Andy A. Tsay

Modeling Supply Chain Contracts: A Review

In this review, we summarize model-based research on contracts in the supply chain setting and provide a taxonomy for work in this area. During our discussions it became clear that the field has developed in many directions at once. Furthermore, as we surveyed the Uterature, it was not obvious what constitutes a contract in this context. While the nomenclature “supply chain management” is relatively new, many of the problems that are addressed are not. In particular, mathematical models for optimizing inventory control have a long history as a significant part of the mainstream of operations research and operations management. Inventory modeling, per se, dates to the early part of the century and the ideas of a Westinghouse engineer named Ford Harris (1915). A natural issue to address first is what is meant by supply chain management (SCM) research and how it relates to the vast body of work constituting classical inventory theory.

Channel Dynamics Under Price and Service Competition

This paper studies a distribution system in which a manufacturer supplies a common product to two independent retailers, who in turn use service as well as retail price to directly compete for end customers. We examine the drivers of each firms strategy, and the consequences for total sales, market share, and profitability. We show that the relative intensity of competition with respect to each competitive dimension plays a key role, as does the degree of cooperation between the retailers. We discover a number of insights concerning the preferences of each party regarding competition. For instance, there will be circumstances under which both retailers would prefer an increase in competitive intensity. Our analysis generalizes existing knowledge about manufacturer wholesale pricing strategies, and rationalizes behaviors that would not be evident without both price and service competition. Finally, we characterize the structure of wholesale pricing mechanisms that can coordinate the system, and show that the most commonly used formats (those that are linear in the order quantity) can achieve coordination only under very limiting conditions.

Quantity Flexibility Contracts and Supply Chain Performance

The Quantity Flexibility (QF) contract is a method for coordinating materials and infor- mation flows in supply chains operating under rolling-horizon planning. It stipulates a maximum percentage revision each element of the period-by-period replenishment schedule is allowed per planning iteration. The supplier is obligated to cover any requests that remain within the upside limits. The bounds on reductions are a form of minimum purchase commitment which discourages the customer from overstating its needs. While QF contracts are being implemented in industrial practice, the academic literature has thus far had little guidance to offer a firm interested in structuring its supply relationships in this way. This paper seeks to address this need, by developing rigorous conclusions about the behavioral consequences of QF contracts, and hence about the implications for the performance and design of supply chains with linkages possessing this structure. Issues explored include the impact of system flexibility on inventory characteristics and the patterns by which forecast and order variability propagate along the supply chain. The ultimate goal is to provide insights as to where to position flexibility for the greatest benefit, and how much to pay for it.

Risk sensitivity in distribution channel partnerships: implications for manufacturer return policies

Abstract The manufacturer return policy is widely regarded as a means for channel partners to share risk. However, existing studies of this popular institutional practice use frameworks that assume risk-neutrality of all parties. This report analyzes how sensitivity to risk affects both sides of the manufacturer-retailer relationship under various scenarios of strategic power, and how these dynamics are altered by a return policy. A key finding is that the penalty for ignoring risk sensitivity can be substantial. This will suggest an informational motive affecting the use of return policies, a consequence of the potential difficulty of inferring another party’s risk sensitivity and the positive incentive for deception.

Managing retail channel overstock: markdown money and return policies

Abstract This paper studies a manufacturer-retailer channel facing unknown demand. When the wholesale relationship comprises only a per-unit price that exceeds the manufacturing cost, the retailer’s inventory strategy will not properly reflect the channel’s overstock and understock costs. A number of researchers have advocated manufacturer return policies to remedy this misalignment of incentives, but none explain the reality that “markdown money” is sometimes paid to retailers expressly to avoid product returns. We formulate a model that distinguishes between these practices, and determine conditions under which each will be more desirable with respect to channel coordination and individual firm performance.

Modeling Conflict and Coordination in Multi-Channel Distribution Systems: A Review

For any company with a product to sell, how to make that product available to the intended customers can be as crucial a strategic issue as developing the product itself1. While distribution channel choice is a very traditional concern, for many companies it has recently come under intense scrutiny due to a number of major developments. The expanding role of the Internet in consumer and business procurement activity has created new opportunities for access to customers. Information and materials handling technologies have broadened the feasible set of sales and distribution activities that a producer might reasonably perform. The economics of materials delivery has been transformed by the pervasive logistical networks deployed by third-party shipping powerhouses such as Federal Express and United Parcel Services. As a result, many manufacturers are reconsidering their approaches to distribution, with particular attention to the role of intermediaries2.

Safeguarding the Promise of Production Outsourcing

Todays product companies (original equipment manufacturers, or OEMs) increasingly outsource production, especially when the activities are asset intensive or require process technologies characterized by rapid innovation. When such an OEM also outsources the procurement of the required materials, especially to the party providing the production services, the OEM risks unpleasant surprises, such as unauthorized part or supplier substitutions, overbilling, mistreatment of the supply base, and the loss of the OEMs procurement leverage. Based on supply chain audits and interviews in numerous industries, we propose and analyze strategies for preventing these outcomes when outsourcing production. We recommend that OEMs carefully consider the underlying means, motives, and opportunities of the service providers when deciding which activities to outsource and how to establish effective business controls. Firms such as Hewlett-Packard, Motorola, and Dell have implemented these ideas.

Free Riding and Conflict in Hybrid Shopping Environments: Implications for Retailers, Manufacturers, and Regulators

Shoppers increasingly utilize multiple distribution channels. One variation of this behavior is hybrid shopping—jumping across channels in the path to a single purchase. Hybrid shopping can create coordination challenges for the distribution system. These include two types of free riding: using the presentation and services offered by a brick-and-mortar channel but maki ng the purchase in an online channel (recently termed “showrooming”) or, conversely, first obtaining information online before ultimately purchasing in a physical store. This article explores the implications of hybrid shopping for retailers and manufacturers, and their evolving responses to the prospective free riding. These include price matching, restrictions on product offerings that provide channels with some degree of exclusivity, service enhancements that leverage multichannel capabilities, and schemes that compensate channel members for contributing to the sale. For each of the developments considered, findings and responses provide implications for competition policy and antitrust.

Sam: A Decision Support System for Retail Supply Chain Planning for Private-label Merchandise with Multiple Vendors

A number of retail firms use a “private-label” strategy in which merchandise is sold under a brand name exclusive to the retail firm, but manufactured by one or more independent vendors. While offering a number of benefits, this approach also poses a different set of supply chain challenges than manufacturer-brand-based retailing, in that the retail firm must take a more active role in organizing and coordinating the planning and materials management activities in a supply base that is often dispersed and heterogenous.

OM Forum -- Benchmarking Global Production Sourcing Decisions: Where and Why Firms Offshore and Reshore

Problem definition: Manufacturing firms are undergoing restructuring defined by a collection of adjustments and decisions, which affect the source and destination of manufactured products throughout the firm’s global supply chain network. We report on a comprehensive picture of manufacturing sourcing on a global basis. Academic/practical relevance: With dynamic changes in global economic, political, and technological conditions, the design of global supply chain strategies has become critically important for executives and has great potential for operations management research. Methodology: Our work is based on a global field study conducted in 2014 and 2015 among leading manufacturers from a wide range of industries. The data set has the distinguishing feature of reflecting actual decisions that the firms made recently (during the last three years). Results: Companies are currently restructuring their global production footprints. The majority of firms engage in offshoring. Reshoring does occur but seldo...