Kashi R. Balachandran

Quality Implications of Warranties in a Supply Chain

We examine a supply chain in which the final product consists of components made by a buyer and a supplier. In the single moral-hazard case, the buyers quality is observable, whereas in the double moral-hazard case, the buyers quality is not observable. The suppliers quality is not observable in both the single and double moral-hazard cases. In each case, we examine a warranty/penalty contract between the buyer and the supplier based on information from incoming inspection and external failures. When the warranty contract is based on information from external failures in the single moral-hazard case, the first-best quality is achieved, whereas in the double moral-hazard case, the first-best quality is achieved if the supplier is not held responsible for the buyers defects. When the warranty contract is based on information from incoming inspection, the first-best is achieved in both the single and double moral-hazard cases, even when the incoming inspection does not identify all of the suppliers defectives. An analysis of whether the penalty on the supplier in each case meets a fairness criterion-that is, the penalty does not exceed the manufacturers external failure cost-indicates that the fairness criterion is met by the warranty contract based on information from incoming inspection when the first-best incoming inspection is sufficiently high. However, if the first-best incoming inspection is low and the precision of pinpointing the suppliers responsibility for external failure is sufficiently high, the warranty contract based on external failures could satisfy the fairness criterion.

Performance measurement and management systems: state of the art, guidelines for design and challenges

Purpose – Recently, performance measurement and management (PMM) has received increasing attention from both the academic and industrial environments. Companies that try to use PMM systems report experiencing implementation problems including goal incongruence. Based on a discussion of the state of the art of PMM, this paper aims to provide research guidelines for building a PMM system through a reference framework, and to identify major design challenges.Design/methodology/approach – At a macro level, the evolution of research is analyzed using citation and co‐citation analysis techniques. Further, the evolution of PMM systems in the last 20 years is traced. The feasibility and applicability of these frameworks/models are analyzed by considering five milestones that a performance measurement system should have. Based on this, an integrated framework is proposed as a basis for designing a cohesive PMM system.Findings – The research on the subject is quite diverse. In fact, the research appears to be quite...

Carbon Business Accounting: The Impact of Global Warming on the Cost and Management Accounting Profession:

The concentrations of greenhouse gases in the atmosphere have risen dramatically, leading to the possibility of costly disruption from rapid climate change. This calls for greater attention and precautionary measures to be put in place, both globally and locally. Governments, business entities and consumers would be affected by the extent to which such precautionary measures are incorporated in their decision-making process. Business entities need to consider such issues as trading in carbon allowances (or permits), investing in low-carbon dioxide (CO2) emission technologies, counting the costs of carbon regularity compliance, and passing on the increased cost of carbon regulation to consumers through higher prices. Such considerations require information for informed decision making. This paper reports on a qualitative research study undertaken to consider the impact of the Kyoto Protocol mechanisms on the changing information paradigms of cost and managerial accounting. It is demonstrated that the information from strategic cost management systems will be particularly useful in this new carbon economy, especially in evaluating the “whole-of-life” costs of products and services in terms of carbon emissions. Similarly, the study discusses how strategic management accounting information would facilitate decisions on business policy, human resource management, marketing, supply chain management, and finance strategies and the resultant evaluation of performance.

The Role of Transfer Price for Coordination and Control within a Firm

This paper explores the role of transfer prices as coordinating mechanisms within a firm. Three cases (full information; pure adverse selection; adverse selection and moral hazard) are analyzed and compared to show how quantity and effort are affected as assumptions on observability are progrssively relaxed. The analysis of the second case, having two observable variables, identifies the necessary and sufficient condition under which “the local approach” can be applied. The third case is reinterpreted as transfer prices in a direct delegation setting. The main results are: First, the optimal transfer price is standard average cost plus. Second, it is not necessarily decreasing in quantity unlike the downward sloping demand function.

Public and private optimization at a service facility with approximate information on congestion

Abstract An M / GI /1 queueing model is considered, where the arrival rate to the facility is a continuous variable which depends, in the steady state, upon the average congestion at the facility. The population of customers arriving to the facility is partitioned into several classes dependent on the ratio of the value of time to the reward due to service but are served according to first-in-first-out rule. It is shown that under the privately optimal behavior of the individuals the facility will be dominated by the class with the highest net reward per value of time. The publicly optimal policy which maximizes the net reward due to service, after costs of waiting are deducted, is shown either to admit only a single class of customers to the facility, thus discriminating against the other classes or to be indifferent to the mix of classes. The class chosen for admission may not be the class which would have privately dominated the facility. When the expected delay experienced at the facility is fixed, a policy of tolls and rebates for the customers is obtained that will assure equal access to the facility for all customers irrespective of their classes. It is shown that the publicly optimal policy, under the condition of fixed aggregate arrival rate to the facility, is shown to be deversified. The optimal arrival rates desired by a single class are derived for two cases. When the proportions of arrivals from the classes are fixed, the aggregate arrival rate desired by a class is shown to be not greater than the equilibrium rate for the individuals from that class. Alternatively, when the aggregate arrival rate is fixed, conditions are obtained under which a class will prefer usage of the facility by several classes to its own domination.

Incentive contracts when production is subcontracted

Abstract The problem of pricing for products under subcontracting is set in an agency theory format. Characteristics of decentralization, moral hazard and adverse selection are inherent in this problem. Optimal incentive compensation function and the transfer price are analyzed. The results are illustrated with an example of logarithm utility functions.

A Rationale for Fixed Charge Application

Much research effort has gone into the question of why service centers typically charge users a fixed amount that does not vary with the duration of service. One mode of imposing such charges is the allocation of fixed costs to the users. This has been studied by Zimmerman [6], Kaplan and Thompson [3], and Kaplan and Welam [4]. Another method of imposing such a charge is the use of a transfer price that is more than the marginal cost. Under conditions of known demand, Hirschleifer [2] found that marginal-cost transfer prices are optimal from the firms viewpoint. It is therefore not clear as to why there should be a component of transfer price that does not vary with service duration. This study provides a rationale for the application of positive fixed charges to the users of a service center using opportunity costs of delay. We do not address the problem of cost allocation in which the applied fixed charge is constrained to be equal to the incurred fixed cost. This study uses concepts from queuing theory when there is a single server; the arrivals are random with a Poisson distribution; and the service time per job is also a random variable with a general distribution. Traditionally, opportunity costs of congestion are said to be incurred only when the service center is operating at nearly full capacity. In this study, we show that under conditions of uncertainty in the arrivals and the service time, congestion can occur even when the service center is operating well below capacity. It is shown that in view of these opportunity costs of delay, a fixed charge needs to be applied to achieve an optimum utilization of the service center. We compute the amount of this fixed charge and show that under very general conditions it is in the interest of the firm to reduce the usage rate from its no-charge equilibrium value by applying a fixed charge. The difference between the no-charge equilibrium usage rate and the optimal usage rate is a measure of the need for such fixed charge application. Under reasonably realistic assumptions, this study deals with how the usage rates and their differences vary with the parameters used in the model. An important finding of the sensitivity analysis in this study is that the need for restricting the usage rate by imposing the fixed charge increases when there is greater uncertainty

Parametric Priority Rules: An Approach to Optimization in Priority Queues

This paper analyzes priority rules that are mixtures of preemption and postponable rules. Whether a preemption occurs is made to depend on some factor in addition to priority class; dependence on the completed portion of service (age) of the lower-priority customer in service and the number of prior preemptions of the lower-priority customer in service are each considered. The stochastic model (without priorities) is that of the M/G/1 queue. The paper obtains first-moment expressions (e.g., expected number of customers in the system) in the steady-state case for each priority class as a function of the particular factor being considered. It then introduces a linear cost model that is a function of expected waiting time and expected number of preemptions, and formulates the problem of finding an optimal rule from each class by considering a parametric class of rules determined by each factor. In each case, conditions are sought for the global optimality of a rule over a class of rules, but results are obta...

Service capacity decision and incentive compatible cost allocation for reporting usage forecasts

Abstract We consider an M/G/1 queue with multiple users where service capacity can be improved at a cost by reducing the mean and variance of service time and each user has private information on his expected usage. The firms headquarter requires information on expected usage to determine the optimum service capacity. We develop a simple cost allocation scheme where a charge is applied to realized usage. This charge is computed by dividing the service capacity costs by the total reported expected usage weighted by the cost per unit time delay. The difference between the service capacity cost and the total charge applied to realized usage is credited/charged to the users based on the proportion of reported expected usage weighted by the cost per unit time delay. This cost allocation scheme (a) induces truthful reports of expected usage, (b) maximizes the expected net benefit of each user with respect to the service capacity, (c) shares all the service capacity costs, (d) achieves the same service capacity that the firms headquarter would choose in an unconstrained maximization problem with no private information, and (e) uses only the realized and reported expected usages. We also examine whether the cost allocation scheme provides incentives for each user to obtain good forecasts on expected usage.

Strategic positioning and cost management along various quality dimensions

The traditional view of quality treats it as an economic good which can be developed by incurring costs. Proponents of total quality management have rejected the traditional view and stress the complementary nature of cost and quality. Reconciles these two views as different manifestations of the same underlying phenomenon within the same strategic framework. This requires precise definitions of quality concepts such as conformance and performance quality. The organization first examines its current position within this framework. The definitions of quality help sharpen the formulation of strategic objectives and the framework helps in mapping out a policy for moving the firm from the current position to the desired position. In addition, also determines the operating systems of quality management by how quality is defined in the organization. In conjunction with the strategic direction, the operational management procedures facilitate the process of cost management.