Optimal Reservation Deposit Policies in the Presence of Rational Customers and Retail Competition. G. Georgiadis, C.S. Tang. March 2010.
We study two reservation deposit policies for a service firm to increase its revenue through higher capacity utilization. First, under the "no deposit" policy, the firm requires no reservation deposit and imposes no "no show" penalty. Anticipating potential "no shows," a firm may overbook; hence, there is no guarantee that the reserved service will be provided under the no deposit policy. On the contrary, under the "guarantee deposit" policy, a guarantee deposit is required for each customer to make a non-cancelable reservation. To honor the reserved service under the guarantee deposit policy, the firm will not overbook. We analyze each deposit policy as a Stackelberg game in which the firm acts as the leader who selects the booking capacity under the no deposit policy (or the required deposit under the guarantee deposit policy), and each customer acts as the follower who decides whether to reserve or not. Our model incorporates rational customer behavior so that each customer will take other customers' behavior into consideration. Using the firm's optimal booking capacity (optimal required deposit) in equilibrium under the no deposit policy (the guarantee deposit policy), we compare the firm's expected profits under these two policies in a monopolistic environment. Our results suggest that the firm should charge a higher optimal retail price under the no deposit policy, and adopt the no deposit policy when the demand rate is below a certain threshold. By analyzing a game of duopolistic competition between two firms, we develop the conditions under which the firms will adopt a particular pair of deposit policies in equilibrium, and we show this game can lead to a Prisoner's Dilemma. Moreover, when both firms charge the same retail price, we show the existence of an equilibrium in which both firms adopt the no deposit policy.
Advance Booking Programs for Managing Supply, Demand, and Price Risks. S.-H. Cho, C.S. Tang. February 2010.
While advance booking programs have been shown to be effective for firms to manage uncertain demand, the effectiveness of such programs is unclear when supply, demand, and price risks are present in a supply chain. Motivated by an advance booking program for managing these three types of risks in a flu vaccine supply chain, we present a two-stage Stackelberg game model to examine the dynamic interactions between a manufacturer and a retailer over two stages. In each stage, both firms enter a Stackelberg game: the manufacturer sets his wholesale price and the retailer determines her order quantity. However, when making the decisions in the second stage, both firms take into account the decisions chosen in the first stage as well as the information about supply and demand revealed after the first stage. Our analysis shows that the advance booking program is always beneficial to the manufacturer but not to the retailer especially when a supply shortage is likely to occur. Interestingly, we find that supply uncertainty and demand uncertainty affect the firms' profits in an opposite manner under the advance booking program: the firms' expected profits tend to decrease in supply uncertainty, but they tend to increase in demand uncertainty.
The Power of Flexibility for Mitigating Supply Chain Risks. C.S. Tang, B. Tomlin. International Journal of Production Economics. 116(1): 12-27. November 2008.
Lee [2004. The triple—a supply chain. Harvard Business Review 102–112] articulated that alignment, adaptability, and agility are the basic ingredients for managing supply chain risks. While it is clear that flexibility (agility) enhances supply chain resiliency, it remains unclear how much flexibility is needed to mitigate supply chain risks. Without a clear understanding of the benefit associated with different levels of flexibility, firms are reluctant to invest in flexibility especially when reliable data and accurate cost and benefit analysis are difficult to obtain. In this paper, we present a unified framework and 5 stylized models to illustrate that firms can obtain significant strategic value by implementing a risk reduction program that calls for a relatively low level of flexibility. Some of our model analyses are based on or motivated by models presented in recent literature. Our findings highlight the power of flexibility, and provide convincing arguments for deploying flexibility to mitigate supply chain risks.
Making Products Safe: Process and Challenges. C.S. Tang. International Commerce Review. 8(1): 48-55. November 2008.
Product recalls can damage a company’s reputation and its share price. Nevertheless, one of the side effects of increased globalization and outsourcing is a rising number of product recalls. What can we learn from these experiences, and what else needs to be done?
Optimal Pricing and Rebate Strategies in a Two-Level Supply Chain. S-H. Cho, K.F. McCardle, C.S. Tang. To appear in Production and Operations Management. 2009.
When selling electronic products, manufacturers and retailers often offer rebates to stimulate sales. Due to certain adverse effects, however, some manufacturers and retailers are contemplating the elimination of their rebate programs. This paper sheds light on the debate about the value of rebate programs by presenting a model for evaluating the conditions under which a firm should offer rebates in a competitive environment. Specifically, we consider a two-level supply chain comprising one manufacturer and one retailer. Each firm makes three decisions: the regular (wholesale or retail) price, whether or not to offer rebates, and the rebate value should the firm decide to launch a rebate program. We determine the equilibrium of a vertical competition game between the manufacturer (leader) and the retailer (follower), and we provide insights about how competition affects the conditions under which a firm should offer rebates in equilibrium.
Project Management Contracts with Delayed Payments. H.D. Kwon, S.A. Lippman, K.F. McCardle, C.S. Tang. To appear in Manufacturing & Service Operations Management.
When managing projects with considerable uncertainty such as those arising in construction, defense, and new product development, it is customary for a manufacturer (project manager) to offer contracts under which each supplier (contractor) receives a pre-specified payment when she completes her task. However, there are recent cases in which the manufacturer imposes "delayed payment" contracts under which each supplier is paid only when all suppliers have completed their tasks. By considering a model of one manufacturer and n greater than or equal to 2 identical and independent suppliers with exponential completion times, we analyze the impact of both a delayed payment regime and a no delayed payment regime on each supplier's effort level and on the manufacturer's net profit in equilibrium. When the suppliers work rates are unadjustable, we conjecture that the manufacturer is actually worse off under the delayed payment regime. However, when the suppliers work rates are adjustable, we obtain a different result: the delayed payment regime is more profitable for the manufacturer either when the project revenue is sufficiently small or when the number of suppliers is sufficiently large.
ASP, The Art and Science of Practice: What Employers Demand from Applicants for MBA-Level Supply Chain Jobs and the Coverage of Supply Chain Topics in MBA Courses. M.S. Sodhi, B-G. Son, C.S. Tang. Interfaces. 38(6): 469-484. November-December 2008.
We analyzed the text of 704 online advertisements of supply chain management jobs for MBA graduates. The content analysis of these job advertisements provided us with a list of supply chain topics, such as inventory management and supply management, and general skills, such as communication and leadership; it also showed the proportion of advertisements requesting these skills. We measured the relative coverage of the same supply chain topics in MBA-level supply chain electives and operations management core courses in 21 of the top 50 business schools in the United States by analyzing the course descriptions and the cases used in these courses. This enabled us to compare the relative importance of supply chain topics to employers on the “demand” side with the relative importance of supply chain electives in MBA curricula on the “supply” side in these schools. Our analysis indicated that the supply usually matches demand; however, there may be an undersupply of practice- or process-oriented topics, such as forecasting, procurement, supplier and vendor management, and contracts and negotiation. In addition, there may be an oversupply of conceptual and strategy-oriented topics, such as product design, supply chain design, and emerging information technology and management information.
The Implications of Customer Purchasing Behavior and In-store Display Formats. R. Yin, Y. Aviv, A. Pazgal, C.S. Tang. To appear in Management Science. 2009.
Consider a retailer announces both the regular price and the post-season clearance price at the beginning of the selling season. Throughout the season, customers arrive in accord with a Poisson process. In this paper we analyze the impact of two types of customer purchasing behavior and two common in-store display formats on the retailer’s optimal expected profit and optimal order quantity. We consider the case when all customers are either myopic (purchase immediately upon arrival) or strategic (either purchase at the regular price upon arrival or attempt to purchase at the clearance price after the season ends). In addition, we consider the case when the retailer would display either all available units or one unit at a time on the sales floor. When all customers have identical valuation, we show that, in equilibrium, each strategic customer’s purchasing decision is based on a threshold policy that depends on the inventory level at the time of arrival. We prove analytically that the retailer would obtain a higher expected profit and would order more when the customers are myopic. Also, we show analytically that the retailer would earn a higher expected profit and would order more under the display one unit format when the customers are strategic. We illustrate numerically the penalty when the retailer mistakenly assumes that the strategic customers are myopic. We extend our analysis to the case in which customers belong to multiple classes, each of which has a class-specific valuation, and also to the case in which the post-season clearance price depends on the actual end-of-season inventory level.
Pre-announced Pricing Strategies with Reservations. W. Elmaghraby, S.A. Lippman, C.S. Tang, R. Yin. To appear in Production and Operations Management. 2009.
At the beginning of the selling season, the retailer announces both the price ph at which the product will be sold during the selling season and the post-season clearance price p` < ph for unsold items. Customers arrive in accord with a Poisson process, and each of the n + 1 customer classes has a class-specific valuation. We analyze two operating regimes. Under the reservation regime, a buyer either can purchase the product (if available) at price ph or reserve the product for purchase at the clearance price p`. If the buyer reserves the product and if it remains unsold at the end of the selling season, then he is obligated to purchase it at price p`. Under the no reservation regime, a buyer either purchases the product when he arrives at price ph or he enters a lottery to purchase at price p` if the product remains unsold. In the presence of stochastic arrivals, we characterize rational purchasing behavior wherein each buyer takes other buyers’ purchasing behavior into consideration, and we analyze the retailer’s expected payoff and the customer’s expected surplus under the two operating regimes.
Perspectives in Supply Chain Risk Management. C.S. Tang. International Journal of Production Economics. 103(2): 451-488. October 2006.
To gain cost advantage and market share, many firms implemented various initiatives such as outsourced manufacturing and product variety. These initiatives are effective in a stable environment, but they could make a supply chain more vulnerable to various types of disruptions caused by uncertain economic cycles, consumer demands, and natural and man-made disasters. In this paper, we review various quantitative models for managing supply chain risks. We also relate various supply chain risk management (SCRM) strategies examined in the research literature with actual practices. The intent of this paper is three-fold. First, we develop a unified framework for classifying SCRM articles. Second, we hope this review can serve as a practical guide for some researchers to navigate through the sea of research articles in this important area. Third, by highlighting the gap between theory and practice, we hope to motivate researchers to develop new models for mitigating supply chain disruptions.
Robust Strategies for Mitigating Supply Chain Disruptions. C.S. Tang. International Journal of Logistics: Research and Applications. 9(1): 33-45. March 2006.
When major disruptions occur, many supply chains tend to break down and take a long time to recover. However, not only can some supply chains continue to function smoothly, they also continue to satisfy their customers before and after a major disruption. Some key differentiators of these supply chains are cost-effective and time-efficient strategies. In this paper, certain "robust" strategies are presented that possess two properties. First, these strategies will enable a supply chain to manage the inherent fluctuations efficiently regardless of the occurrence of major disruptions. Second, these strategies will make a supply chain become more resilient in the face of major disruptions. While there are costs for implementing these strategies, they provide additional selling points for acquiring and retaining apprehensive customers before and after a major disruption.
Rental Price and Rental Duration Under Retail Competition. C.S. Tang, S. Deo. European Journal of Operational Research. 187(3): 806-828. June 2008.
Consider a retailer that rents products to customers for a pre-specified rental duration. By considering the dynamics of uncertain rental demand and return processes, we first present a base model that is intended to analyze the impact of rental duration on the stocking level, the rental price, and the retailer’s profit. Due to the complexity of the base model, we develop an approximation scheme to obtain tractable results. Also, we apply the base model to analyze a situation in which a retailer enters a revenue sharing agreement with a distributor. Moreover, we expand our base model to address the issue of competition in rental duration and rental price. The analysis of our competitive model in a duopolistic environment suggests that the market equilibrium depends on the market potential and the rental duration sensitivity. Furthermore, we establish conditions under which one firm will charge a lower rental price while the other firm will offer a longer rental duration in equilibrium.
An Auction Model Arising from an Internet Search Service Provider. W.S. Lim, C.S. Tang. European Journal of Operational Research. 172(3): 956-970. August 2006.
Most search service providers such as Lycos and Google either produce irrelevant search results or unstructured company listings to the consumers. To overcome these two shortcomings, search service providers such as GoTo.com have developed mechanisms for firms to advertise their services and for consumers to search for the right services. To provide relevant search results, each firm who wishes to advertise at the GoTo site must specify a set of keywords. To develop structured company listings, each firm bids for priority listing in the search results that appear on the GoTo site. Since the search results appear in descending order of bid price, each firm has some control over the order in which the firm appears on the list resulting from the search. In this paper, we present a one-stage game for two firms that captures the advertising mechanism of a search service provider (such as GoTo). This model enables us to examine the firm’s optimal bidding strategy and evaluate the impact of various parameters on the firm’s strategy. Moreover, we analyze the conditions under which all firms would increase their bids at the equilibrium. These conditions could be helpful to the service provider when developing mechanisms to entice firms to submit higher bids.
The Impact of Alternative Performance Measures on Single-Period Inventory Policy. A.O. Brown, C.S. Tang. Journal of Industrial and Management Optimization. 2(3): 297-318. August 2006.
While many firms and researchers have developed various supply chain solutions, there are many underlying reasons why these solutions have not been adopted in practice. Some key reasons, as articulated by Lee and Billington (1992), include organizational barriers, coordination challenges among marketing, manufacturing, and logistics, technical challenges in the area of information systems, as well as conflicting supply chain performance metrics. Other key reasons are due to alternative performance measures besides total expected relevant cost, which include sales target, product substitution, product clearance, sales per square foot, etc. In order to understand how these alternative performance measures affect the supply chain solution, we make an initial attempt to analyze how alternative measures would affect the simplest form of inventory policy, namely, the newsvendor solution. To identify various alternative measures and to explore how such order decisions are made, we conducted a simple experiment by giving a single-period inventory problem to 250 MBA students and 6 professional buyers who order fashion items. We observed that both groups select their order quantities less than the newsvendor solution and made their ordering decisions based on various specific performance metrics besides total expected cost. These observations have motivated us to analyze how these performance metrics would affect the ordering decision. Our analysis indicates that, under these performance metrics, it is rational for the decision maker to order less than the newsvendor solution.
Bundling Retail Products: Models and Analysis. K.F. McCardle, K. Rajaram, C.S. Tang. European Journal of Operational Research. 177(2): 1197-1217. 2007.
We consider the impact of bundling products on retail merchandising. We consider two broad classes of retail products: basic and fashion. For these product classes, we develop models to calculate the optimal bundle prices, order quantities, and profits under bundling. We use this analysis to establish conditions and insights under which bundling is profitable. Our analysis confirms that bundling profitability depends on individual product demands, bundling costs, and the nature of the relationship between the demands of the products to be bundled. We also provide detailed numerical examples.
A Modeling Framework for Category Assortment Planning. J. Chong, T. Ho, C.S. Tang. Manufacturing & Service Operations Management. 3(3): 191 - 210. Summer 2001.
The complexity of managing a category assortment has grown tremendously in recent years due to the increased product turnover and proliferation rates in most categories. It is an increasingly difficult task for managers to find an effective assortment due to uncertain consumer preferences and the exponential number of possible assortments. This paper presents an empirically based modeling framework for managers to assess the revenue and lost sales implication of alternative category assortments. Coupled with a local improvement heuristic, the modeling framework generates an alternative category assortment with higher revenue. The framework, which consists of a category-purchase-incidence model and a brand-share model, is calibrated and validated using 60,000 shopping trips and purchase records. Specifically, the purchase-incidence model predicts the probability of an individual customer who purchases (and who does not purchase) from a given product category during a shopping trip. The no-purchase probability enables us to estimate lost sales due to assortment changes in the category. The brand-share model predicts which brand the customer chooses if a purchase incidence occurs in the category. Our brand-share model extends the classical Guadagni and Little model (1983) by utilizing three new brand-width measures that quantify the similarities among products of different brands within the same category. We illustrate how our modeling framework is used to reconfigure the category assortment in eight food categories for five stores in our data set. This reconfiguration exercise shows that a reconfigured category assortment can have a profit improvement of up to 25.1% with 32 products replaced. We also demonstrate how our modeling framework can be used to gauge lost sales due to assortment changes. We find the level of lost sales could range from 0.9% to 10.2% for a period of 26 weeks.
The Implications of Pooled Returns Policies. A.O. Brown, M.C. Chou, C.S. Tang. International Journal of Production Economics. 111(1): 129-146. January 2008.
When selling products with highly uncertain demands and short life cycles, it is common for a manufacturer to offer some form of returns policy to entice the distributors to increase their order quantities. In this paper we consider a multi-item returns policy called “pooled” (or joint) returns policy under which the distributor can return any combination of the products up to R percent of the total purchases across all products. We analyze the distributor's optimal profit and order quantity under the pooled returns policy, and compare these operating characteristics to the case when a single-item “non-pooled” returns policy is instituted. Under the non-pooled returns policy, the distributor can only return on individual items using item-specific return limits. We show an intuitive result that the distributor will always achieve a higher profit under the pooled policy. However, the manufacturer could actually obtain a lower profit under the pooled policy due to a counter-intuitive result: the distributor may order less under the pooled policy even though the pooled policy offers more flexibility. This counter-intuitive result motivates us to determine the conditions under which the distributor would order less under the pooled policy. Finally, we develop a heuristic for determining the distributor's optimal order quantities associated with the n-product case under the pooled policy.
Demand Modeling in Product Line Trimming: Substitutability and Variability.
J-K. Chong, T-H. Ho, C.S. Tang. Managing Business Interfaces: Marketing, Engineering, and Manufacturing Perspectives. A.K. Chakravarty, J. Eliasberg. pp. 39-52. Kulwer Academic Publishers.
The number of products or stock keeping units (SKUs) in most product categories has been growing at a phenomenal rate. Even though the number of products increases, the average sale of products can decrease. Due to cannibalization, the sales of some products may even drop below a threshold that makes them unprofitable. This has spurred some firms to remove these under-performing products from their product lines. This ad-hoc "trim the lame duck" procedure can have an adverse effect on the ¯rm's profit for two reasons: first, the "lame duck" may not be the most substitutable product within the line, trimming it results in higher lost sales; second, the "lame duck" may be cheaper to keep with lower inventory cost due to less variability in sales. As an initial step to developing a better product elimination procedure, we use a model that explicitly captures product substitution phenomenon to examine various product portfolios. We compare the mean and the variance of the sales associated with two basic strategies: trimming and no trimming. Our results provide insight into when and which products could be trimmed.
Designing Supply Contracts: Contract Type And Information Asymmetry. C.J. Corbett, D. Zhou, C.S. Tang. Management Science. 50(4): 550-559. April 2004.
This paper studies the value to a supplier of obtaining better information about a buyer's cost structure, and of being able to offer more general contracts. We use the bilateral monopoly setting to analyze six scenarios: three increasingly general contracts (wholesale-pricing schemes, two-part linear schemes, and two-part nonlinear schemes), each under full and incomplete information about the buyer's cost structure. We allow both sides to refuse to trade by explicitly including reservation profit levels for both; for the supplier, this is implemented through a cutoff policy. We derive the supplier's optimal contracts and profits for all six scenarios and examine the value of information and of more general contracts. Our key findings are as follows: First, the value of information is higher under two-part contracts; second, the value of offering two-part contracts is higher under full information; and third, the proportion of buyers the supplier will choose to exclude can be substantial.
The Benefits of Advance Booking Discount Programs: Model and Analysis. C.S. Tang, K. Rajaram, A. Alptekinoglu, J. Ou. Management Science. 50(4): 465-478. 2004.
Consider a retailer who sells perishable seasonal products with uncertain demand. Due to the short sales season and the long replenishment lead times associated with such products, the retailer is unable to update demand forecasts by using actual sales data generated from the early part of the season and to respond by replenishing stocks during the season. To overcome this limitation, we examine the case in which the retailer develops a program called the ‘Advance Booking Discount’ (ABD) program that entices customers to commit to their orders at a discount price prior to the selling season. The time between placement and fulfillment of these pre-committed orders provides an opportunity for the retailer to update demand forecasts by utilizing information generated from the pre-committed orders and to respond by placing a cost-effective order at the beginning of the selling season. In this paper, we evaluate the benefits of the ABD program and characterize the optimal discount price that maximizes the retailers expected profit.
An Integrated Planning System for Managing the Refurbishment of Thermoluminescent Badges. M. Bayiz, C.S. Tang. Interfaces. 34(5): 383-393. September-October 2004.
ABC Worldwide Dosimetry Service provides a high-quality service for measuring and reporting radioactive exposure at its customers’ sites. It leases thermoluminescent badges that record radioactive exposure over a prespeci?ed time period. As each recording cycle ends, ABC must send refurbished (or new) badges to the customers before they return the old badges to ensure continuous monitoring. It then measures, recalibrates, and refurbishes the returned badges for future use. We developed an integrated system that could help ABC to manage its purchasing schedule for new badges so it can meet a target customer service level with minimal inventory. We ran our integrated system using the data ABC provided and found that our system could have helped ABC to reduce its inventory level by 17.7 percent and its costs by $820,000 within a six-month period.
Advance Booking Discount Programs under Retail Competition. K.F. McCardle, K. Rajaram, C.S. Tang. Management Science 50(5): 701-708. May 2004.
As product demand uncertainty increases and life cycles shorten, retailers respond by developing mechanisms for more accurate demand forecasting and supply planning to avoid over-stocking or under-stocking a product. We consider a situation in which two retailers consider launching one such mechanism, known as the `Advance Booking Discount' (ABD) program. In this program customers are enticed to pre-commit their orders at a discount-selling season. While the ABD program enables the retailers to lock in a portion of the customer demand and use this demand information to develop more accurate forecasts and supply plans, the advance booking discount price reduces profit margin. We analyze the four possible scenarios wherein each of the two firms offer an ABD program or not, and establish conditions under which the unique equilibrium calls for launching the ABD program at both retailers. We also provide a detailed numerical example to illustrate how these conditions are affected by the level of demand uncertainty, demand correlation, market share and fixed costs for instituting an ABD program.
The Impact of Product Substitution on Retail Merchandising. K. Rajaram, C.S. Tang. European Journal of Operational Research. 135(3): 582-601. December 2001.
The impact of product substitution on two key aspects of retail merchandising, order quantities, and expected profits, is analyzed. To perform this analysis, the basic newsvendor model is extended to include the possibility that a product with surplus inventory can be used as a substitute for out of stock products. This extension requires a definition and an approximation for the resulting effective demand under substitution. A service rate heuristic is developed to solve the extended problem. The performance of this heuristic is evaluated using an upper bound generated by solving the associated Lagrangian dual problem. Analysis suggests that this heuristic provides a tractable and accurate method to determine order quantities and expected profits under substitution. This heuristic is applied to examine how the level of demand uncertainty and correlation, and the degree of substitution between products, affect order quantities and expected profits under substitutable demand. In addition, the heuristic is used to better understand the mechanism by which substitution improves expected profits.
Managing Demand Uncertainty for Short Life Cycle Products Using Advance Booking Discount Programs. C.S. Tang, K. Rajaram, J. Ou. Supply Chain Management: Applications and Algorithms. E. Romeijn. (Ed.). Kluwer Academic Publishers. Forthcoming.
Consider a retailer that sells perishable seasonal products with uncertain demand. Due to the short sales season and long replenishment lead times associated with such products, the retailer is unable to update demand forecasts by using actual sales data generated from the early part of the season and to respond by replenishing stocks during the season. To overcome this limitation, we examine the case in which the retailer develops a new program called ‘Advance Booking Discount’ (ABD) program that entices customers to pre-commit their orders at a discount price prior to the selling season. However, such orders are filled during the selling season. The time between the placement and the fulfillment of these pre-committed orders provides an opportunity for the retailer to update demand forecasts by utilizing information generated from the pre-committed orders and to respond by placing a cost effective order at the beginning of the selling season. In this chapter, we evaluate the benefits of the ABD program and characterize the optimal discount price that maximizes the retailer’s expected profit.
Store Choice and Shopping Behavior: How Price Format Works. C.S. Tang, D.R. Bell, T. Ho. California Management Review. 43(2): 56-74. Winter 2001.
A perceived shopping utility framework is presented for analyzing the impact of retail price format on store choice. This, in turn, determines 3 key performance metrics: 1. number of shoppers, 2. number of trips, and 3. average spending per trip. When choosing a store, consumers evaluate both the fixed and variable utilities of shopping. The fixed utility does not vary from trip to trip, whereas the variable utility depends on the size and composition of the shopping list. A framework is presented that can accommodate situations where retailers face multiple segments of buyers who have different sensitivities to fixed and variable utilities.
Modeling the Impact of an Outcome-Oriented Reimbursement Policy on Clinic, Patients, and Pharmaceutical Firms. K.C. So, C.S. Tang. Management Science (lead article). 46(7): 875-892. July 2000.
Tackling the steep increase in drug costs is an especially important issue among many health care providers and insurers. To entice the clinics to become more cost efficient, the US federal government, as well as many HMOs, have developed various cost containment initiatives recently. However, the impact of these initiatives on the patients' well being, the clinic's profitability, and the pharmaceutical firm's profitability has not been formally analyzed. In this paper a mathematical model is developed that is intended to examine the impact of a reimbursement policy for drug usage. Despite the simplistic structure of the model, the analysis enhances the understanding of the joint impact of the reimbursement policy on the patients, the clinic, and the pharmaceutical firm. Thus, the analysis can provide valuable information for evaluating the effectiveness of implementing such a reimbursement policy. In addition, the data gathered from a clinic is used to help support the assumptions and results of the underlying model.
The Value of Information Sharing in a Two-Level Supply Chain. H.L. Lee, K.C. So, C.S. Tang. Management Science. 46(5): 626-643. May 2000.
Many companies have embarked on initiatives that enable more demand information sharing between retailers and their upstream suppliers. While the literature on such initiatives in the business press is proliferating, it is not clear how one can quantify the benefits of these initiatives and how one can identify the drivers of the magnitudes of these benefits. Using analytical models, this paper aims at addressing these questions for a simple two-level supply chain with non-stationary end demands. Our analysis suggests that the value of demand information sharing can be quite high, especially when demands are significantly correlated over time.
Note: Optimal Ordering Decisions with Uncertain Cost and Demand Forecast Updating. H. Gurnani, C.S. Tang. Management Science. 45(10): 1456-1462. October 1999.
The optimal ordering policy for a retailer who has 2 instants to order a seasonal product from a manufacturer prior to a single selling season is determined. While the demand is uncertain, the retailer can improve the forecast by utilizing the market signals observed between the first and 2nd instants. However, because of the nature of the manufacturing environment, the unit cost at the 2nd instant is uncertain and could be higher (or lower) than the unit cost at the first instant. To determine the profit-maximizing ordering strategies at both instants, the retailer has to evaluate the trade-off between a more accurate forecast and a potentially higher unit cost at the 2nd instant. A nested newsvendor model for determining the optimal order quantity at each instant is presented and the conditions under which it is optimal for the retailer to delay its order until the 2nd instant are characterized.
Designing Supply Contracts: Contract Type and Information Asymmetry. C.J. Corbett, C.S. Tang. Supply Chain Management. pp. 270-297. S. Tayur, R. Ganeshan, M. Magazine (Eds.). Kluwer Academic Publishers. January 1999.
This paper studies the value to a supplier obtaining better information about a buyer's cost structure and the value of being able to offer more flexible contracts. Specifically, we use the basic bilateral monopoly to analyze six scenarios: three types of contracts (simple wholesale pricing schemes, two-part linear schemes, and two-part nonlinear schemes) and two different settings in which the supplier has either full or incomplete information about the buyer's cost structure. In contrast to most existing work that assumes that the supplier must trade with the buyer, we explicitly include a reservation profit level for the supplier below which he will refuse to trade with the buyer. We derive the supplier's optimal contracts and profits for all six scenarios and use these results to evaluate the value of information and the value of contracting flexibility. The key findings of our analysis are: first, the value of information is higher under two-part contracts; second, the value of offering two-part contracts is higher under full information; and third, more flexible contracts allow the supplier to trade with the buyer with higher costs.
Supplier Relationship Map. C.S. Tang. International Journal of Logistics: Research and Applications. 2(1): 39-56. 1999.
Despite recognizing the strategic importance of their relationship with suppliers, most manufacturers maintained an arm’s length relationship with their suppliers until the late 80s. This paper examines the underlying reasons for the dramatic changes in the supplier relationship during the late 80s and early 90s. In addition, we present a conceptual framework for mapping different types of supplier relationships for different business environments. This paper concludes with a discussion of some strategies for the buyers and the suppliers that will change the supplier relationship.
Rational Shopping Behavior and the Option Value of Variable Pricing. T-H. Ho, C.S. Tang, D.R. Bell. Management Science (Lead Article). 44(12): S145-S160. December 1998.
A normative model is developed that shows how rational customers should shop when the price of the product is random. A closed-form expression is derived for the optimal purchasing policy and it is shown that the optimal quantity to purchase under a given price scenario is linearly decreasing in the difference between the price under that scenario and the average price. This purchase flexibility due to price variability has a direct impact on shopping frequency. Rational shoppers should shop more often and buy fewer units per trip when they face higher price variability. Results suggest that if 2 stores charge the same average price for a product, rational shoppers incur a lower level of expenditure at the store with a higher price variability. Since stores with different price variabilities coexist in practice, one expects that stores with higher price variability to charge a higher average price. Thus, given 2 stores, a higher relative mean price for a given item should be indicative of higher price variability, and vice versa.
Determining Where to Shop: Fixed and Variable Costs of Shopping. D.R. Bell, T. Ho, C.S. Tang. Journal of Marketing Research. 35(3): 352-369. August 1998.
A study develops and tests a new model of store choice behavior whose basic premise is that each shopper is more likely to visit the store with the lowest total shopping cost. The total shopping cost is composed of fixed and variable costs. The study has 3 objectives: 1. to model and estimate the relative importance of fixed and variable shopping costs, 2. to investigate customer segmentation in response to shopping costs, and 3. to introduce a new measure (the basket size threshold) that defines competition between stores from a shopping cost perspective. The model controls for 2 important phenomena: consumer shopping lists might differ from the collection of goods ultimately bought, and shoppers might develop category-specific store loyalty.
Successful Strategies for Product Rollovers. C. Billington, H.L. Lee, C.S. Tang. Sloan Management Review. 39(3): 23-30. Spring 1998.
Companies' financial strength and market position depend on successful new product introductions, which, in turn, depend on successful product rollovers. Given the low success rate of product rollovers, companies need a formal process to plan and coordinate product rollovers and to reduce risk. A paper presents a framework to help companies manage product rollovers, choose the best rollover strategy, and improve product rollovers. Companies need to plan their rollovers early, when they are planning the new product's introduction. First, they choose a primary rollover strategy. Then they monitor product and market conditions. Finally, as product and market conditions change, they adopt a contingency strategy if necessary. Companies can consider 2 primary strategies for product rollovers: solo-product roll or dual-product roll.
Product Structure, Brand Width and Brand Share. J-K, Chong, T. Ho, C.S. Tang. Product Variety Management: Research Advances. pp. 39-64. T. Ho, C.S. Tang (Eds.). Kluwer Academic Publishers. 1998.
Most brand managers believe that a brand that has more products should have a higher brand share because it offers more options to customers. We utilize the underlying structure of the products (within a brand) to develop three measures of brand width: the number of stock keeping units (SKUs), the number of distinct feature levels, and the number of distinct products. To examine the impact of brand width on brand share, we develop a logit model and estimate the sensitivities of brand share to our brand width measures using panel data of eight food product categories. Our logit model suggests that the brand width measures provide explanatory and predictive power. In addition, our latent-class analysis implies that different segments have different (brand choice) responses to different measures of brand width. We also use the estimated model to simulate the impact of stock-out and delayed new product introduction on brand share. Our simulation results suggest: (1) stock-out will lower the brand share in a long run and its impact is more severe when the stock-out duration lengthens; and (2) delayed new product introduction will lower the brand share initially but has minimal impact on the brand share in a long run.
Managing Supply Chains with Contract Manufacturing. H.L. Lee, C.S. Tang. Global Supply Chain and Technology Management. pp. 141-151. H.L. Lee, S.M. Ng (Eds.). Production and Operations Management Society Book Series. 1998.
Outsourcing assembly operations to contract manufacturers has been found to be a strategy that enables a rapid increase in production capacity without incurring exorbitant fixed costs associated with capacity expansion. To enjoy volume discounts through central purchasing, many companies have traditionally consigned the requisite parts to their contract manufacturers who perform the assembly operations. Thus, the company purchases the requisite parts from different suppliers. Sorts the parts to form different kits, and ships the kits to the corresponding contract manufacturers. However, part consignment could increase the length of the supply chain and the total manufacturing lead time, as well as the total cost associated with material handling. To mitigate these undesirable effects, some companies have begun considering an arrangement in which the contract manufacturer would order the parts directly from designated suppliers. The contract manufacturer would simply charge the material and handling costs under this arrangement. This paper presents a simple approach for evaluating the costs associated with two specific arrangements arising from contract manufacturing. The analysis could provide useful information to the company when negotiating contracts with contract manufacturers.
Variability Reduction Through Operations Reversal. H.L. Lee, C.S. Tang. Management Science. 44(2): 162-172. February 1998.
This paper is motivated by observations in industry, where some companies have reengineered the manufacturing process by reversing 2 consecutive stages of the process. Such changes could lead to variance reduction, thereby improving the performance of the process. Formalized models are developed that characterize the impact of such changes: operations reversal. These models are used to derive insights on when such reversal would be advisable.
Product Variety Management: Research Advances, T.H. Ho, C.S. Tang. (Eds.). Kluwer Academic Publishers. 233 pp. 1998.
The proliferation of new products has become a common phenomenon in today’s business world. Most companies now offer hundreds, if not thousands, of stock keeping units (SKUs) in order to compete in the market place. Companies that expand their product and service varieties now face a new set of problems: accurate demand forecasts, controlling production and inventory costs, and providing high quality delivery performance. In addition, marketing managers will often advocate widening product lines for increasing revenue and market share, but increasing product lines can also decrease the efficiency of manufacturing processes and distribution systems. Hence, firms must weigh the benefits of increasing product variety against its cost and determine the optimal level of product variety to offer to their customers.
Product Variety Management examines the interrelated problems between the marketing and production functions in industry, and through a series of research survey papers by leading scholars in economics, engineering, marketing, and operations research, the book addresses the following questions: Why do companies extend their product lines? Do consumers care about product variety? Will a brand with more variety enjoy higher market share? How should product variety be measured? How can a company exploit its product and process design to deliver a higher level of product variety quickly and cheaply? What should the level of product variety be and what should the price of each of the product variants be? What kind of challenges would a company face in offering a high level of product variety and how can these obstacles be overcome? The solutions to these questions are drawn from multiple functions and a variety of disciplines. Product Variety Management is a state-of-the-art treatment of a multi-discipline approach to product variety.
Control of a Stochastic Production System With Estimated Parameters. E.V. Denardo, C.S. Tang. Management Science. 43(9): 1296-1307. September 1997.
For an uncertain production system, the rule that controls the flow of material relies on parameters, such as the yield rates and the demand rate. These parameters are estimates, and they are usually inaccurate. A type of pull rule called a proportional restoration rule is analyzed. It is shown that these rules are not stable; they do not lead to erratic behavior even when the estimation error is significant. It is also shown that these rules localize the effect of mis-estimates; e.g., underestimating the demand rate lowers the level of finished goods inventory, but has scant effect within the line. It is shown that these rules exhibit other desirable attributes - that they are efficient, that they are easy to interpret, and that they recover from disruptions quickly.
Modeling the Costs and Benefits of Delayed Production Differentiation. H.L. Lee, C.S. Tang. Management Science. 43(1): 40-53. January 1997.
Expanding product variety and high customer service provision are both major challenges for manufacturers to compete in the global market. In addition to many ongoing programs, such as lead-time reduction, redesigning products and processes so as to delay the point of product differentiation is becoming an emerging means to address these challenges. Such a strategy calls for redesigning products and processes so that the stages of the production process in which a common process is used are prolonged. This product/process redesign will defer the point of differentiation (i.e., defer the stage after which the products assume their unique identities). In this paper, we develop a simple model that captures the costs and benefits associated with this redesign strategy. We apply this simple model to analyze some special cases that are motivated by real examples. These special cases enable us to formalize three different product/process redesign approaches (standardization, modular design, and process restructuring) for delaying product differentiation that some companies are beginning to pursue. Finally, we analyze some special theoretical cases that enable us to characterize the optimal point of product differentiation and derive managerial insights.
On Postponement Strategies for Product Families with Multiple Points of Differentiation. A. Garg, C.S. Tang. IIE Transactions. 29: 641-650. 1997.
Several researchers have studied the benefits of product and process design that calls for delaying the differentiation of products. Previous research has focused on products having only one point of differentiation. However, in reality most product families have several points of differentiation. Two models are developed to study products with more than one point of differentiation. In each model, the benefits of delayed differentiation at each of these points are examined, and the necessary conditions are derived when one type of delayed differentiation is more beneficial than the other. The analysis indicates that demand variability, correlations and the relative magnitudes of the lead times play an important role in determining which point of differentiation should be delayed.
Lead Time and Response Time in a Pull Production Control System. I. Kim, C.S. Tang. European Journal of Operational Research. 101: 474-485. 1997
In the late 1980s, most manufacturers have shifted their manufacturing strategies from cost and quality to speed. Two performance measures of speed are the focus: manufacturing lead time and response time. Manufacturing lead time is the sum of the processing time to convert raw material to finished goods and the waiting time at the buffers. Response time is the time between the customer places an order and the customer receives the order. A queuing model of a pull-based production control system for a single-stage facility is developed. The intent of the model is two-fold. First, the trade-off between manufacturing lead time and response time is highlighted. Second, an optimization model is used to determine an optimal control system that guarantees certain delivery performance (in terms of response time).
On Managing Operating Capacity to Reduce Congestion in Service Systems. K.C. So, C.S. Tang. European Journal of Operational Research. 92: 83-98. 1996.
An alternative framework in which service systems are classified according to the visibility level of the queue length in the system to the customers is presented. By directly considering the customer's behavior while waiting in the system, 2 simple models are developed that analyze the benefit of adjusting the operating capacity dynamically for 2 different types of service systems: a system with invisible queue length and a system with visible queue length. The first system is motivated by a customer support service system in which the caller cannot see the queue length while the 2nd system is motivated by a check-out service system in which the queue length is highly visible to the customers. For each service system, a policy for adjusting the operating capacity dynamically according to the physical environment of the operation is specified. A queuing model that analyzes the benefit of managing the capacity dynamically is developed. Useful managerial insights for managing capacity in these types of service systems are provided.
Reducing Cycle Time at an IBM Wafer Fabrication Facility. L. Demeester, C.S. Tang. Interfaces. 26(2): 34-49. March-April 1996.
In 1991, IBM San Jose decided to produce and sell magnetic heads for computer disk drives on the open market to original equipment manufacturers. However, as IBM's wafer fabrication facility increased the number of products it manufactured, its manufacturing cycle time lengthened. Since cycle time is important in competing in the open market, IBM San Jose formed a study team (in cooperation with UCLA) to examine the wafer fabrication and to develop ways to reduce cycle time. The team designed a new production control system and proposed new performance measures for operators and engineers. IBM implemented the new production control system and established the performance measures in June 1992, and the cycle time decreased by 50 percent by the end of 1992.
Managing Supply Chains with Contract Manufacturing. H.L. Lee, C.S. Tang. Asian Journal of Business & Information Systems. 1(1): 11-22. Summer 1996.
Outsourcing assembly operations to contract manufacturers has been found to be a strategy that enables speedy increases in the production capacity without incurring exorbitant fixed cost associated with capacity expansion. To enjoy volume discount through central purchasing, many companies have traditionally consigned the requisite parts to their contract manufacturers who perform the assembly operations. Thus, the company purchases the requisite parts from different suppliers, sorts the parts to form different kits, and ships the kits to the corresponding contract manufacturers. However, part consignment could increase the length of the supply chain, the total manufacturing lead time, as well as the total cost associated with material handling. As a way to mitigate these undesirable effects, some companies have begun considering an arrangement in which the contract manufacturer would order the parts directly from designated suppliers. The contract manufacturer would simply charge the material and handling costs under this arrangement. This paper presents a simple approach for evaluating the costs associated with these two arrangements arising from contract manufacturing. The analysis could provide useful information to the company when negotiating contracts with contract manufacturers.
Optimal Batch Sizing and Repair Strategies for Operations with Repairable Jobs. K.C. So, C.S. Tang. Management Science, 41(5): 894-908. May 1995.
A model of a bottleneck facility that performs 2 distinct types of operation - regular and repair - is presented. Both switch-over time and cost are incurred when the facility switches from performing one type of operation to a different type. Upon the completion of a batch of jobs in the regular mode, each batch is subjected to a test, where the entire batch (of jobs) will be classified accordingly as either nondefective, repairable or nonrepairable. A nondefective batch continues its process downstream, a nonrepairable batch is scrapped, and a repairable batch can be cycled back to the bottleneck facility for repair. The objective is to determine the optimal repair policy for the bottleneck facility so that the long run average operating profit is maximized. The optimal repair policy is characterized by showing that the optimal repair policy must take on of the 2 forms: 1) a repair-none policy under which all repairable batches are scrapped, or 2) a repair-all policy under which all repairable batches are repaired. Then optimality conditions for the repair-none policy and the repair-all policy are developed.
A Tactical Model for Airing New Seasonal Products. D. Kim, D.G. Morrison, C.S. Tang. European Journal of Operational Research. 84: 250-264. 1995.
A model is introduced that analyzes the impact of the length of time spent presenting new seasonal products. Specifically, a simple stochastic model for determining the optimal airing time for each product so that the net profit is maximized is developed. Cases in which there are 2 products to present, 2 channels to select for airing the products, and 2 methods of presentation to choose are considered. In each case, the problem is formulated as a mathematical program and the properties of the optimal airing time are characterized. These properties may provide managerial insights for determining airing time for each product, selecting channels to air the products, and choosing a presentation method for products. In addition, this analysis may help the management to make strategic decisions in airing products that would lead to an increase in sales.
Optimal Operating Policy for a Bottleneck with Random Rework. K.C. So, C.S. Tang. Management Science. 41(4): 620-636. April 1995.
A model is presented of a bottleneck facility that performs 2 distinct types of operations: regular and rework. Each job is subjected to a test after completing the regular operation at the bottleneck. If the job passes the test, then it continues its process downstream. Otherwise, the job will cycle back to the bottleneck stage for rework operation. Upon the completion of a batch of regular jobs, the decision maker observes the amount of rework and decides on whether to switch over to process that reworks or continue to process another batch of regular jobs. The goal of the analysis is to characterize the optimal operating policy for the bottleneck so that the average operating cost is minimized. The problem is first formulated as a semi-Markov decision process. A simple procedure to compute the critical value that specifies the optimal threshold policy is developed. The impact of batch sizes, yield, and switch-over time on the optimal threshold policy is evaluated.