Tolga Aydinliyim

Coordination of Outsourced Operations to Minimize Weighted Flow Time and Capacity Booking Costs

A set of manufacturers outsources certain operations to a single third party following the announcement of a booking price for each available day of production. Knowing these costs, manufacturers book available production days in a first-come-first-serve order to optimize their individual cost. The cost for each manufacturer consists of booking and work-in-progress costs, as expressed by the weighted flow time. When window booking is completed, the third party identifies a schedule that minimizes the total cost incurred by all manufacturers. This coordination reduces the total cost but may result in higher costs for a subset of manufacturers. For this reason, the third party devises a savings sharing scheme with which the monetary benefit for each manufacturer is greater. In this article we present algorithms for the problem considered, as well as savings-sharing schemes that make coordination a better alternative for all parties. The highlight of our experiments is that the costs of the production chain can be reduced by an average of 32% if one-third of the members let the third party cover their increased work-in-progress cost in exchange for 38%--53% of the total savings.

Sequencing Strategies and Coordination Issues in Outsourcing and Subcontracting Operations

Managing the supply chain has recently been the most significant task for manufacturing companies toward cost efficiency and customer satisfaction. Globalization not only increased the size of supply chains, but also created an environment where competing suppliers, manufacturers, and distributors need to cooperate. Even when firms own a significant portion of their supply chain, multiple parties with different performance measures and goals are involved in the decision-making processes. Examples from the automotive industry include General Motors, Ford Motor Company and others. Each division in such organizations tries to reach optimal plans for the portion of the overall system under its authority. However, the extent to which the individual goals are achieved depends on the decisions made by other parties involved in supply chains. Therefore, the quality of the strategic decisions made by such decision makers depends on the amount of information they have regarding other members of the supply chain. The more information is shared among the decision makers, the greater the resulting coordination benefits.

Counteracting Strategic Purchase Deferrals: The Impact of Online Retailers' Return Policy Decisions

Online shoppers value lenient return policies as they are unable to assess whether products match their expectations. We study how consumers’ discount-seeking purchase deferrals affect online retailers’ return policy choices. Lenient returns may induce higher full-price sales by limiting consumer regret, while signaling clearance unavailability risk. Contrasting earlier research that concluded a monopolist must set the refund at the clearance price when strategic consumers were overlooked, we find that an optimal refund bounded by the clearance price can mitigate purchase deferrals only when a monopolist salvages at mild discounts. To explore conditions under which a monopolist permits “full-refund returns,” we consider three scenarios: we permit clearing inventory without a loss; we assume lenient returns stimulate aggregate demand; we consider consumers’ transaction costs. We also derive a unique rational expectations equilibrium for competing retailers, wherein each retailer’s equilibrium refund is nondecreasing in its clearance price. Furthermore, retailers with clearance prices below a threshold should not allow returns, and those who do, higher clearance revenues imply higher full prices, higher quantities, and higher profits. We conclude that a credible clearance partner salvaging at higher prices than those at competing clearance mediums helps retailers gain competitive advantage when selling to strategic consumers.

Reducing Packaging Waste and Cost via Consumer Price Discounts

Low-waste packaging may imply an inconvenience to consumers and cause firms to offer a compensating price discount. For example, Starbucks’ “Take the Mug Pledge” campaign provides a 10-cent discount for customers who purchase coffee without a standard cup (i.e., customers provide their own cup). Understanding how such a discount drives demand and profit is the focus of this article. We consider a monopolist that can offer a reduced-packaging option for its product at a variable cost savings. That option implies a transactional “inconvenience” cost for consumers. While that transactional cost is generally positive, our model also permits some consumers to associate convenience with reduced packaging. We derive the optimal price and discount that maximize profits. We show the optimal discount is bounded by the magnitude of the variable cost savings associated with the packaging reduction. We explore when the optimal discount is negative (a price premium), which requires a specific proportion of consumers to associate convenience with reduced packaging. We also derive conditions under which the firm should price to eliminate demand for the standard product, rather than segment the market, to leverage the variable cost savings of reduced packaging. When the variable cost savings are low (e.g., as is true for Starbucks), we show the profit curve for the segmenting policy is relatively flat for a discount up to several multiples of the cost differential. Finally, we demonstrate the potential for the reduced packaging option, with optimal discounting, to simultaneously increase profit and consumer surplus while reducing waste.

Inventory disclosure in online retailing

Unlike in a traditional store environment where inventory is directly visible to customers, Internet retailers can selectively choose how to divulge inventory level information to customers. For example, when viewing a particular item page, online shoppers may either see merely “in stock” or a specific inventory level. By choosing the appropriate inventory-level cue to display, a retailer can selectively signal stock-out risk to customers. In this paper, we analyze the optimal structure of an online retailers inventory disclosure and pricing policy, in a two-period setting—a regular selling period followed by a clearance period. Consumers may potentially face uncertainty regarding the firms inventory level, as well as the overall market demand. We show that there exists an inventory level threshold below which a retailer should optimally disclose inventory, and above which masking (i.e., showing only “in stock”) is optimal.Even though the optimal price decreases in the stock level, we show that equilibrium full-price sales may increase or decrease, highlighting the non-intuitive consumer behavior implications of selective inventory disclosure. The optimal “threshold-type” inventory disclosure that we derive reflects the practice of several prominent online retailers selling fashion products, and is new to the literature as prior models of inventory sharing invoked assumptions that led to either consistent disclosure or consistent masking to be optimal. We also extend the model to consider a stochastic market size, and thus highlight that the threshold policy structure continues to hold with demand uncertainty.

Key Factors for Green Product Line Design: Opposing Consumer Perceptions, Cost Implications, Price and Quality Optimization

We consider the price and quality optimization (i.e., product line design) problem of a monopolist selling (at most) two product variants, a base product and a green variant that comprises recycled/reused content, to a market of two distinct consumer types with heterogeneous valuations for the base product. Our setting features three distinguishing elements, which had hitherto not been considered together in the literature: (i) Consumer segments demonstrate opposing perceptions of the green variant, i.e., “conventionals” associate dis-utility with a green variant that has more recycled/reused content, whereas “naturalites” have a higher willingness-to-pay for the same. (ii) Including a green variant yields diseconomies-in-scope for the firm’s production costs, which increases non-linearly as product variants become more vertically (and environmentally) differentiated. (iii) Using more recycled/reused content for the green variant permits input material cost savings. Using an endogenous demand model and non-linear programming theory, we characterize the economic conditions under which a monopolist can profitably cover the entire market by maintaining a uniformly green product line, i.e., by selling only the green product variant. When such equilibrium outcomes result, the firm’s traditional profit maximization objective coincides with an environmentally-conscious outcome. We also assess the demand segmentation and firm profit consequences of underestimating the naturalites’ (conventionals’) marginal utility (dis-utility) for a green variant with more recycled/reused content, and show that such missteps may yield adverse implications for both firm profits and the environment.We consider the price and quality optimization (i.e., product line design) problem of a monopolist selling (at most) two product variants, a base product and a green variant that comprises recycled/reused content, to a market of two distinct consumer types with heterogeneous valuations for the base product. Our setting features three distinguishing elements, which had hitherto not been considered together in the literature: (i) Consumer segments demonstrate opposing perceptions of the green variant, i.e., “conventionals” associate dis-utility with a green variant that has more recycled/reused content, whereas “naturalites” have a higher willingness-to-pay for the same. (ii) Including a green variant yields diseconomies-in-scope for the firm’s production costs, which increases non-linearly as product variants become more vertically (and environmentally) differentiated. (iii) Using more recycled/reused content for the green variant permits input material cost savings. Using an endogenous demand model and non-linear programming theory, we characterize the economic conditions under which a monopolist can profitably cover the entire market by maintaining a uniformly green product line, i.e., by selling only the green product variant. When such equilibrium outcomes result, the firm’s traditional profit maximization objective coincides with an environmentally-conscious outcome. We also assess the demand segmentation and firm profit consequences of underestimating the naturalites’ (conventionals’) marginal utility (dis-utility) for a green variant with more recycled/reused content, and show that such missteps may yield adverse implications for both firm profits and the environment.

An Empirical Analysis of How Inventory Disclosure Affects Online Retail Sales

Online retailers employ varied inventory disclosure tactics ranging from full disclosure at all times to showing mere stock availability cues, which begs the questions “what is the best inventory disclosure strategy” and “can inventory disclosure influence demand at all?” Past academic research in operations and marketing has not reached a consensus, as some researchers advocated that inventory can stimulate demand by indicating popularity or availability, whereas other papers suggest that in some retail settings, low inventory signals scarcity and should stimulate more imminent sales. In this paper, we try to establish a link between inventory and sales empirically by using a large data set that comprises a wide array of products sold at Amazon.com. Controlling for price effects on sales rates and taking into account endogeneity among disclosed inventory levels, prices and sales rates, we show that low disclosed inventory levels stimulate sales. Moreover, we isolate two distinct mechanisms that underlie our main finding, i.e., the frequency of product sales and the magnitude of sales, by which reductions in disclosed inventory and prices positively influence sales rates.