To help a firm reduce inefficiencies associated with equipment capacity planning, we propose adual-mode equipment procurement(DMEP) framework. DMEP combines dual-source (i.e., a less-expensive-but-slower base mode and a faster-but-more-expensive flexible mode) procurement with option contracts in three layers: acontract negotiationlayer, where the firm chooses the best combination of lead time and price for each mode from the supply contract menu; a capacityreservationlayer, where the firm reserves total equipment procurement quantities from the two supply modes before the planning horizon starts; and anexecutionlayer, where the firm orders equipment from the two supply modes based on the updated demand information. We first investigate the execution layer as a dynamic dual-source capacity expansion problem with demand backlogging and demonstrate that the optimal policy lacks structure even under the simplest setting. Thus, we propose a heuristic solution for the execution-layer problem, which also serves as a building block for the other two layers. Through numerical analysis, we quantify the value of the added flexibility of DMEP for the firm. The DMEP framework has been implemented at Intel Corporation and has resulted in savings of tens of millions of dollars for one process technology.
Operational Compliance Levers, Environmental Performance, and Firm Performance Under Cap and Trade Regulation
Cap and trade programs impose limits on industry emissions but offer individual firms the flexibility to choose among different operational levers toward compliance, including inputs, process changes, and the use of allowances to account for emissions. In this paper, we examine the relationships among (1) levers for compliance (at-source pollution prevention, end-of-pipe pollution control, and the use of allowances); (2) environmental performance; and (3) firm market performance for the context of stringent cap and trade regulation with allowance grandfathering (i.e., the allocation of allowances for free). To investigate these relationships, we use data on publicly traded utility firms operating coal-fired generating units regulated by the U.S. Acid Rain Program from three principal sources: the U.S. Energy Information Administration, the U.S. Environmental Protection Agency, and the Compustat database. Our results indicate a significant relationship between better environmental performance and lower firm market performance over at least a three-year period. From a regulatory perspective, our results show a negative association between allowance grandfathering and firm environmental performance. Overall, by explicitly considering the context of stringent regulation, we find a counter-example to the view that better environmental performance generally associates with better economic performance.
Using a Dual-Sourcing Option in the Presence of Asymmetric Information About Supplier Reliability: Competition vs. Diversification
We study a buyer's strategic use of a dual-sourcing option when facing suppliers possessing private information about their disruption likelihood. We solve for the buyer's optimal procurement contract. We show that the optimal contract can be interpreted as the buyer choosing between diversification and competition benefits. Better information increases diversification benefits and decreases competition benefits. Therefore, with better information the buyer is more inclined to diversify. Moreover, better information may increase or decrease the value of the dual-sourcing option, depending on the buyer's unit revenue: for large revenue, the buyer uses the dual sourcing option for diversification, the benefits of which increase with information; for small revenue, the buyer uses the dual sourcing option for competition, the benefits of which decrease with information. Surprisingly, as the reliability of the entire supply base decreases, the buyer may stop diversifying under asymmetric information (to leverage competition), whereas it would never do so under symmetric information. Finally, we analyze the effect of codependence between supply disruptions. We find that lower codependence leads the buyer to rely less on competition. Because competition keeps the information costs in check, a reduction in supplier codependence increases the buyer's value of information. Therefore, strategic actions to reduce codependence between supplier disruptions should not be seen as a substitute for learning about suppliers' reliabilities.
Are Reservations Recommended?
We examine the role of reservations in capacity-constrained services with a focus on restaurants. Although customers value reservations, restaurants typically neither charge for them nor impose penalties for failing to keep them. However, reservations impose costs on firms offering them. We offer a novel motivation for offering reservations that emphasizes the way in which reservations can alter customer behavior. We focus on a market in which demand is uncertain and the firm has limited capacity. There is a positive chance that the firm will not have enough capacity to serve all potential customers. Customers are unable to observe how many potential diners are in the market before incurring a cost to request service. Hence, if reservations are not offered, some may choose to stay home rather than risk being denied service. This lowers the firm's sales when realized demand is low. Reservations increase sales on a slow night by guaranteeing reservations holders service. However, some reservation holders may choose not to use their reservations resulting in no-shows. The firm must then trade off higher sales in a soft market with sales lost to no-shows on busy nights. We consequently evaluate various no-show mitigation strategies, all of which serve to make reservations more likely in equilibrium. Competition also makes reservations more attractive; when there are many small firms in the market, reservations are always offered.
Optimizing Organic Waste to Energy Operations
A waste-to-energy firm that recycles organic waste with energy recovery performs two environmentally beneficial functions: it diverts waste from landfills and it produces renewable energy. At the same time, the waste-to-energy firm serves and collects revenue from two types of customers: waste generators who pay for waste disposal service and electricity consumers who buy energy. Given the process characteristics of the waste-to-energy operation, the market characteristics for waste disposal and energy, and the mechanisms regulators use to encourage production of renewable energy, we determine the profit-maximizing operating strategy of the firm. We also show how regulatory mechanisms affect the operating decisions of the waste-to-energy firm. Our analyses suggest that if the social planner's objective is to maximize landfill diversion, offering a subsidy as a per kilowatt-hour for electricity is more cost effective, whereas if the objective is to maximize renewable energy generation, giving a subsidy as a lump sum to offset capital costs is more effective. This has different regulatory implications for urban and rural settings where the environmental objectives may differ.
Unit-Contingent Power Purchase Agreement and Asymmetric Information About Plant Outage
This paper analyzes a unit-contingent power purchase agreement between an electricity distributor and a power plant. Under such a contract the distributor pays the plant a fixed price if the plant is operational and nothing if plant outage occurs. Pricing a unit-contingent contract is complicated by the fact that the plant's true status is its private information. The difference between the electricity spot price and the unit-contingent contract price provides an incentive for the plant to misreport its status and earn profit at the distributor's expense. To prevent misreporting, the distributor may inspect the plant and levy penalties if misreporting is discovered. We find that some type of misreporting under certain circumstances can benefit both the plant and the distributor, because it serves as a risk-allocation mechanism between the two parties. We show that such a risk-allocation mechanism is equivalent to using state-contingent options and prohibiting misreporting.
The Impact of Dependent Service Times on Large-Scale Service Systems
This paper investigates the impact of dependence among successive service times on the transient and steady-state performance of a large-scale service system. This is done by studying an infinite-server queueing model with time-varying arrival rate, exploiting a recently established heavy-traffic limit, allowing dependence among the service times. This limit shows that the number of customers in the system at any time is approximately Gaussian, where the time-varying mean is unaffected by the dependence, but the time-varying variance is affected by the dependence. As a consequence, required staffing to meet customary quality-of-service targets in a large-scale service system with finitely many servers based on a normal approximation is primarily affected by dependence among the service times through this time-varying variance. This paper develops formulas and algorithms to quantify the impact of the dependence among the service times on that variance. The approximation applies directly to infinite-server models but also indirectly to associated finite-server models, exploiting approximations based on the peakedness (the ratio of the variance to the mean in the infinite-server model). Comparisons with simulations confirm that the approximations can be useful to assess the impact of the dependence.
Optimal Algorithms for Assortment Selection Under Ranking-Based Consumer Choice Models
A retailer's product selection decisions are largely driven by her assumptions on how consumers make choices. We use a ranking-based consumer choice model to represent consumer preferences: every customer has a ranking of the potential products in the category and purchases his highest ranked product (if any) offered in the assortment. We consider four practically motivated special cases of this model, namely, the one-way substitution, the locational choice, the outtree, and the intree preference models, and we study the retailer's product selection problem when products have different price and cost parameters. We assume that the retailer incurs a fixed carrying cost per product offered, a goodwill penalty for each customer who does not purchase his first choice and a lost sale penalty for each customer who does not find an acceptable product to buy. For the first three models, we obtain efficient solution methods that simplify to either a shortest path method or a dynamic program. For the fourth model, we construct an effective algorithm and show numerically that, in practice, it is much faster than enumeration. We also obtain valuable insights on the structure of the optimal assortment.
In-Season Transshipments Among Competitive Retailers
A decentralized system of competing retailers that order and sell the same product in a sales season is studied. When a customer demand occurs at a stocked-out retailer, that retailer requests a unit to be transshipped from another retailer who charges a transshipment price. If this request is rejected, the unsatisfied customer may go to another retailer with a customer overflow probability. Each retailer decides on the initial order quantity from a manufacturer and on the acceptance/rejection ofeachtransshipment request. For two retailers, we show that retailers' optimal transshipment policies are dynamic and characterized by chronologically nonincreasing inventory holdback levels. We analytically study the sensitivity of holdback levels to explain interesting findings, such as smaller retailers and geographically distant retailers benefit more from transshipments. Numerical experiments show that retailers substantially benefit from using optimal transshipment policies compared to no sharing. The expected sales increase in all but a handful of over 3,000 problem instances. Building on the two-retailer optimal policies, we suggest an effective heuristic transshipment policy for a multiretailer system.
Managing Opportunistic Supplier Product Adulteration: Deferred Payments, Inspection, and Combined Mechanisms
Recent cases of product adulteration by foreign suppliers have compelled many manufacturers to rethink approaches to deterring suppliers from cutting corners, especially when manufacturers cannot fully monitor and control the suppliers' actions. In this paper, we study three mechanisms for dealing with product adulteration problems: (a) the deferred payment mechanism—the buyer pays the supplier after the deferred payment period only if no adulteration has been discovered by the customers; (b) the inspection mechanism—the buyer pays the supplier immediately, contingent on product passing the inspection; and (c) the combined mechanism—a combination of the deferred payment and inspection mechanisms. We show that the inspection mechanism cannot completely deter the suppliers from product adulteration, whereas the deferred payment mechanism can. Surprisingly, the combined mechanism is redundant: either the inspection or the deferred payment mechanisms perform just as well. Finally, we identify four factors that determine the dominance of deferred payment mechanism over the inspection mechanism: (a) the inspection cost relative to inspection accuracy, (b) the buyer's liability for adulterated products, (c) the difference in financing rates for the buyer and the supplier relative to the defects discovery rate by customers, and (d) the difference in production costs for adulterated and unadulterated product. We find that the deferred payment mechanism is preferable to inspection if the threats of adulteration (either incentive to adulterate or the consequences) are low.
Key Factors in the Market for Remanufactured Products
Measures to extend the economic lives of products—such as remanufacturing carried out byclosed-loop supply chains—are receiving increased attention because of various economic and regulatory factors. In this paper, we examine drivers of price differentials between new and remanufactured products using data on purchases made on eBay. Our analysis shows that seller reputation significantly explains the price differentials between new and remanufactured products. We also find that products remanufactured by original equipment manufacturers or their authorized factories are purchased at relatively higher prices than products remanufactured by third parties. However, in the presence of these reputation signals (seller reputation and remanufacturer identity), we find that stronger warranties are not significantly associated with higher prices paid for remanufactured products. Our work contributes to the closed-loop supply chain research stream in operations management by empirically examining market factors that have not been studied before.
Supply Chain Dynamics and Channel Efficiency in Durable Product Pricing and Distribution
This study extends the single-period vertical price interaction in a manufacturer–retailer dyad to a multiperiod setting. A manufacturer distributes a durable product through an exclusive retailer to an exhaustible population of consumers with heterogeneous reservation prices. In each period, the manufacturer and retailer in turn set wholesale and retail prices, respectively, and customers with valuation above the retail price adopt the product at a constant (hazard) rate. We derive the open-loop, feedback, and myopic equilibria for this dynamic pricing game and compare it to the centralized solution. Although in an integrated supply chain a forward-looking dynamic pricing strategy is always desirable, we show that this is not the case in a decentralized setting, because of vertical competition. Our main result is that both supply chain entities are better off in the long run when they ignore the impact of current prices on future demand and focus on immediate-term profits. A numerical study confirms that this insight is robust under various supply- and demand-side effects. We use the channel efficiency corresponding to various pricing rules to further derive insights into decisions on decentralization and disintermediation.
