Robert Swinney

Purchasing, Pricing, and Quick Response in the Presence of Strategic Consumers

We consider a retailer that sells a product with uncertain demand over a finite selling season. The retailer sets an initial stocking quantity and, at some predetermined point in the season, optimally marks down remaining inventory. We modify this classic setting by introducing three types of consumers: myopic consumers, who always purchase at the initial full price; bargain-hunting consumers, who purchase only if the discounted price is sufficiently low; and strategic consumers, who strategically choose when to make their purchase. A strategic consumer chooses between a purchase at the initial full price and a later purchase at an uncertain markdown price. In equilibrium, strategic consumers and the retailer make optimal decisions given their rational expectations regarding future prices, availability of inventory, and the behavior of other consumers. We find that the retailer stocks less, takes smaller price discounts, and earns lower profit if strategic consumers are present than if there are no strategic consumers. We find that a retailer should generally avoid committing to a price path over the season (assuming such commitment is feasible)---committing to a markdown price (or to not mark down at all) is often too costly (inventory may remain unsold) even in the presence of strategic consumers; the better approach is to be cautious with the initial quantity and then mark down optimally. Furthermore, we discuss the value of quick response (the ability to procure additional inventory after obtaining updated demand information, albeit at a higher unit cost than the initial order). We find that the value of quick response to a retailer is generally much greater in the presence of strategic consumers than without them: on average 67% more valuable and as much as 558% more valuable in our sample. In other words, although it is well established in the literature that quick response provides value by allowing better matching of supply with demand, it provides more value, often substantially more value, by allowing a retailer to control the negative consequences of strategic consumer behavior.

The Value of Fast Fashion: Quick Response, Enhanced Design, and Strategic Consumer Behavior

A fast fashion system combines quick response production capabilities with enhanced product design capabilities to both design “hot” products that capture the latest consumer trends and exploit minimal production lead times to match supply with uncertain demand. We develop a model of such a system and compare its performance to three alternative systems: quick-response-only systems, enhanced-design-only systems, and traditional systems (which lack both enhanced design and quick response capabilities). In particular, we focus on the impact of each of the four systems on “strategic” or forward-looking consumer purchasing behavior, i.e., the intentional delay in purchasing an item at the full price to obtain it during an end-of-season clearance. We find that enhanced design helps to mitigate strategic behavior by offering consumers a product they value more, making them less willing to risk waiting for a clearance sale and possibly experiencing a stockout. Quick response mitigates strategic behavior through a different mechanism: by better matching supply to demand, it reduces the chance of a clearance sale. Most importantly, we find that although it is possible for quick response and enhanced design to be either complements or substitutes, the complementarity effect tends to dominate. Hence, when both quick response and enhanced design are combined in a fast fashion system, the firm typically enjoys a greater incremental increase in profit than the sum of the increases resulting from employing either system in isolation. Furthermore, complementarity is strongest when customers are very strategic. We conclude that fast fashion systems can be of significant value, particularly when consumers exhibit strategic behavior. This paper was accepted by Yossi Aviv, operations management.

Long-Term Contracts Under the Threat of Supplier Default

Contracting with suppliers prone to default is an increasingly common problem in some industries, particularly automotive manufacturing. We model this phenomenon as a two-period contracting game with two identical suppliers, a single buyer, deterministic demand, and uncertain production costs. The suppliers are distressed at the start of the game and do not have access to external sources of capital; hence, revenues from the buyer are crucial in determining whether default occurs. The production cost of each supplier is the sum of two stochastic components: a common term that is identical for both suppliers (representing raw materials costs, design specifications, etc.) and an idiosyncratic term that is unique to a given supplier (representing inherent firm capability). The buyer chooses a supplier and then decides on a single-or two-period contract. Comparing models with and without the possibility of default, we find that, without the possibility of supplier failure, the buyer always prefers short-term contracts over long-term contracts, whereas this preference is typically reversed in the presence of failure. Neither of these contracts coordinates the supply chain. We also consider dynamic contracts, in which the contract price is partially tied to some index representing the common component of production costs (e.g., commodity prices of raw materials such as steel or oil), allowing the buyer to shoulder some of the risk from cost uncertainty. We find that dynamic long-term contracts allow the buyer to coordinate the supply chain in the presence of default risk. We also demonstrate that our results continue to hold under a variety of alternative assumptions, including stochastic demand, allowing the buyer the option of subsidizing a bankrupt supplier via a contingent transfer payment or loan and allowing the buyer to unilaterally renegotiate contracts. We conclude that the possibility of supplier default offers a new reason to prefer long-term contracts over short-term contracts.

Selling to Strategic Consumers When Product Value Is Uncertain: The Value of Matching Supply and Demand

We address the value of quick response production practices when selling to a forward-looking consumer population with uncertain, heterogeneous valuations for a product. Consumers have the option of purchasing the product early, before its value has been learned, or delaying the purchase decision until a time at which valuation uncertainty has been resolved. Whereas individual consumer valuations are uncertain ex ante, the market size is uncertain to the firm. The firm may either commit to a single production run at a low unit cost prior to learning demand, or commit to a quick response strategy that allows additional production after learning additional demand information. We find that the value of quick response is generally lower with strategic (forward-looking) customers than with nonstrategic (myopic) customers in this setting. Indeed, it is possible for a quick response strategy to decrease the profit of the firm, though whether this occurs depends on various characteristics of the market; specifically, we identify conditions under which quick response increases profit (when prices are increasing, when dissatisfied consumers can return the product at a cost to the firm) and conditions under which quick response may decrease profit (when prices are constant or when consumer returns are not allowed). This paper was accepted by Martin Lariviere, operations and supply chain management.

Capacity Investment Timing by Start-ups and Established Firms in New Markets

We analyze the competitive capacity investment timing decisions of both established firms and start-ups entering new markets, which have a high degree of demand uncertainty. Firms may invest in capacity early (when uncertainty is high) or late (when uncertainty has been resolved), possibly at different costs. Established firms choose an investment timing and capacity level to maximize expected profits, whereas start-ups make those choices to maximize the probability of survival. When a start-up competes against an established firm, we find that when demand uncertainty is high and costs do not decline too severely over time, the start-up takes a leadership role and invests first in capacity, whereas the established firm follows; by contrast, when two established firms compete in an otherwise identical game, both firms invest late. We conclude that the threat of firm failure significantly impacts the dynamics of competition involving start-ups. This paper was accepted by Yossi Aviv, operations management.

Responsible Sourcing in Supply Chains

We analyze the sourcing decision of a buyer choosing between two supplier types: responsible suppliers are costly but adhere to strict social and environmental responsibility standards, whereas risky suppliers are less expensive but may experience responsibility violations. A segment of the consumer population, called socially conscious, is willing to pay a higher price for a product sourced from a responsible supplier and may not purchase in the event of a responsibility violation from a risky supplier. We identify four possible sourcing strategies that a buyer might employ: low cost sourcing (sourcing from the risky supplier), dual sourcing, responsible niche sourcing (sourcing from a responsible supplier and selling only to socially conscious consumers), and responsible mass market sourcing (sourcing responsibly and selling to all consumers). We determine when each strategy is optimal and show that efforts to improve supply chain responsibility that focus on consumers (by increasing their willingness t...

Disruption Risk and Optimal Sourcing in Multitier Supply Networks

We study sourcing in a supply chain with three levels: a manufacturer, tier 1 suppliers, and tier 2 suppliers prone to disruption from, e.g., natural disasters such as earthquakes or floods. The manufacturer may not directly dictate which tier 2 suppliers are used but may influence the sourcing decisions of tier 1 suppliers via contract parameters. The manufacturer’s optimal strategy depends critically on the degree of overlap in the supply chain: if tier 1 suppliers share tier 2 suppliers, resulting in a “diamond-shaped” supply chain, the manufacturer relies less on direct mitigation (procuring excess inventory and multisourcing in tier 1) and more on indirect mitigation (inducing tier 1 suppliers to mitigate disruption risk). We also show that while the manufacturer always prefers less overlap, tier 1 suppliers may prefer a more overlapped supply chain and hence may strategically choose to form a diamond-shaped supply chain. This preference conflict worsens as the manufacturer’s profit margin increases,...

Product Quality in a Distribution Channel With Inventory Risk

In many industries, product design and manufacturing lead-times are sufficiently long that both the quality level of a product and the amount of inventory produced must be determined well before a firm knows what the actual demand will be. On the other hand, price is typically adjusted dynamically in response to observed demand. In this paper, we conduct a generalized theoretical analysis of such a setting. We first consider a centralized channel and characterize the optimal decisions by establishing relationships that must hold between the elasticity of cost of quality and the elasticity of revenue, show that quality and inventory are substitutes, and more- over show that quality rather than inventory can be a primary lever to mitigate the impact of demand uncertainty. Next, we consider a decentralized channel, in which a manufacturer deter- mines quality and contractual terms, while a retailer determines inventory and retail price. We find that the channel is not coordinated under the optimal wholesale price contract and, counter to standard intuition, product quality can be higher compared to a centralized channel because a simple wholesale price contract shields the manufacturer from inventory risk. We then examine two more sophisticated contracts: quantity discounts and buyback contracts. For the former, we derive the optimal quantity discount schedule, show that it can coordinate the channel even in the presence of joint decisions on quality, inventory and responsive pricing, and determine how it varies as the product and market characteristics change. For the latter, we show that buyback contracts can coordinate the channel only if the manufacturer can specify retail price ceilings that depend on the realized demand outcome, which is an unrealistic contracting instrument. We thus conclude that the contracts that are more likely to be implemented in practice in settings similar to our own are wholesale price contracts (because of their simplicity) and quantity discount con- tracts (because they offer a robust and implementable mechanism to coordinate the channel, with moderate complexity); this is consistent with observations from industry.

The Impact of Strategic Consumer Behavior on the Value of Operational Flexibility

Increasingly sophisticated consumers have learned to anticipate future price reductions and forego purchasing products until such markdowns occur. Such forward-looking or strategic behavior on the part of consumers can have a significant impact on retail margins by shifting a large number of sales from higher, “full” prices to lower, “clearance” prices. Some firms, however, have become adept at dealing with the strategic consumer problem by implementing various forms of operational flexibility (for example, investing in faster supply chains capable of rapidly responding to changing demand conditions). A firm famous for this strategy is the Spanish fashion retailer Zara. In this chapter, we explore the strategic consumer purchasing phenomenon, and in particular address how the Zara model of operational flexibility impacts consumer behavior (and, conversely, how consumer behavior impacts the value of operational flexibility). We examine in detail the consequences of volume flexibility – the ability of a firm to adjust production or procurement levels to meet stochastic demand – and demonstrate that this type of flexibility can be highly effective at reducing the extent of strategic behavior. Indeed, we show that in many cases, the value of volume flexibility is greater when consumers are strategic than when they are not. We also show that volume flexibility is always socially optimal (i.e., it increases the total welfare of the firm and consumers) and may also improve consumer welfare (i.e., it can be a Pareto improving strategy). We also discuss the impact of other types of operational flexibility – design flexibility, in which a product’s design can be modified to suit changing consumer tastes, and mix flexibility, in which production capacity can be dynamically allocated among several similar product variants – and argue that these types of flexibility are also effective at mitigating strategic customer purchasing behavior.

Novel technique for ultra-sensitive determination of trace elements in organic scintillators

A technique based on neutron activation has been developed for an extremely high sensitivity analysis of trace elements in organic materials. Organic materials are sealed in plastic or high purity quartz and irradiated at the HFIR and MITR. The most volatile materials such as liquid scintillator (LS) are first preconcentrated by clean vacuum evaporation. Activities of interest are separated from side activities by acid digestion and ion exchange. The technique has been applied to study the liquid scintillator used in the KamLAND neutrino experiment. Detection limits of <2.4×10 15 g 40 K/g LS, <5.5×10 15 g Th/g LS, and <8×10 15 g U/g LS have been achieved.