Kaijie Zhu

Pushing Quality Improvement Along Supply Chains

In this paper, we consider a buyer who designs a product and owns the brand, yet outsources the production to a supplier. Both the buyer and the supplier incur quality-related costs, e.g., costs of customer goodwill and future market share loss by the buyer and warranty-related costs shared by both the buyer and the supplier whenever a nonconforming item is sold to a customer. Therefore, both parties have an incentive to invest in quality-improvement efforts. This paper explores the roles of different parties in a supply chain in quality improvement. We show that the buyers involvement can have a significant impact on the profits of both parties and of the supply chain as a whole, and he cannot cede the responsibility of quality improvement to the supplier in many cases. We also investigate how quality-improvement decisions interact with operational decisions such as the buyers order quantity and the suppliers production lot size.

Two-Wholesale-Price Contracts: Push, Pull, and Advance-Purchase Discount Contracts

The allocation of inventory ownership affects the inventory availability in a supply chain, which in turn determines the supply chain performance. In this paper, we consider a supplier-retailer supply chain in which the supplier starts production well in advance of the selling season, and the retailer is offered two ordering opportunities at different points in time. An early order is allowed before the suppliers production decision, and a late order is allowed after the completion of production and after observing the demand. When the two wholesale prices change, we illustrate how the inventory decision rights and ownership are shifted and/or shared between the two firms, resulting in push, pull, or advance-purchase discount contracts. We then characterize the complete set of Pareto-dominant contracts for any given two-wholesale-price contract. We find that Pareto improvement can be achieved when inventory ownership is shifted from individual to shared and sometimes vice versa. In the latter case, push contracts not only are more likely to offer Pareto improvement, but also can achieve higher supply chain efficiency than pull contracts. We also identify conditions that enable Pareto improvement by introducing a new ordering opportunity to firms that had been bound by a single ordering opportunity without renegotiating the existing wholesale price, and we demonstrate through a numerical study that the adoption of the new ordering opportunity can significantly improve supply chain efficiency. We show that such Pareto improvement is more likely to happen when demand is more volatile.

Endogenous information acquisition in supply chain management

In this paper, we analyze an endogenous determination of efforts put into information acquisition and its impact on supply chain management. More specifically, we consider a supplier who sells a product to a buyer during a single selling season. Prior to placing an order with the supplier, the buyer has an option to acquire additional information about the demand by hiring experts (who are capable of providing forecasts). Because a commission fee must be paid to each hired expert, there exists a tradeoff between the cost and the value of the information, and the buyer needs to determine how much information to acquire. We derive the optimal information-acquisition level in an integrated setting and compare it with that determined in a decentralized setting. We also analyze several types of supply contracts to examine if they can coordinate the supply chain and allow an arbitrary division of system profit between the supplier and the buyer.

Analysis of Perishable-Inventory Systems with Censored Demand Data

We consider a multiperiod inventory system of a perishable product with unobservable lost sales. Demand distribution parameters are unknown and are updated periodically using the Bayesian approach based on the censored historical sales data. We develop an explicit expression of the first-order condition for optimality that demonstrates the key trade-off of the problem. The result generalizes partial characterizations of this trade-off in the literature. It shows that the myopic solution is a lower bound on the optimal inventory level. It also enables us to quantify the expected marginal value of information.

Modeling the Benefits of Sharing Future Demand Information

We analyze how sharing of future demand information (FDI) can help companies to lower cost. FDI is imperfect information on the customer demands of the upcoming period. We consider a supply chain with a single retailer and multiple customers, where customer demands are normally distributed and correlated. The retailer faces two decisions: With which customers should information be shared and how much should be ordered? We model the problem as a two-stage dynamic program, develop an optimal solution approach, and provide structural insights into the optimal extent of FDI sharing. We show that information cost and demand correlation are important factors for determining the optimal extent of FDI sharing. For a simplified version of the problem where only a single customer is contacted, we analyze how the optimal solution is affected by nonidentically distributed or nonuniformly correlated demands.

On The Censored Newsvendor and the Optimal Acquisition of Information

We have read Ding et al. (2002), referred to hereafter as DPB, with great interest. DPB con ains two main results: Theorem A claims that the myopic inventory level is a lower bound on the optimal inventory level, and Theo rem B attempts to quantify the marginal expected value of information. However, there are mistakes in the proof of Theorem A. The result itself is correct; a proof is given in Lu et al. (2004). Furthermore, one of the erroneous expressions in DPBs proof leads to an error in the marginal expected value of information in Theorem B. We now provide more details. The equation numbers, unless specified otherwise, refer to the appendix of DPB, available at the Operations Research home page (http://or. pubs.informs.org). The main error in the proof of Theorem A is the follow ing. If a{x) and b{x) are two functions of the variable jc, then the derivative of a(x)b(x) with respect to x is d r / x, / m , / ,da{x) .db(x) ? [a(x)b(x)] = b(x) -?? + a(x) -^. DPBs mistake, in essence, is to omit the second term. More specifically, a key step in proving Theorem A is inequality (35):

Product Line Pricing in a Supply Chain

A vertically integrated channel would prefer to coordinate the pricing of its products. In this paper, we investigate drivers of product line pricing decisions in a bilateral monopoly where a manufacturer produces and sells two substitutable or complementary products to a retailer. In a two-stage game, each firm commits credibly in the first stage to a pricing scheme within its own organization: product line pricing (PLP) or nonproduct line pricing (NPLP). In the second stage, depending on the relative balance of power in the supply chain, the firms engage in either a Nash or a leader-follower pricing game. We study the equilibrium of the two-stage game under a general symmetric demand function. With strategic interaction between firms, a firm may choose NPLP as the equilibrium pricing strategy. In particular, when the second stage is a leader-follower game, the price leader chooses PLP, and the follower may choose NPLP only if the inefficiency of using NPLP empowers the follower by increasing the demand sensitivity to the leaders margin. When the second stage is a vertical Nash game, whether NPLP occurs in equilibrium depends on the nature of coupling between demand interdependence and vertical strategic dependence: NPLP can be an equilibrium onlyif products are demand substitutes (complements) and vertical strategic dependencies are complementary (substitutable). We find that prisoners dilemma exists in the first stage for both types of second-stage pricing games. In those cases, one firm may have the incentive to commit to a pricing scheme in the first stage prior to its channel partner and steer the supply chain away from prisoners dilemma.

Tax-Effective Supply Chain Decisions Under China's Export-Oriented Tax Policies

In this paper, we study the impacts of a set of Chinas export-oriented tax and tariff rules on the optimal supply chain design and operations for a firm that produces its product in China and sells it in markets both inside and outside China. We develop an analytical framework to evaluate four major supply chain structures that we observed in practice. We derive the optimal supply chain decisions for each structure and investigate various business environments under which one of the structures is preferred over the others. Our analysis indicates that the ultimate purpose of a product sold in the China market (i.e., whether it will be consumed domestically or be assembled in another exported product) may have a significant impact on the structure preference. In addition, threshold values exist for several key business parameters over (or under) which certain supply chain structures are favored over others. Managerial insights based on such results are useful for multinational firms who are challenged to develop effective supply chain strategies in the regions increasingly volatile business environment.

Information acquisition in new product introduction

In the presence of huge losses from unsuccessful new product introductions, companies often seek forecast information from various sources. As the information can be costly, companies need to determine how much effort to put into acquiring the information. Such a decision is strategically important because an insufficient investment may cause lack of knowledge of product profitability, which in turn may lead to introducing a loss-making product or scrapping a potentially profitable one. In this paper, we use decision analytical models to study information acquisition for new product introduction. Specifically, we consider a decision maker (DM) who, prior to introducing a new product, can purchase forecasts and use the information to update his knowledge of the market demand. We analyze and compare two approaches: The first approach is to determine the total amount of forecasts to purchase all at once. The second one is to purchase forecasts sequentially and, based on the purchased forecasts, determine whether those forecasts are informative enough for making an introduction decision or an additional forecast is needed. We present dynamic programming formulations for both approaches and derive the optimal policies. Via a numerical study, we find the second approach, i.e., purchasing forecasts sequentially, can generate a significant profit advantage over the first one when (1) the cost of acquiring forecasts is neither too high nor too low, (2) the precision of the forecasts is of a moderate level, and (3) the profit margin of the new product is small.

Should purchasing activities be outsourced along with production

When outsourcing its production to a contract manufacturer, a brand name company may also let the manufacturer take over the procurement of raw materials so as to focus on core competencies. However, by outsourcing the purchasing function, the brand name company may lose control over the quality of purchased materials, which may in turn damage its brand name and market share. In this paper, we study ways by which a brand name company can control the input material quality when outsourcing its procurement activities. Specifically, we consider a supply chain consisting of one brand name company, one contract manufacturer and a pool of material suppliers, each associated with a distinct quality level. The prices that the brand name company and the contract manufacturer are able to obtain from the suppliers depend on their bargaining power which may be private information. We show that a well designed procurement outsourcing contract can motivate the contract manufacturer to select higher quality materials. We also propose a material inspection strategy for fraud prevention and quality assurance in procurement outsourcing. Finally, we discuss the possibility of the brand name company ceding contracting rights to the contract manufacturer.