Houcai Shen

Coordinating a supply chain with a quality assurance policy via a revenue-sharing contract

This paper explores coordination of a (global) supply chain consisting of one manufacturer and one retailer via a revenue-sharing contract, where a product quality assurance policy is provided and the utility of consumer is sensitive to product (physical) quality, service quality (i.e., reciprocal of delivery lead-time) and retail price. We assume that the supply chain operates in a make-to-order (MTO) environment and a defective product is returned to the manufacturer for remanufacturing free. We give the optimal service quality and pricing decisions of the decentralised supply chain, its coordination mechanism and the Pareto condition of coordination mechanism. In the decentralised setting, although a higher defective rate of the final product implies a higher cost for the manufacturer, the optimal service quality first decreases and then increases and the optimal retail price decreases as the defective rate increases, which differs from the effects of the unit remanufacturing cost due to the service reliability constraint and the effects of the defective rate on the market scale and lead-time sensitivity; when the supply chain is coordinated, comparing to the traditional models without considering service quality, the manufacturer charges the retailer a higher unit wholesale price. The effect of the defective rate on the Pareto range of coordination mechanism is inconsistent with that of the unit production cost because the defective rate directly influences the demand rate.

Pricing, service level and lot size decisions of a supply chain with risk-averse retailers: implications to practitioners

This article develops a game theoretic model of a supply chain with one supplier and two risk-averse retailers competing in price, service and lot size, where the Economic Order Quantity (EOQ) production-inventory policy is adopted. After studying the existence of EOQ equilibrium, we investigate how to adjust their decisions when the economic environment changes. We find that one retailer will decrease its optimal lot size, retail price and service level when it becomes more risk averse or its service investment efficiency decreases. When the suppliers capacity increases, the retailers will reduce retail price and increase service level, which in turn results in a higher lot size. The effect of the risk sensitivity of one retailer on the rival retailers decisions depends on the relative service cost efficiency of the retailer. When the absolute risk aversion and service investment efficiency of one retailer increase, the suppliers profitability will increase due to a higher total expected demand. We further give the managerial insights for practitioners, which helps managers to make right decisions in an uncertain environment.

Production and Inventory Rationing in a Make-to-Stock System With a Failure-Prone Machine and Lost Sales

We consider production and inventory rationing of a product to fulfill multiple demand classes in a make-to-stock production system with a failure-prone machine. Demand that cannot be satisfied immediately is lost and incurs a lost sales cost, which differs from class to class. We find that the optimal control policies under both the expected total discounted cost criterion and the average cost criterion have similar structural properties. Specifically, the optimal production policy is the base-stock policy and the optimal inventory allocation policy is the threshold control policy with machine-state-dependent threshold levels. Finally, we provide numerical examples to show the importance of taking machine failures into consideration and the effectiveness of the optimal control policy.

Production planning and pricing policy in a make-to-stock system with uncertain demand subject to machine breakdowns

We consider a make-to-stock system served by an unreliable machine that produces one type of product, which is sold to customers at one of two possible prices depending on the inventory level at the time when a customer arrives (i.e., the decision point). The system manager must determine the production level and selling price at each decision point. We first show that the optimal production and pricing policy is a threshold control, which is characterized by three threshold parameters under both the long-run discounted profit and long-run average profit criteria. We then establish the structural relationships among the three threshold parameters that production is off when inventory is above the threshold, and that the optimal selling price should be low when inventory is above the threshold under the scenario where the machine is down or up. Finally we provide some numerical examples to illustrate the analytical results and gain additional insights.

Incentives for quality improvement efforts coordination in supply chains with partial cost allocation contract

In this paper, we consider quality improvement efforts coordination in a two-stage decentralised supply chain with a partial cost allocation contract. The supply chain consists of one supplier and one manufacturer, both of which produce defective products. Two kinds of failure cost occur within the supply chain: internal and external. The supplier and the manufacturer determine their individual quality levels to maximise their own profits. We propose a partial cost allocation contract, under which the external failure cost is allocated between the manufacturer and the supplier at different rates based on information derived from failure root cause analysis. If the quality levels of the supplier and the manufacturer are observable, we show that the partial cost allocation contract coordinates the supply chain, provided that the failure root cause analysis does not erroneously identify the manufacturer’s fault as the supplier’s, and the supplier does not take responsibility for the manufacture’s fault. In the single moral hazard model, where only the quality level of the supplier is unobservable, the optimal share rates require the supplier to take some responsibility for the manufacture’s fault. However, in the double moral hazard model, where quality levels of the supplier and the manufacturer are unobservable to each other, the optimal share rates require the supplier not to take responsibility for the manufacturer’s fault. It is noted that the root cause analysis conducted by the manufacturer may have its disadvantage in attributing the fault to the supplier when both sides are at fault. We also propose a contract based on the dual root cause analysis to reduce the supplier’s penalty cost. Numerical results illustrate that the partial cost allocation contract satisfies the fairness criterion compared with the traditional cost allocation contract.

Supply chain coordination via capacity options with uncertain demand and supply

This paper develops a capacity options model in the two-echelon supply chain with the emergent procurement from the spot market. In our model, we deal with not only demand uncertainty but also supply uncertainty. At first, we find the equilibrium of the Stackelberg game and then investigate the effect of uncertainties in the demand and supply on the optimal decision behaviors. We also discuss the value of the options contract and the option flexibility for the manufacturer, the supplier and the supply chain respectively. Then, we study the channel coordination by incorporating the profit sharing rules and find the set of Pareto sharing rules, and we analyze the Nash bargaining game over the Pareto sharing rules and find the optimal sharing rule.

How heterogeneity influences condition-based maintenance for gamma degradation process

In many applications, units from the same population exhibit heterogeneity that they degrade with different rates due to random factors. This article studies how this heterogeneity in degradation influences condition-based maintenance (CBM) policy. Many CBM polices are developed based on gamma process because it is popularly used to characterise monotone degradation processes. In this study, we also model the unit’s degradation by gamma process. To account for the heterogeneity among units’ degradation, we incorporate a random effect parameter in the gamma process. Then the optimal policy for CBM is obtained through Markov decision process. We show that when heterogeneity exists, the transition probability of degradation state depends on both unit’s age and observed degradation level. And consequently, the optimal maintenance policy is a monotone control limit policy. We conduct extensive numerical experiments to validate and demonstrate our findings in depth.