Charles J. Corbett

Designing Supply Contracts: Contract Type and Information Asymmetry

This paper studies the value to a supplier of obtaining better information about a buyers cost structure, and of being able to offer more general contracts. We use the bilateral monopoly setting to analyze six scenarios: three increasingly general contracts (wholesale-pricing schemes, two-part linear schemes, and twopart nonlinear schemes), each under full and incomplete information about the buyers cost structure. We allow both sides to refuse to trade by explicitly including reservation profit levels for both; for the supplier, this is implemented through a cutoff policy. We derive the suppliers optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts. Our key findings are as follows: First, the value of information is higher under two-part contracts; second, the value of offering two-part contracts is higher under full information; and third, the proportion of buyers the supplier will choose to exclude can be substantial.

Extending the Horizons: Environmental Excellence as Key to Improving Operations

The view that adopting an environmental perspective on operations can lead to improved operations is in itself not novel; phrases such as lean is green are increasingly commonplace. The implication is that any operational system that has minimized inefficiencies is also more environmentally sustainable. However, in this paper we argue that the underlying mechanism is one of extending the horizons of analysis and that this applies to both theory and practice of operations management. We illustrate this through two principal areas of lean operations, where we identify how successive extensions of the prevailing research horizon in each area have led to major advances in theory and practice. First, in quality management, the initial emphasis on statistical quality control of individual operations was extended through total quality management to include a broader process encompassing customer requirements and suppliers operations. More recently, the environmental perspective extended the definition of customers to stakeholders and defects to any form of waste. Second, in supply chain management, the horizon first expanded from the initial focus on optimizing inventory control with a single planner to including multiple organizations with conflicting objectives and private information. The environmental perspective draws attention to aspects such as reverse flows and end-of-life product disposal, again potentially improving the performance of the overall supply chain. In both cases, these developments were initially driven by practice, where many of the benefits of adopting an environmental perspective were unexpected. Given that these unexpected side benefits seem to recur so frequently, we refer to this phenomenon as the law of the expected unexpected side benefits. We conclude by extrapolating from the developmental paths of total quality management and supply chain management to speculate about the future of environmental research in operations management.

Stochastic Inventory Systems in a Supply Chain with Asymmetric Information: Cycle Stocks, Safety Stocks, and Consignment Stock

The two critical factors distinguishing inventory management in a multifirm supply-chain context from the more traditional centrally planned perspective are incentive conflicts and information asymmetries. We study the well-known order quantity/reorder point Q, r model in a two-player context, using a framework inspired by observations during a case study. We show how traditional allocations of decision rights to supplier and buyer lead to inefficient outcomes, and we use principal-agent models to study the effects of information asymmetries about setup cost and backorder cost, respectively. We analyze two “opposite” models of contracting on inventory policies. First, we derive the buyers optimal menu of contracts when the supplier has private information about setup cost, and we show how consignment stock can help reduce the impact of this information asymmetry. Next, we study consignment and assume the supplier cannot observe the buyers backorder cost. We derive the suppliers optimal menu of contracts on consigned stock level and show that in this case, the supplier effectively has to overcompensate the buyer for the cost of each stockout. Our theoretical analysis and the case study suggest that consignment stock helps reduce cycle stock by providing the supplier with an additional incentive to decrease batch size, but simultaneously gives the buyer an incentive to increase safety stock by exaggerating backorder costs. This framework immediately points to practical recommendations on how supply-chain incentives should be realigned to overcome existing information asymmetries.

Competition and Structure in Serial Supply Chains with Deterministic Demand

Supply chains often consist of several tiers, with different numbers of firms competing at each tier. A major determinant of the structure of supply chains is the cost structure associated with the underlying manufacturing process. In this paper, we examine the impact of fixed and variable costs on the structure and competitiveness of supply chains with a serial structure and price-sensitive linear deterministic demand. The entry stage is modeled as a simultaneous game, where the players take the outcomes of the subsequent post-entry Cournot competition into account in making their entry decisions. We derive expressions for prices and production quantities as functions of the number of entrants at each tier of a multitier chain. We characterize viability and stability of supply-chain structures and show, using lattice arguments, that there is always an equilibrium structure in pure strategies in the entry game. Finally, we examine the effects of vertical integration in the two-tier case. Altogether, the paper provides a framework for comparing a variety of supply-chain structures and for studying how they are affected by cost structures and by the number of entrants throughout the chain.

A Spatiotemporal Analysis of the Global Diffusion of ISO 9000 and ISO 14000 Certification

We study the global diffusion of ISO 9000 and ISO 14000 certification using a network diffusion framework. We start by investigating the presence and nature of contagion effects by defining alternative cross-country networks and testing their relative strength. Second, we study how the rate of diffusion differs between the two standards and between early-and later-adopting countries. Third, we identify which countries had more influence on diffusion than others. Empirically, we build a diffusion model which includes several possible cross-country contagion effects and then use Bayesian methods for estimation and model selection. Using country by year data for 56 countries and nine years, we find that accounting for cross-country influences improves both the fit and the prediction accuracy of our models. However, the specific cross-country contagion mechanism is different across the two standards. Diffusion of ISO 9000 is driven primarily by geography and bilateral trade relations, whereas that of ISO 14000 is driven primarily by geography and cultural similarity. We also find that the diffusion rate of ISO standards is higher for later-adopting countries and for the later ISO 14000 standard. We discuss several implications of our findings for the global diffusion of management standards.

Global Diffusion of ISO 9000 Certification Through Supply Chains

The ISO 9000 series of quality management systems standards is widely diffused, with more than 560,000 sites certified in 152 countries as of December 2003. Anecdotal evidence suggests that global supply chains contributed to this diffusion, in the following sense. Firms in Europe were the first to seek ISO 9000 certification in large numbers. They then required their suppliers, including those abroad, to do likewise. Once the standard had thus entered other countries, it spread beyond those firms immediately exporting to Europe to be adopted by many other firms in those same countries. This paper empirically examines the validity of this view of the role of supply chains in global diffusion of ISO 9000. To do so, we decompose the statement “supply chains contributed to the global diffusion of ISO 9000” into a series of four requirements that must be met for the original statement to be supported. We then use firm-level data from a global survey of more than 5,000 firms in nine countries to test the hypotheses that correspond to these requirements. Our findings are consistent with the view that part of the global diffusion of ISO 9000 did move upstream in global supply chains. In short, this means that firms that export goods or services to a particular country may simultaneously be importing that countrys management practices. We conclude by suggesting how these findings might form the basis for future research on the environmental management systems standard ISO 14000.

Natural drift: what happened to operations research?

“Crisis? What crisis?” could also have been an appropriate title for this paper. The OR/MS literature contains more than enough papers addressing the crisis in OR/MS to take the matter seriously, but it is not always clear exactly what is meant by crisis. The complaints usually concern the perceived gap between theory and practice, pointing out that there are too many theoretical and too few practice-oriented papers. This may well be true, but we suggest a slightly different view of the crisis, by hypothesizing that a ‘natural drift’ has occurred, i.e., that old-style OR has remained underdeveloped relative to its more purely theoretical and practical counterparts. To explain how this hypothesis arose, we provide an overview of the debate on professional concerns in OR/MS, and contrast it with Harvard Business Review papers providing a managerial perspective. We also explore the extent to which such a natural drift would be truly natural, by comparing the development of OR/MS to that of other professions....

Optimal Shared Savings Contracts in Supply Chains: Linear Contracts and Double Moral Hazard

In many supply chains consumption of indirect materials, sold by a supplier to a customer for use in her production process, can be reduced by efforts exerted by either party. Since traditional supply contracts provide no incentive for the supplier to exert such effort, shared-savings contracts have been proposed as a way to improve incentives in the channel, leading to more efficient effort choices by the two parties. Such shared-savings contracts typically combine a fixed service fee with a variable component based on consumption volume. We formalize this situation using the double moral hazard framework, in which both parties decide how much effort to exert by trading off the cost of their effort against the benefits that they will obtain from reduced consumption. We also extend the double moral hazard framework to analyze a broader class of cost-of-effort functions than considered so far, including the linear cost-of-effort functions commonly found in practice. We show that the supplier can still always induce the optimal second-best equilibrium with a linear shared-savings contract. Under this broader class of functions, however, the behavior of the optimal contract as a function of the problem parameters becomes more complex. We illustrate how small changes in the problem parameters can turn profits from being a well-behaved to a poorly-behaved function of the contract, and provide some theoretical characterization of this phenomenon. The practical significance of this is that simple (linear) contracts are sufficient in many double moral hazard contexts, even for the broader class of functions we consider, but care must be taken in selecting the optimal contract parameters.

The Green Fee: Internalizing and Operationalizing Environmental Issues

Two of the major challenges facing business with respect to environmental issues are internalization and operationalization. Appropriate internalization is needed to ensure that the companys responses to environmental issues are consistent with its responses to other issues and with its long-term goals. For each environmental issue, different levels of response are possible. This article suggests a framework that can assist managers in structuring these responses. To be effective, environmental intentions need to be operationalized—i. e., integrated into a firms daily operations. The operationalization of environmental programs can be facilitated by exploring and exploiting analogies with existing and proven programs already in place in many firms.

Mass Customization vs. Mass Production: Variety and Price Competition

We study competition between two multiproduct firms with distinct production technologies in a market where customers have heterogeneous preferences on a single taste attribute. The mass customizer (MC) has a perfectly flexible production technology and thus can offer any variety within a product space, represented by Hotellings linear city. The mass producer (MP) has a more focused production technology and therefore offers a finite set of products in the same space. The MP can invest in more flexible technology, which reduces its cost of variety and hence allows it to offer a larger set of products; in the extreme, the MP can emulate the MCs technology and offer infinite variety. The firms simultaneously decide whether to enter the market, and the MP chooses its degree of product-mix flexibility on entry. Next, the MP designs its product line---i.e., the number and position of its products---the MCs perfectly flexible technology makes this unnecessary. Finally, both firms simultaneously set prices. We analyze the subgame-perfect Nash equilibrium in this three-stage game, allowing firm-specific fixed and variable costs that together characterize their production technology. We find that an MP facing competition from an MC offers lower product variety than an MP monopolist to reduce the intensity of price competition. We also find that the MP can survive this competition, even if it has higher fixed cost of production technology, higher marginal cost of production, or both.