Goker Aydin

Supply Disruptions, Asymmetric Information, and a Backup Production Option

We study a manufacturer that faces a supplier privileged with private information about supply disruptions. We investigate how risk-management strategies of the manufacturer change and examine whether risk-management tools are more or less valuable in the presence of such asymmetric information. We model a supply chain with one manufacturer and one supplier, in which the suppliers reliability is either high or low and is the suppliers private information. On disruption, the supplier chooses to either pay a penalty to the manufacturer for the shortfall or use backup production to fill the manufacturers order. Using mechanism design theory, we derive the optimal contract menu offered by the manufacturer. We find that information asymmetry may cause the less reliable supplier type to stop using backup production while the more reliable supplier type continues to use it. Additionally, the manufacturer may stop ordering from the less reliable supplier type altogether. The value of supplier backup production for the manufacturer is not necessarily larger under symmetric information; for the more reliable supplier type, it could be negative. The manufacturer is willing to pay the most for information when supplier backup production is moderately expensive. The value of information may increase as supplier types become uniformly more reliable. Thus, higher reliability need not be a substitute for better information.

Joint Inventory and Pricing Decisions for an Assortment

We seek optimal inventory levels and prices of multiple products in a given assortment in a newsvendor model (single period, stochastic demand) under price-based substitution, but not stockout-based substitution. We address a demand model involving multiplicative uncertainty, motivated by market share models often used in marketing. The pricing problem that arises is known not to be well behaved in the sense that, in its deterministic version, the objective function is not jointly quasi-concave in prices. However, we find that the objective function is still reasonably well behaved in the sense that there is a unique solution to the first-order conditions, and this solution is optimal for our problem.

Manufacturer-To-Retailer versus Manufacturer-To-Consumer Rebates in a Supply Chain

Starting with a newsvendor model (single-product, single-period, stochastic demand), we build a single-retailer, single-manufacturer supply chain with endogenous manufacturer rebates and retail pricing. The demand uncertainty is multiplicative, and the expected demand depends on the effective (retail) price of the product. A retailer rebate goes from the manufacturer to the retailer for each unit it sells. A consumer rebate goes from the manufacturer to the consumers for each unit they buy. Each consumer’s response to consumer rebates is characterized by two exogenous parameters: α, the effective fraction of the consumer rebate that the consumer values, leading to the lower effective retail price perceived by the consumer, and β, the probability that a consumer rebate will be redeemed. The type(s) of rebate(s) allowed and the unit wholesale price are given exogenously. Simultaneously, the manufacturer sets the size of the rebate(s) and the retailer sets the retail price. The retailer then decides how many units of the product to stock and the manufacturer delivers that amount by the beginning of the selling season. Compared to no rebates, an equilibrium retailer rebate leads to a lower effective price (hence, higher sales volume) and higher profits for both the supply chain and the retailer. An equilibrium consumer rebate also leads to a lower effective price and higher profits for the retailer, but not necessarily for the chain. Under our assumptions, such a consumer rebate (with or without a retailer rebate) allocates a fixed fraction of the (expected) supply chain profits to each player: The retailer gets \(\alpha/(\alpha+\beta)\) and the manufacturer gets the rest, leading to interesting consequences. However, both firms prefer that α be higher and β lower: Even though the manufacturer gets a smaller share of the chain profits, the total amount received is higher. Neither the retailer nor the manufacturer always prefers one particular kind of rebate to the other. In addition, contrary to popular belief, it is possible for both firms to prefer consumer rebates even when all such rebates are redeemed.

Risk, Financing and the Optimal Number of Suppliers

Should firms in developed economies work with more or fewer suppliers than firms in developing economies? More generally, how does the number of suppliers for a firm depend on the firm’s economic environment? To answer these questions we identify several economic and business factors that might affect the number of suppliers (and that separate developed and developing economies): supply risk, fixed costs of working with suppliers, and access to financing (particularly trade-credit financing).

Dynamic Pricing of Limited Inventories When Customers Negotiate

Although take-it-or-leave-it pricing is the main mode of operation for many retailers, a number of retailers discreetly allow price negotiation when some haggle-prone customers ask for a bargain. At these retailers, the posted price, which itself is subject to dynamic adjustments in response to the pace of sales during the selling season, serves two important roles: (i) it is the take-it-or-leave-it price to many customers who do not bargain, and (ii) it is the price from which haggle-prone customers negotiate down. To effectively measure the benefit of dynamic pricing and negotiation in such a retail environment, one must take into account the interactions among inventory, dynamic pricing, and negotiation. The outcome of the negotiation (and the final price a customer pays) depends on the inventory level, the remaining selling season, the retailers bargaining power, and the posted price. We model the retailers dynamic pricing problem as a dynamic program, where the revenues from both negotiation and posted pricing are embedded in each period. We characterize the optimal posted price and the resulting negotiation outcome as a function of inventory and time. We also show that negotiation is an effective tool to achieve price discrimination, particularly when the inventory level is high and/or the remaining selling season is short, even when implementing negotiation is costly.

Decentralized Supply Risk Management

In a 2008 survey of 138 companies, 58% reported that they suffered financial losses within the last year due to a supply disruption. This article emphasizes the challenges and opportunities in supply risk management arising from the decentralized nature of supply chains and highlight how supply risks influence the interactions among firms in supply networks, review insights into decentralized supply risk management from the extant academic research and point out important future research directions.

Pricing and assortment decisions for a manufacturer selling through dual channels

In many supply chains, the manufacturer sells not only through an independent retailer, but also through its own direct channel. This work studies the pricing and assortment decisions in such a supply chain in the presence of inventory costs. In our model, the retailer offers a subset of the assortment that the manufacturer offers through its direct channel. We model the customer demand by building on the nested-logit model, which captures the customer’s choice between the manufacturer and the retailer. This model produces several insights into the optimal pricing strategies of the manufacturer. For example, we find that variants with high demand variability will carry a lower wholesale price. Furthermore, we characterize scenarios in which the manufacturer’s and retailer’s assortment preferences are in conflict. In particular, the manufacturer may prefer the retailer to carry items with high demand variability while the retailer prefers items with low demand variability.

Dismantle or remanufacture

In this paper we study a firm’s disposition decision for returned end-of-use products, which can either be remanufactured and sold, or dismantled into parts that can be reused. We formulate this problem as a multi-period stochastic dynamic program, and find the structure of the optimal policy, which consists of monotonic switching curves. Specifically, if it is optimal to remanufacture in a given period and for given inventory levels, then it is also optimal to remanufacture when the inventory of part(s) is higher or the inventory of remanufactured product is lower.

Dynamic pricing of substitutable products with limited inventories under logit demand

This article considers the dynamic pricing of two substitutable products over a predetermined, finite selling season. The initial inventory levels of the products are fixed exogenously and there are no replenishment opportunities during the season. It is assumed that each arriving customer chooses from available products based on the multinomial logit choice model, which captures the effect of prices on consumer choice. Every time a product runs out of stock, the set of choices shrinks, capturing the effect of stockouts on consumer choice. It is shown that, under the optimal pricing policy, the marginal value of an item is increasing in the remaining time and decreasing in its own stock level and the other products stock level. Despite such non-surprising behavior on the part of marginal values, the optimal price itself is not simply monotonic in the remaining time or the other products stock level. For example, a products optimal price may increase if the remaining time decreases or if the total inventory grows. It is shown that such optimal behavior can be understood through alternative gauges such as the optimal price difference between the two products and the optimal purchase probabilities.

Bargaining for an Assortment

A retailers assortment decision results from a process of give-and-take, during which the retailer may bid manufacturers against one another, and the terms of trade offer plenty of flexibility for allocating the profit among the retailer and manufacturers. We adopt a bargaining framework to capture such an assortment selection process. We investigate the properties of the profit allocations that could emerge in a decentralized supply chain. In our model, the retailer engages in simultaneous bilateral negotiations with all manufacturers. Our model and analysis produce managerial insights that could not be obtained in the absence of a bargaining perspective on assortment planning. For example, we find that when a manufacturer improves its product, such improvements not only benefit the retailer but might even benefit competing manufacturers. In fact, even improvements to out-of-assortment products can increase the profits of the retailer and certain in-assortment manufacturers. Hence, our results suggest that a manufacturer can benefit from collaborating with judiciously chosen competitors. This paper was accepted by Serguei Netessine, operations management.