Glen M. Schmidt

In Search of the Bullwhip Effect

The bullwhip effect is the phenomenon of increasing demand variability in the supply chain from downstream echelons (retail) to upstream echelons (manufacturing). The objective of this study is to document the strength of the bullwhip effect in industry-level U.S. data. In particular, we say an industry exhibits the bullwhip effect if the variance of the inflow of material to the industry (what macroeconomists often refer to as the variance of an industrys “production”) is greater than the variance of the industrys sales. We find that wholesale industries exhibit a bullwhip effect, but retail industries generally do not exhibit the effect, nor do most manufacturing industries. Furthermore, we observe that manufacturing industries do not have substantially greater demand volatility than retail industries. Based on theoretical explanations for observing or not observing demand amplification, we are able to explain a substantial portion of the heterogeneity in the degree to which industries exhibit the bullwhip effect. In particular, the less seasonal an industrys demand, the more likely the industry amplifies volatility---highly seasonal industries tend to smooth demand volatility whereas nonseasonal industries tend to amplify.

The optimal pace of product updates

Some firms (such as Intel and Medtronics) use a time–pacing strategy for new product development, introducing new generations at regular intervals. If the firm adopts a fast pace (introducing frequently) then it prematurely cannibalizes its old generation and incurs high development costs, while if it waits too long, it fails to capitalize on customer willingness–to– pay for more advanced technology. We develop a model to gain insight into which factors drive the pace. We consider the degree to which a new generation stimulates market growth, the rate at which it diffuses (its coefficients of innovation and imitation), the rate of decline in its margin over time, and the cost of new product development. The optimization problem is non–concave; however we are able to solve it numerically for a wide range of parameters because there is a finite number of possible solutions for each case. Somewhat intuitively, we find that a faster pace is associated with a higher market growth rate and faster margin decay. Not so intuitively, we find that relatively minor differences in the new product development cost function can significantly impact the optimal pace. Regarding the Bass coefficients of innovation and imitation, we find that a higher sum of these coefficients leads to a faster pace but with diminishing effects, and that for relatively higher sums the coefficients are effectively

The Impact of an Integrated Marketing and Manufacturing Innovation

Suppose you are a Marketing Manager envisioning a new product, or an Operations Manager contemplating a process improvement, or a CEO who commissioned an integrated new product development team. If our assumptions hold, our model offers you a single numerical measure, called thedegree of product/process innovation, to determine your initiatives impact on potential sales, prices, market segments, and profits. Our simple, single-period model is a variation of the existing vertically differentiated products model: There are two competing substitute products, and customers will buy at most one of them. Our contribution is to allow new relationships between the valuations of the two products by potential customers, and to allow differing unit production costs. We identify equilibrium results when two competing firms each offer one product, and find the profit maximizing result when one (monopolistic) firm offers both products. The new product infringes on the market in one of two ways:High-end encroachment results when the new product attracts the best customers (those with the highest reservation prices), whilelow-end encroachment identifies a situation where the new product attracts fringe (lower-end) customers. Low-end encroachment may help explain why an incumbent sometimes fails to recognize the threat of an entrants product, as we illustrate with an example from the disk drive industry. In short, we offer insight into the value of both a marketing objective (enhancing the product design attributes) and a manufacturing goal (lowering the production cost) in a product and/or process improvement project.

LOW-END AND HIGH-END ENCROACHMENT STRATEGIES FOR NEW PRODUCTS

Successful new products typically encroach in some fashion on an existing market, impacting prices, sales, and profits for the old product(s). We present a framework in which encroachment takes one of two forms, either high-end or low-end. High-end encroachment is exemplified by Intels Pentium III, which encroached on the Pentium II by first catering to high-end customers before diffusing to the low end to fully displace the Pentium II. Low-end encroachment is illustrated by disk drives with smaller form factors, which first catered to low-end customers desiring lower-cost, but eventually diffused upward to the high end. Our low-end encroachment framework may help clarify how a disruptive innovation impacts the market, in terms of sales prices, volumes, and profits. Similarly, our high-end encroachment results may lend insight into the market impact of a sustaining technology.

Consumer Valuation of Modularly Upgradeable Products

Although product modularity is often advocated as a design strategy in the operations management literature, little is known about how consumers respond to modular products. In this research we undertake several experiments to explore consumer response to modularly upgradeable products in settings featuring technological change. We consider both the initial product choice (between a modularly upgradeable product and an integral one) and the subsequent upgrade decision (replacement of a module versus full product replacement). First, we show that consumers tend to discount the cost savings associated with modular upgrades excessively (insufficiently) when the time between the initial purchase and the upgrade is short (long). This suggests that modular upgradability as a product feature has higher profit potential for slowly rather than rapidly improving products. Second, we observe a preference reversal between the initial purchase and the point of upgrade: At the point of initial purchase, people foresee making a full product replacement in the future, yet, when faced with the actual upgrade decision, they are more likely to revert to modular upgrades. Finally, we discuss and test several pricing and product design strategies that the firm can use to respond to these cognitive biases. This paper was accepted by Kamalini Ramdas, entrepreneurship and innovation.

LOW TEMPERATURE FLUIDITY OF LUBRICATING OILS UNDER SLOW COOL CONDITIONS

A Slow Cool Fluidity Test (SCFT) was developed to detect gelation of oils. In this test, SAE 10W multigrade oils of known poor field experience solidified at temperatures ranging from -11 to -17 deg C. The test was based on field temperature histories, and was found to be more reliable than other standard and experimental industry tests in detecting gelation tendencies. The SCFT consists of a 0.10 deg C per hour cool from above the oils cloud point to the lowest use temprature expected. Fluidity is determined by the time for the oil to flow 30 mm when a standard ASTM pour point test jar is turned from vertical to horizontal. The effect of additives such as pour point depressant type and quantity can be determined by utilizing the SCFT.

PERFORMANCE OF MULTIGRADE OILS IN OFF-HIGHWAY DIESEL ENGINES

A number of multigrade diesel engine oils meeting API (American Petroleum Institute) Service Classification CD, including multicylinder diesel test engine. There was a wide range in performance of these commercial oils in regard to piston deposits, wear, oil deterioration, oil consumption, filterability, deposits and wear from high sulfur and low cetane fuels, and fuel economy, a range similar to SAE 30 oils of the same service classification. This wide variability in oil performance indicates that engine oil test criteria of API Service Classification CD do not adequately address the concerns of diesel engine manufacturers. A new performance classification above and beyond API Service Classification CD is needed to quantify oil performance parameters so that extended oil drain intervals can be used without sacrificing engine durability and reliability.

Stage-Gate Contracts to Screen Agents with Inside Information: Stage-Gate Contracts to Screen Agents

Stage‐gate contracts are common in R&D projects, and outsourcing of R&D (from a principal to an agent) is becoming more prevalent. We explore how the principal can best formulate an outsourcing contract when the agents effort is unobservable (moral hazard) and the agent has inside information (adverse selection) in a stage‐gate setting with two distinct stages. We find that the Stage‐Gate contract can help offset the information asymmetry and that the agent pays an upfront buy‐in.

Want to reduce the bullwhip? Measure it. Here’s how

The popular “beer game” illustrates the bullwhip effect where a small perturbation in downstream demand can create wild swings in upstream product flows. The purpose of this paper is to present a methodical framework to measure the bullwhip effect and evaluate its impact.,This paper illustrates a framework using SKU-level data from an industry-leading manufacturer, its distributors, end-users and suppliers.,Firms benefit from tracking multiple intra-firm bullwhips and from tracking bullwhips pertinent to specific products, specific suppliers and specific customers. The framework presented in this paper enables managers to pinpoint bullwhip sources and mitigate bullwhip effects.,This paper presents a framework for methodically measuring and tracking intra-firm and inter-firm bullwhips.,A disconnect exists between what is known and taught regarding the bullwhip effect and how it is actually tracked and managed in practice. This paper aims to reduce this gap. For the various products analyzed herein, the authors show how using this framework has the potential to reduce delivered product cost by 2 to 15 per cent.,Properly managing the bullwhip leads to lower inventories and potentially lower product prices while simultaneously increasing firm profits.,This paper presents a novel approach to systematically tracking intra-firm bullwhips along with bullwhips specific to a given supplier or customer.

Managing Supply Risk in Fixed Price Contracts: A Contingent Claims Perspective

The primary focus of this paper is supply risk mitigation. though, its objectives are twofold. First, we develop a generic contingent claims model framed as an exercise in stochastic optimal control. The model is easily adjusted to a number of risk-based operational problems. Second, we adapt the model to the problem of supply uncertainty and the valuation of a fixed price contract with a focus on managing supply uncertainty through a portfolio based risk sharing framework. The risk and reward tradeoffs characterizing our general findings in this chapter indicate a subtle balance between supply risk, sourcing allocations and related costs, and accordingly, the resulting operational strategies considered. Given this setup, increased supplier-portfolio risk is a defining measure in establishing optimal operating policies, with the caveat that increases in the supplier portfolio’s volatility, also increase shortages which lowers the contract’s value.