽  
Partial Completion ◽  
Innovative Solution ◽  
Managerial Implications ◽  
Level 3

Problem definition: Faced with the challenge of serving beneficiaries with heterogeneous needs and under budget constraints, some nonprofit organizations (NPOs) have adopted an innovative solution: providing partially complete products or services to beneficiaries. We seek to understand what drives an NPO’s choice of partial completion as a design strategy and how it interacts with the level of variety offered in the NPO’s product or service portfolio. Academic/practical relevance: Although partial product or service provision has been observed in the nonprofit operations, there is limited understanding of when it is an appropriate strategy—a void that we seek to fill in this paper. Methodology: We synthesize the practices of two NPOs operating in different contexts to develop a stylized analytical model to study an NPO’s product/service completion and variety choices. Results: We identify when and to what extent partial completion is optimal for an NPO. We also characterize a budget allocation structure for an NPO between product/service variety and completion. Our analysis sheds light on how beneficiary characteristics (e.g., heterogeneity of their needs, capability to self-complete) and NPO objectives (e.g., total-benefit maximization versus fairness) affect the optimal levels of variety and completion. Managerial implications: We provide three key observations. (1) Partial completion is not a compromise solution to budget limitations but can be an optimal strategy for NPOs under a wide range of circumstances, even in the presence of ample resources. (2) Partial provision is particularly valuable when beneficiary needs are highly heterogeneous, or beneficiaries have high self-completion capabilities. A higher self-completion capability generally implies a lower optimal completion level; however, it may lead to either a higher or a lower optimal variety level. (3) Although providing incomplete products may appear to burden beneficiaries, a lower completion level can be optimal when fairness is factored into an NPO’s objective or when beneficiary capabilities are more heterogeneous.

The Effects of Patent Extension and Take-Back Regulation on Green Pharmacy

2021 ◽  
Author(s):  
Tianqin Shi ◽  
Nicholas C. Petruzzi ◽  
Dilip Chhajed
Keyword(s):  
Pharmaceutical Industry ◽  
Social Welfare ◽  
Technical Information ◽  
Problem Definition ◽  
Theoretic Model ◽  
Innovative Company ◽  
Take Back ◽  
Starting Point ◽  
European Environmental Agency ◽  
Managerial Implications

Problem definition: The eco-toxicity arising from unused pharmaceuticals has regulators advocating the benign design concept of “green pharmacy,” but high research and development expenses can be prohibitive. We therefore examine the impacts of two regulatory mechanisms, patent extension and take-back regulation, on inducing drug manufacturers to go green. Academic/practical relevance: One incentive suggested by the European Environmental Agency is a patent extension for a company that redesigns its already patented pharmaceutical to be more environmentally friendly. This incentive can encourage both the development of degradable drugs and the disclosure of technical information. Yet, it is unclear how effective the extension would be in inducing green pharmacy and in maximizing social welfare. Methodology: We develop a game-theoretic model in which an innovative company collects monopoly profits for a patented pharmaceutical but faces competition from a generic rival after the patent expires. A social-welfare-maximizing regulator is the Stackelberg leader. The regulator leads by offering a patent extension to the innovative company while also imposing take-back regulation on the pharmaceutical industry. Then the two-profit maximizing companies respond by setting drug prices and choosing whether to invest in green pharmacy. Results: The regulator’s optimal patent extension offer can induce green pharmacy but only if the offer exceeds a threshold length that depends on the degree of product differentiation present in the pharmaceutical industry. The regulator’s correspondingly optimal take-back regulation generally prescribes a required collection rate that decreases as its optimal patent extension offer increases, and vice versa. Managerial implications: By isolating green pharmacy as a potential target to address pharmaceutical eco-toxicity at its source, the regulatory policy that we consider, which combines the incentive inherent in earning a patent extension on the one hand with the penalty inherent in complying with take-back regulation on the other hand, serves as a useful starting point for policymakers to optimally balance economic welfare considerations with environmental stewardship considerations.

Truthful Mechanisms for Medical Surplus Product Allocation

2020 ◽  
Vol 22 (4) ◽  
pp. 735-753 ◽  
Author(s):  
Can Zhang ◽  
Atalay Atasu ◽  
Turgay Ayer ◽  
L. Beril Toktay
Keyword(s):  
Private Information ◽  
Value Added ◽  
Information Provision ◽  
Problem Definition ◽  
Preference Ranking ◽  
Additional Increase ◽  
Healthcare Facilities ◽  
Selection Decisions ◽  
Managerial Implications ◽  
Recipient Selection

Problem definition: We analyze a resource allocation problem faced by medical surplus recovery organizations (MSROs) that recover medical surplus products to fulfill the needs of underserved healthcare facilities in developing countries. The objective of this study is to identify implementable strategies to support recipient selection decisions to improve MSROs’ value provision capability. Academic/practical relevance: MSRO supply chains face several challenges that differ from those in traditional for-profit settings, and there is a lack of both academic and practical understanding of how to better match supply with demand in this setting where recipient needs are typically private information. Methodology: We propose a mechanism design approach to determine which recipient to serve at each shipping opportunity based on recipients’ reported preference rankings of different products. Results: We find that when MSRO inventory information is shared with recipients, the only truthful mechanism is random selection among recipients, which defeats the purpose of eliciting information. Subsequently, we show that (1) eliminating inventory information provision enlarges the set of truthful mechanisms, thereby increasing the total value provision; and (2) further withholding information regarding other recipients leads to an additional increase in total value provision. Finally, we show that under a class of implementable mechanisms, eliciting recipient valuations has no value added beyond eliciting preference rankings. Managerial implications: (1) MSROs with large recipient bases and low inventory levels can significantly improve their value provision by appropriately determining the recipients to serve through a simple scoring mechanism; (2) to truthfully elicit recipient needs information to support the recipient selection decisions, MSROs should withhold inventory and recipient-base information; and (3) under a set of easy-to-implement scoring mechanisms, it is sufficient for MSROs to elicit recipients’ preference ranking information. Our findings have already led to a change in the practice of an award-winning MSRO.

On Co-opetitive Supply Partnerships with End-Product Rivals: Information Asymmetry, Dual Sourcing and Supply Market Efficiency

2021 ◽  
Author(s):  
Seung Hwan Jung ◽  
Panos Kouvelis
Keyword(s):  
Wholesale Price ◽  
Information Leakage ◽  
Problem Definition ◽  
The Other ◽  
Theoretic Model ◽  
Market Information ◽  
Dual Sourcing ◽  
Strategic Sourcing ◽  
Demand Information ◽  
Separating Equilibrium

Problem definition: We consider opportunities for cooperation at the supply level between two firms that are rivals in the end-product market. One of our firms is vertically integrated (VI), has in-house production capabilities, and may also supply its rival. The other is a downstream outsourcing (DO) firm that has better market information. The DO is willing to consider a supply partnership with the VI, but it also has the option to use the outside supply market. Academic/practical relevance: Such co-opetitive practices are common in industrial supply chains, but firms’ co-opetitive strategic sourcing with the potential of information leakage has not been examined in the literature. Methodology: We build a game-theoretic model to capture the firms’ strategic interactions under the co-opetitive supply partnership with the potential information leakage. Results: The DO exploits its information advantage to obtain a better wholesale price from the VI and may use dual sourcing to protect its private information. Anticipating that, the VI may offer wholesale price concessions as an information rent to obtain the DO’s information. Our work identifies demand uncertainty and efficiency of outside supply market as the factors affecting the VI’s pricing decision and the resulting equilibrium. Pooling equilibrium arises often, but in a few cases, the equilibrium is separating. At the separating equilibrium, the DO always single sources, either from the VI or the independent supplier depending on the demand state. The VI benefits from ancillary revenue-generating opportunity, and from information acquisition in a separating equilibrium. On the other hand, the DO’s benefit is a cheaper price in exchange for market information in a separating equilibrium. In the pooling case, the DO uses dual sourcing to hide demand information, especially in the high demand case, and to better supply the end-market through his accurate demand information. Managerial implications: Our work provides useful insights into firms’ strategic sourcing behaviors to efficiently deal with the potential of information leakage in the co-opetitive supply environment and for the rationale behind such relationships often observed in industries.

Managing Congestion in Matching Markets

2021 ◽  
Author(s):  
Nick Arnosti ◽  
Ramesh Johari ◽  
Yash Kanoria
Keyword(s):  
Problem Definition ◽  
Theoretic Model ◽  
Matching Markets ◽  
Contact Potential ◽  
Managerial Implications ◽  
The Commons ◽  
Game Theoretic ◽  
Face Search ◽  
Uniqueness Of Equilibrium ◽  
Never Screened

Problem definition: Participants in matching markets face search and screening costs when seeking a match. We study how platform design can reduce the effort required to find a suitable partner. Practical/academic relevance: The success of matching platforms requires designs that minimize search effort and facilitate efficient market clearing. Methodology: We study a game-theoretic model in which “applicants” and “employers” pay costs to search and screen. An important feature of our model is that both sides may waste effort: Some applications are never screened, and employers screen applicants who may have already matched. We prove existence and uniqueness of equilibrium and characterize welfare for participants on both sides of the market. Results: We identify that the market operates in one of two regimes: It is either screening-limited or application-limited. In screening-limited markets, employer welfare is low, and some employers choose not to participate. This occurs when application costs are low and there are enough employers that most applicants match, implying that many screened applicants are unavailable. In application-limited markets, applicants face a “tragedy of the commons” and send many applications that are never read. The resulting inefficiency is worst when there is a shortage of employers. We show that simple interventions—such as limiting the number of applications that an individual can send, making it more costly to apply, or setting an appropriate market-wide wage—can significantly improve the welfare of agents on one or both sides of the market. Managerial implications: Our results suggest that platforms cannot focus exclusively on attracting participants and making it easy to contact potential match partners. A good user experience requires that participants not waste effort considering possibilities that are unlikely to be available. The operational interventions we study alleviate congestion by ensuring that potential match partners are likely to be available.

Incentives for Shared Services: Multiserver Queueing Systems with Priorities

2021 ◽  
Author(s):  
Hanlin Liu ◽  
Yimin Yu
Keyword(s):  
Cooperative Game ◽  
Cost Allocation ◽  
Service Providers ◽  
Queueing Systems ◽  
Service Level ◽  
Problem Definition ◽  
Shared Services ◽  
Scheduling Policy ◽  
Shared Service ◽  
Managerial Implications

Problem definition: We study shared service whereby multiple independent service providers collaborate by pooling their resources into a shared service center (SSC). The SSC deploys an optimal priority scheduling policy for their customers collectively by accounting for their individual waiting costs and service-level requirements. We model the SSC as a multiclass [Formula: see text] queueing system subject to service-level constraints. Academic/practical relevance: Shared services are increasingly popular among firms for saving operational costs and improving service quality. One key issue in fostering collaboration is the allocation of costs among different firms. Methodology: To incentivize collaboration, we investigate cost allocation rules for the SSC by applying concepts from cooperative game theory. Results: To empower our analysis, we show that a cooperative game with polymatroid optimization can be analyzed via simple auxiliary games. By exploiting the polymatroidal structures of the multiclass queueing systems, we show when the games possess a core allocation. We explore the extent to which our results remain valid for some general cases. Managerial implications: We provide operational insights and guidelines on how to allocate costs for the SSC under the multiserver queueing context with priorities.

Joint Product Framing (Display, Ranking, Pricing) and Order Fulfillment Under the Multinomial Logit Model for E-Commerce Retailers

2021 ◽  
Author(s):  
Yanzhe (Murray) Lei ◽  
Stefanus Jasin ◽  
Joline Uichanco ◽  
Andrew Vakhutinsky
Keyword(s):  
Large Scale ◽  
Matrix Decomposition ◽  
Multinomial Logit Model ◽  
Problem Definition ◽  
Order Fulfillment ◽  
Cardinality Constraints ◽  
Joint Product ◽  
Shipping Costs ◽  
Managerial Implications ◽  
Randomization Scheme

Problem definition: We study a joint product framing and order fulfillment problem with both inventory and cardinality constraints faced by an e-commerce retailer. There is a finite selling horizon and no replenishment opportunity. In each period, the retailer needs to decide how to “frame” (i.e., display, rank, price) each product on his or her website as well as how to fulfill a new demand. Academic/practical relevance: E-commerce retail is known to suffer from thin profit margins. Using the data from a major U.S. retailer, we show that jointly planning product framing and order fulfillment can have a significant impact on online retailers’ profitability. This is a technically challenging problem as it involves both inventory and cardinality constraints. In this paper, we make progress toward resolving this challenge. Methodology: We use techniques such as randomized algorithms and graph-based algorithms to provide a tractable solution heuristic that we analyze through asymptotic analysis. Results: Our proposed randomized heuristic policy is based on the solution of a deterministic approximation to the stochastic control problem. The key challenge is in constructing a randomization scheme that is easy to implement and that guarantees the resulting policy is asymptotically optimal. We propose a novel two-step randomization scheme based on the idea of matrix decomposition and a rescaling argument. Managerial implications: Our numerical tests show that the proposed policy is very close to optimal, can be applied to large-scale problems in practice, and highlights the value of jointly optimizing product framing and order fulfillment decisions. When inventory across the network is imbalanced, the widespread practice of planning product framing without considering its impact on fulfillment can result in high shipping costs, regardless of the fulfillment policy used. Our proposed policy significantly reduces shipping costs by using product framing to manage demand so that it occurs close to the location of the inventory.

Dynamic Type Matching

2021 ◽  
Author(s):  
Ming Hu ◽  
Yun Zhou
Keyword(s):  
Sufficient Conditions ◽  
Sharing Economy ◽  
Problem Definition ◽  
Periodic Review ◽  
Optimal Matching ◽  
Demand And Supply ◽  
Holding Costs ◽  
Current Period ◽  
Dynamic Type ◽  
Managerial Implications

Problem definition: We consider an intermediary’s problem of dynamically matching demand and supply of heterogeneous types in a periodic-review fashion. Specifically, there are two disjoint sets of demand and supply types, and a reward for each possible matching of a demand type and a supply type. In each period, demand and supply of various types arrive in random quantities. The platform decides on the optimal matching policy to maximize the expected total discounted rewards, given that unmatched demand and supply may incur waiting or holding costs, and will be fully or partially carried over to the next period. Academic/practical relevance: The problem is crucial to many intermediaries who manage matchings centrally in a sharing economy. Methodology: We formulate the problem as a dynamic program. We explore the structural properties of the optimal policy and propose heuristic policies. Results: We provide sufficient conditions on matching rewards such that the optimal matching policy follows a priority hierarchy among possible matching pairs. We show that those conditions are satisfied by vertically and unidirectionally horizontally differentiated types, for which quality and distance determine priority, respectively. Managerial implications: The priority property simplifies the matching decision within a period, and the trade-off reduces to a choice between matching in the current period and that in the future. Then the optimal matching policy has a match-down-to structure when considering a specific pair of demand and supply types in the priority hierarchy.

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