Guido Voigt

Supply chain coordination and setup cost reduction in case of asymmetric information

Previous research shows that asymmetric information triggers a decrease of lot sizes compared to the supply chain optimum. Thus, the setup costs per period are suboptimally high. To analyse, whether setup cost reduction can mitigate this effect, we extend the standard framework of lotsizing decisions under asymmetric information by allowing investments in setup cost reduction. We find that asymmetric information tends to lead to an overinvestment in setup cost reduction. The overall effect of setup cost reduction on supply chain performance is therefore ambiguous. We show that these results hold for a wide variety of investment functions.

Dynamic buy-back for product recovery in end-of-life spare parts procurement

The efficient supply of spare parts is of prime concern for original equipment manufacturers (OEM). While manufacturing the parent product, spare parts can be sourced efficiently by using existing manufacturing facilities. This situation completely changes once the original equipment manufacturer ceases production of the parent product. In addition to traditional spare parts sources in the form of final order and remanufacturing, the option to buy back parts or products provides a viable alternative in the end-of-life phase. This can prevent the OEM from fulfilling his spare parts availability obligation or increase his ability to remanufacture. Current practice in industry is, on the one hand, to offer trade-in campaigns to acquire functional products from customers by giving substantial discounts on a new-generation product. On the other hand, trade-in rebates are given when customers return their broken parts in exchange for spare parts. We propose the consideration of a third option, i.e. to buy back broken products in order to improve control of both demand for spare parts and supply of recoverable parts. This contribution seeks to assess the potential benefit of buy-back strategies in contrast to both traditional sourcing and trade-in campaigns for different settings regarding information availability and buy-back flexibility. For each situation, a MILP formulation is presented, and in a numerical study we analyse the circumstances under which the buy-back of broken products is especially beneficial for the OEM.

Supply chain coordination with information sharing in the presence of trust and trustworthiness

The strategic use of private information can cause efficiency losses in traditional principal–agent settings, which are found, for example, in supply chain interactions. One stream of research states that these efficiency losses cannot be overcome if all agents use their private information strategically. However, another stream of research highlights the importance of communication, trust, and trustworthiness in supply chain management. In many instances, supplier–buyer relationships are found to reflect a principal–agent context where the supplier acts as the principal and the buyer behaves as the agent. Typically, here it is assumed that the supplier has an a priori distribution assumption over the buyers private information on cost positions or market conditions. However, little is said on how the principal obtains this distribution. Moreover, it is stressed that the assessment of the a priori distribution is not influenced by communication because of the strategic extent of information sharing. The underlying concept behind this study is that there are two types of buyers (agents). The first type always reports her private information truthfully while the second type does not. In this framework, the supplier (principal) adjusts his a priori distribution conditioned on the buyers shared information and generates the menu of contracts with respect to the adjusted probabilities. The presented model highlights that the impact of communication on the suppliers, buyers, and supply chains performance level is ambiguous and mainly depends on the buyers information-sharing behavior as well as the relative extent of trust and trustworthiness. This study gives valuable insights into which situations communication is likely to harm the overall supply chain performance, thereby increasing the awareness that the ever increasing claims for trust and information sharing in supply chain management have to be handled carefully.

Supply Chain Coordination in Case of Asymmetric Information: Information Sharing and Contracting in a Just-in-Time Environment

Information sharing is frequently discussed as a main enhancer for supply chain cooperation. This holds particularly true for environments that are characterized by asymmetrically distributed information concerning, e.g., cost parameters or end-customer demand. Yet, if the supply chain parties are profit-maximizing and fully rational, credible information sharing might not be established due to misaligned incentives. In this context, non-linear contract schemes are intensively discussed in the supply chain coordination literature, since they coordinate the supply chain to a second-best outcome. The present work applies methods of non-linear optimization in order to obtain optimal contracting schemes (so-called screening contracts) in a strategic lot sizing framework. The validity of the applied theory is tested via laboratory experiments. This approach allows for identifying the main critical assumptions within the theory while showing that non-predicted behavior leads to a deterioration of supply chain performance. Interestingly, the experiments reveal that—in contrast to standard assumptions—the impact of information sharing is ambiguous and dependent on several factors, such as contract flexibility and complexity. The experimental results form the basis for a behavioral principal-agent model. The model gives valuable insights on how the interaction of information sharing and information processing impacts the supply chain performance.

Supply Chain Coordination in Case of Asymmetric Information

The following chapter elaborates the impact of asymmetric information in a supply chain context and shows that information sharing can enhance supply chain performance if some level of trust and trustworthiness can be established. Section 2.1 gives a brief overview over related research areas while introducing basic definitions, assumptions and concepts. Section 2.2 discusses the impact of asymmetric information in a supply chain context while showing that specific contract structures can be used to align the incentives in the supply chain. Since these contract structures are not efficient, Sect. 2.3 discusses under which circumstances regarding trust and trustworthiness information sharing can lead to supply chain optimal outcomes. Finally, Sect. 2.4 gives a comprehensive review of supply chain models in which contracts are used for coordinating actions in supply chain management.

Inequity Aversion in a Joint Economic Lot Sizing Environment with Asymmetric Holding Cost Information

Screening contracts (or ‘menu of contracts’) are frequently used for aligning the incentives in supply chains with private information. In this context, it is assumed that all supply chain parties are strictly (expected) profit-maximizing. However, previous empirical work shows that this is a critical assumption. In fact, it seems that inequity adverse subjects are willing to invest money for achieving higher relative payoffs. Interestingly, the classical approach to design incentive compatible mechanisms gives the agent cheap leeway to increase relative pecuniary payoffs and thereby achieving more equitable profit allocations, because the agent is left (almost) indifferent between two contract alternatives. In other words, we argue (and actually observe in laboratory experiments) that this classical approach of contract design allows the agent to achieve more equitable outcomes at low cost. Since the agent’s better relative performance solely stems from reducing the principal’s payoffs, we observe a substantial negative impact on the overall supply chain performance. The present work relaxes the assumption of the profit-maximizing buyer (agent) in a serial supply chain for a lot sizing framework with asymmetrically distributed holding cost information and deterministic end-customer demand. The study provides researchers and managers an approach on how to account for disadvantageous inequity aversion (ie, the agent suffers from profits being lower than the principals profits) by designing a contract that anticipates such behaviour while providing a solution method for the resulting non-linear mathematical program. We denote the resulting contract as ‘behavioural robust’, since it limits the inefficiency losses that result if agents exhibit disadvantageous inequity aversion instead of being strictly profit-maximizing. A numerical study compares the advantages of the ‘behavioural robust’ contract against the classical screening contract. The results highlight that supply chain performance losses can be substantially reduced under the behavioural robust contract.

Note on “Heuristics with guaranteed performance bounds for a manufacturing system with product recovery”

We test the lower bound for a static remanufacturing system with returns proposed by Feng and Viswanathan (2014) against two heuristics proposed by Choi et al. (2007) and Schulz and Voigt (2014). A numerical study with 81,000 instances concludes that the lower bound always holds for the Choi et al. (2007) heuristic, but does not hold for 45 percent of all tested instances compared to the Schulz and Voigt (2014) heuristic. In these 45 percent, the average deviation from the lower bound is 4 percent with a maximum deviation of 14.9 percent. The main difference between the two analyzed heuristics is that the Choi et al. heuristic applies equally sized manufacturing and remanufacturing batches (which is also assumed to hold in the proposed lower bound), while Schulz and Voigt present a heuristic in which the respective remanufacturing batch sizes may vary. In contrast to Feng and Viswanathan (2014), we conclude that management should be cautious to use too simple policy structures when obtaining a solution for a static remanufacturing system with product returns.

Setup Cost Reduction and Supply Chain Coordination in Case of Asymmetric Information

The model utilized in this paper captures a supply chain planning problem, in which the buyer asks the supplier to switch the delivery mode to Just-in-Time (JiT). We characterize the JiT mode with low order sizes. The buyer faces several multidimensional advantages from a JiTdelivery, which we aggregate to the buyer‘s holding costs per period. Hence, if the buyer faces high holding costs she is supposed to have high advantages from a JiT-delivery, and vice versa. On the other hand, smaller order sizes can cause an increase of the supplier‘s setup and distribution costs. In our modelling approach, the supplier‘s setup costs per period reect these disadvantages. Yet, it is well known that small order sizes are not sufficient for a successful implementation of the JiT concept. Setup cost reduction, thus, is regarded to be one main facilitator for JiT to be efficient. Our model depicts the need for accompanying process improvements by the supplier‘s option to invest in setup cost reduction (see [4]). From a supply chain perspective, an implementation of a JiT strategy will only be profitable, if the buyer`s cost advantages exceed the supplier`s cost increase. Yet, this is not always the case. The supplier, thus, may have a strong incentive to convince the buyer to abandon the JiT strategy, i.e. to accept higher order sizes. However, the buyer is supposed to be in a strong bargaining position and will not be convinced unless she is offered a compensation for the disadvantages of not implementing the JiT strategy. Yet, as long as pareto improvements are possible, the supplier can compensate the buyer while improving his own performance. Nonetheless, the above-mentioned advantages of a JiT strategy contain to a major extent private information of the buyer. Thus, they can not be easily observed and valued by the supplier. The buyer, thus, will apparently claim that switching towards higher order sizes causes substantial costs and that a high compensation is required. Assuming the strategic use of private information, it is in the supplier‘s best interest to offer a menu of contracts (see [1]). Basically, this menu of contracts aligns the incentives of the supply chain members such that a buyer with low advantages of a JiT delivery will agree upon higher order sizes than a buyer with high advantages of this supply mode. However, the incentive structure provided by this menu of contracts causes inefficiencies, because the resulting order sizes are too low compared to the supply chain‘s optimal solution. Starting from this insight, our main focus in this study is to analyse the impact of investments in setup cost reduction on this lack of coordination. Summing up, there are basically two streams of research (namely the inefficiencies due to asymmetric information and the optimal set-up cost reduction in an integrated lot-sizing decision) this paper combines.

Inventory related compensation in decentralized organizations

We consider a principal agent problem in a decentralized organization. The agent holds private information with respect to an uncertain demand within a single selling season. As such his task is to determine the optimal order quantity. Being head of a profit center, however, he naturally focuses on maximizing profit of his particular unit while the principal aims at maximizing long run firm value. This goal incongruency results in a systematic shortfall of order quantity chosen by the agent as opposed to the strategically optimal level. We show that a menu of contracts offered to the agent to pick from is suitable to solve the agency problem and to achieve first best outcomes. Each contract specifies a fixed payment and a bonus or a penalty, conditioned on the inventory level at the end of the selling season, along with a prescribed order quantity. An exogenously given profit share is added to reflect the assumed profit center structure. Omitting any of the contracting elements specified above, however, destroys first best. The paper not only demonstrates that first best can be achieved in the described setting, it also provides a theoretical explanation for the widely observed practice of using inventory related compensation elements in organizations.

A Behavioral Model on the Effects of Information Sharing on Supply Chain Performance

This section investigates the impact of information sharing in a behavioral model assuming that a certain fraction of buyers give honest reports, and the supplier reacts to these reports by adjusting his beliefs according to Bayes’ rule. First, Sect. 6.1 briefly summarizes the principal–agent literature assuming that not all agents (here: buyers) use their private information entirely strategically, while showing that this assumption is supported by experimental results. Afterwards, Sect. 6.2 depicts how communication, trust, and trustworthiness can be formalized in the strategic lotsizing framework. Then, Sect. 6.3 evaluates the impact of information sharing assuming that the deceptive buyer gives his signals without considering his actual cost position, while Sect. 6.4 discusses the impact of strategic reporting. Finally, Sect. 6.5 summarizes the results and gives some managerial insights.