Stephen M. Gilbert

Strategic commitment to price to stimulate downstream innovation in a supply chain

Abstract It is generally in a firm’s interest for its supply chain partners to invest in innovations. To the extent that these innovations either reduce the partners’ variable costs or stimulate demand for the end product, they will tend to lead to higher levels of output for all of the firms in the chain. However, in response to the innovations of its partners, a firm may have an incentive to opportunistically increase its own prices. The possibility of such opportunistic behavior creates a hold-up problem that leads supply chain partners to underinvest in innovation. Clearly, this hold-up problem could be eliminated by a pre-commitment to price. However, by making an advance commitment to price, a firm sacrifices an important means of responding to demand uncertainty. In this paper we examine the trade-off that is faced when a firm’s channel partner has opportunities to invest in either cost reduction or quality improvement, i.e. demand enhancement. Should it commit to a price in order to encourage innovation, or should it remain flexible in order to respond to demand uncertainty. We discuss several simple wholesale pricing mechanisms with respect to this trade-off.

Managing Hotel Reservations with Uncertain Arrivals

Based on our interactions with managers at two large hotels, we present a realistic model of the hotel reservation problem. Unlike traditional models, ours does not assume that all customers arrive simultaneously on the targeted booking date. We explain why this assumption may not be appropriate for the hotel industry and develop a model of reservation booking which explicitly includes the room allocation decisions which are made on the targeted booking date. Based on observations of how the problem is solved in practice as well as the insights gained from this analysis, we develop simple heuristic procedures for accepting reservations. Computational results demonstrate that these heuristics perform well relative to an upper bound that is based on perfect information about reservations requests and customer arrivals.

Quantity discounts in single-period supply contracts with asymmetric demand information

We investigate how supplier can use a quantity discount schedule to influence the stocking decisions of a downstream buyer that faces a single period of stochastic demand. In contrast to much of the work that has been done on single-period supply contracts, we assume that there are no interactions between the supplier and the buyer after demand information is revealed and that the buyer has better information about the distribution of demand than does the supplier. We characterize the structure of the optimal discount schedule for both all-unit and incremental discounts and show that the supplier can earn larger profits with an all-unit discount.

Real-time disruption management in a two-stage production and inventory system

This paper presents a general disruption management approach for a two-stage production and inventory control system. A penalty cost for deviations of the new plan from the original plan is incorporated and the concept of a disruption recovery time window is introduced. We define two classes of problems: one with fixed setup epochs and another with flexible setup epochs. With linear or quadratic penalty functions for production/ordering quantity change and fixed setup epochs, the best recovery plan is obtained by solving a quadratic mathematical programming problem. With convex penalty functions for quantity changes and flexible setup epochs, it is shown that the second stage orders have identical order quantities within each production cycle. Therefore, in a lot-for-lot system, the ordering and production quantities for both stages are the same. As a special case, we consider disruption recovery problems with short time windows spanning one or two production cycles. We also discuss solution procedures for both major and minor disruption problems and give an extension for the case of multiple retailers. Throughout the paper managerial insights are presented that indicate how a company should respond to various types of disruptions during its operations.

Supply chain benefits from advanced customer commitments

Abstract Buyers are frequently encouraged through price discounts to buy in certain ways — purchase in large quantities or purchase in advance of their needs. Ideally, these pricing incentives can lead to lower costs for both the buyer and the seller. In this paper, a situation is examined where a steel distributor faces stiff competition in its highly undifferentiated service offerings and price is the primary factor in attracting sales. A model is developed that quantifies the benefits to the supplier from obtaining advanced commitments from downstream customers. This model can be used to suggest the maximum price discount that can be offered to customers to encourage them to commit to their orders in advance. Careful balancing of the advanced ordering time with the price discount can lead to cost reductions for both members of the supply channel.

Selling and Leasing Strategies for Durable Goods with Complementary Products

It has been recognized that when a durable goods manufacturer sells its output, it has an incentive to produce at a rate that will drive down the market price of the product over time. Because anticipation of declining prices makes consumers less willing to invest in owning the durable good, selling can be self-defeating for the manufacturer. If the manufacturer instead leases the product, it can eliminate its own incentive to decrease the price over time, which allows it to extract larger rents from consumers. In this paper, we investigate how a durable goods manufacturers choice between leasing and selling is affected by a complementary product that is produced by an independent firm. We show that a durable goods manufacturer that leases its product has an incentive to increase prices (by limiting the availability of the product) in response to the availability of a complement. Because this potential for opportunistic behavior discourages output of the complement, leasing can also be problematic. As a result, the durable goods manufacturer faces a trade-off between leasing, which commits the manufacturer to not overproduce, and selling, which commits it to not underproduce. Our contribution is to identify this trade-off and show how a durable goods manufacturer can use a combination of leasing and selling to balance its strategic commitment across both its own market as well as the complementary market.

Coordination of pricing and multi-period production for constant priced goods

This paper addresses the problem of jointly determining a single price and production schedule for a product with seasonal demand. Under the assumption that the ratio of the demands in any two periods does not depend upon the price at which the product is offered, we develop a procedure that guarantees an optimal solution. Perhaps more importantly, however, our model provides insight into the manner in which the firms production cost increases with the intensity of total demand.

Strategic commitment versus postponement in a two-tier supply chain

Abstract In this paper the trade-off between strategic commitment and operational flexibility is examined as it arises in a supply chain when a supplier offers competing buyers opportunities to make early purchase commitments for a product with a short life cycle. Traditionally, the use of incentives for early purchase commitments for short life-cycle products has been justified on the basis of a suppliers production lead times or capacity constraints. An alternative explanation has been proposed by offering early purchasing opportunities, a supplier can influence the form of competition in the downstream market. Using a single period model, it has been shown that, below a threshold level of demand uncertainty, the supplier can benefit from providing adequate pricing incentives to entice downstream buyers to commit to purchase quantities before demand information is revealed. Moreover, such early purchasing opportunities can benefit the supplier as well as the buyers even in the absence of production lead times or capacity constraints.

Supplier Encroachment Under Asymmetric Information

Prior literature has shown that, for a symmetric information setting, supplier encroachment into a resellers market can mitigate double marginalization and benefit both the supplier and the reseller. This paper extends the investigation of supplier encroachment to the environment where the reseller might be better informed than the supplier. We find that the launch of the suppliers direct channel can result in costly signaling behavior on the part of the reseller, in which he reduces his order quantity when the market size is small. Such a downward order distortion can amplify double marginalization. As a result, in addition to the “win--win” and “win--lose” outcomes for the supplier and the reseller, supplier encroachment can also lead to “lose--lose” and “lose--win” outcomes, particularly when the reseller has a significant efficiency advantage in the selling process and the prior probability of a large market is low. We further explore the implications of those findings for information management in supply chains. Complementing the conventional understanding, we show that with the ability to encroach, the supplier may prefer to sell to either a better informed or an uninformed reseller in different scenarios. On the other hand, as a result of a supplier developing encroachment capability, a reseller either may choose not to develop an advanced informational capability or may become more willing to find a means of credibly sharing his information. This paper was accepted by Yossi Aviv, operations management.

Strategic outsourcing for competing OEMs that face cost reduction opportunities

This paper explores production and outsourcing decisions for two Original Equipment Manufacturers (OEMs) who produce partially substitutable products and have opportunities to invest in reducing the manufacturing cost. In such an environment, competition drives both OEMs to set lower prices and invest more than would maximize their combined profits, particularly when product substitutability is high. However, outsourcing provides a mechanism by which the two OEMs can credibly signal that they will not overinvest in cost reduction, mitigating a mutually destructive cost competition. Our paper explores the role that an external supplier(s) can play in dampening competition between the OEMs when there are opportunities to invest in cost reduction. In particular, we characterize the conditions under which a supplier can profitably enter the market by inducing the OEMs to outsource production. We first examine a basic model of two identical OEMs in which there is a single common supplier and a single component that is a candidate for outsourcing. Later, we extend the basic model to allow for market asymmetry, two suppliers, and more than one component that might be outsourced.