Gad Allon

Global Dual Sourcing: Tailored Base-Surge Allocation to Near-and Offshore Production

When designing a sourcing strategy in practice, a key task is to determine the average order rates placed to each source because that affects cost and supplier management. We consider a firm that has access to a responsive nearshore source (e.g., Mexico) and a low-cost offshore source (e.g., China). The firm must determine an inventory sourcing policy to satisfy random demand over time. Unfortunately, the optimal policy is too complex to allow a direct answer to our key question. Therefore, we analyze a tailored base-surge (TBS) sourcing policy that is simple, used in practice, and captures the classic trade-off between cost and responsiveness. The TBS policy combines push and pull controls by replenishing at a constant rate from the offshore source and producing at the nearshore plant only when inventory is below a target. The constant base allocation allows the offshore facility to focus on cost efficiency, whereas the nearshore facilitys quick response capability is utilized only dynamically to guarantee high service. The research goals are to (i) determine the allocation of random demand into base and surge capacity, (ii) estimate corresponding working capital requirements, and (iii) identify and value the key drivers of dual sourcing. We present performance bounds on the optimal cost and prove that economic optimization brings the system into heavy traffic. We analyze the sourcing policy that is asymptotically optimal for high-volume systems and present a simple “square-root” formula that is insightful to answer our questions and sufficiently accurate for practice, as is demonstrated with a validation study.

Competition in Service Industries with Segmented Markets

We develop a model for the competitive interactions in service industries where firms cater to multiple customer classes or market segments with the help of shared service facilities or processes so as to exploit pooling benefits. Different customer classes typically have distinct sensitivities to the price of service as well as the delays encountered. In such settings firms need to determine (i) the prices charged to all customer classes; (ii) the waiting time standards, i.e., expected steady state waiting time promised to all classes; (iii) the capacity level; and (iv) a priority discipline enabling the firm to meet the promised waiting time standards under the chosen capacity level, all in an integrated planning model that accounts for the impact of the strategic choices of all competing firms. We distinguish between three types of competition: depending on whether firms compete on the basis of their prices only, waiting time standards only, or on the basis of prices and waiting time standards. We establish in each of the three competition models that a Nash equilibrium exists under minor conditions regarding the demand volumes. We systematically compare the equilibria with those achieved when the firms service each market segment with a dedicated service process.

The Impact of Size and Occupancy of Hospital on the Extent of Ambulance Diversion: Theory and Evidence

In recent years, growth in the demand for emergency medical services, along with decline in the number of hospitals with emergency departments (EDs), has raised concerns about the ability of the EDs to provide adequate service. Many EDs frequently report periods of overcrowding during which they are forced to divert incoming ambulances to neighboring hospitals, a phenomenon known as “ambulance diversion.” The objective of this paper is to study the impact of key operational characteristics of the hospitals such as the number of ED beds, the number of inpatient beds, and the utilization of inpatient beds on the extent to which hospitals go on ambulance diversion. We propose a simple queueing network model to describe the patient flow between the ED and the inpatient department. We analyze this network using two different approximations—diffusion and fluid—to derive two separate sets of measures for inpatient occupancy and ED size. We use these sets of measures to form hypotheses and test them by estimating...

Bounded Rationality in Service Systems

The traditional operations management and queueing literature typically assumes that customers are fully rational. In contrast, in this paper we study canonical service models with boundedly rational customers. We capture bounded rationality using a model in which customers are incapable of accurately estimating their expected waiting time. We investigate the impact of bounded rationality from both a profit-maximizing firms perspective and a social planners perspective. For visible queues with the optimal price, bounded rationality results in revenue and welfare loss; with a fixed price, bounded rationality can lead to strict social welfare improvement. For invisible queues, bounded rationality benefits the firm when its level is sufficiently high. Ignoring bounded rationality, when present yet small, can result in significant revenue and welfare loss.

How Do Delay Announcements Shape Customer Behavior? An Empirical Study

In this paper, we explore the impact of delay announcements using an empirical approach by analyzing the data from a medium-sized call center. We first explore the question of whether delay announcements impact customers’ behavior using a nonparametric approach. The answer to this question appears to be ambiguous. We thus turn to investigate the fundamental mechanism by which delay announcements impact customer behavior, by constructing a dynamic structural model. In contrast to the implicit assumption made in the literature that announcements do not directly impact customers’ waiting costs, our key insights show that delay announcements not only impact customers’ beliefs about the system but also directly impact customers’ waiting costs. In particular, customers’ per-unit waiting cost decreases with the offered waiting times associated with the announcements. The results of our counterfactual analysis show that it may not be necessary to provide announcements with very fine granularity. This paper was accepted by Yossi Aviv, operations management .

Outsourcing Service Processes to a Common Service Provider Under Price and Time Competition

In many industries, firms consider the option of outsourcing an important service process associated with the goods or services they bring to the market. Often, competing firms outsource this service process to one or more common service suppliers. When they outsource to a common service provider, this gives rise to a service supply chain. We develop analytical models to characterize the benefits and disadvantages of outsourcing in service industries in which the retailers compete with each other in terms of the price they charge and/or the waiting time expectations and standards which they adopt and sometime advertise. To assess the benefits of outsourcing strategies, we give concrete answers to the following questions: (i) if a service supply chain wants to operate at maximum efficiency, what type of payment schemes does the service provider need to offer the retailers to coordinate the chain? (ii) Given optimally coordinating payment schemes for the outsourced service, when are firms better off if all of them choose to outsource rather than perform the service in-house? In addition, when will a service supply chain in which firms choose to outsource to a common provider be stable in the sense that no firm has an incentive to unilaterally abandon the chain and provide in-house service instead? How do the answers to these questions depend on the type of competition, the intensity of the competition, the number of firms in the industry and the sales volume of the firms? (iii) How do the answers to the questions raised in (i) and (ii) depend on whether the outside supplier pools the service processes or not and whether it is able to operate at lower cost rates than the service retailers themselves?

Large-Scale Service Marketplaces: The Role of the Moderating Firm

Recently, large-scale, Web-based service marketplaces, where many small service providers compete among themselves in catering to customers with diverse needs, have emerged. Customers who frequent these marketplaces seek quick resolutions and thus are usually willing to trade prices with waiting times. The main goal of this paper is to discuss the role of the moderating firm in facilitating information gathering, operational efficiency, and communication among agents in service marketplaces. Surprisingly, we show that operational efficiency may be detrimental to the overall efficiency of the marketplace. Furthermore, we establish that to reap the “expected” gains of operational efficiency, the moderating firm may need to complement the operational efficiency by enabling communication among its agents. The study emphasizes the scale of such marketplaces and the impact it has on the outcomes. This paper was accepted by Yossi Aviv, operations management.

The Mexico-China Sourcing Game: Teaching Global Dual Sourcing

We describe a three-hour class on global dual sourcing built around a game that demonstrates the challenges in making operational decisions, and transfers recent academic insights to the classroom. Student teams manage a firm with access to a responsive but expensive supply source Mexico and a cheap but remote source China. Each team must determine a sourcing strategy to satisfy random demand that is revealed throughout the game. In each period, teams place orders to both sources and manage two assets: inventory and their bank account. The goal is to maximize each teams value final bank balance. During the debriefings, we analyze the policies used by different teams along both financial and operational metrics, present the optimal strategy, and summarize the experiential learning points.

Cutting in Line: Social Norms in Queues

Although the norm in many retail banks is to serve customers on a first-come, first-served basis, some customers try to cut the line, usually by providing an excuse for their urgency. In other queues, however, this behavior is considered unacceptable and is aggressively banned. In all of these cases, customer exhibit strategies that have not yet been explored in the operations literature: they choose whether or not to cut the line and must also decide whether to accept or reject such intrusions by others. This paper derives conditions for the emergence of such behavior in equilibrium among the customers themselves, i.e., when the queue manager is not involved in granting priorities and the customers have to use community enforcement to sustain such equilibria. This paper was accepted by Yossi Aviv, operations management.

Buying from the Babbling Newsvendor: Availability Information and Cheap Talk

Provision of real-time information by a firm to its customers has become prevalent in recent years in both the service and retail sectors. In this paper, we study a retail operations model where customers are strategic in both their actions and in the way they interpret information, while the retailer is strategic in the way it provides information. This paper focuses on the ability (or the lack thereof) to communicate credibly unverifiable information. We develop a game-theoretic framework to study this type of communication and discuss the equilibrium language emerging between the retailer and its customers. We show that for a single-retailer setting, the equilibrium language that emerges carries no information. In this sense, a single-retailer providing information on its own cannot create any credibility with the customers. We explore several remedies so that the firm can credibly disclose availability information to its customers. While in these remedies we show that the firm may be able to reveal complete information, the firm would prefer to shade some information and use intentional vagueness.