The effect of a temporary product distribution channel on supply chain performance

We analyze a supply chain of a manufacturer and two retailers, a permanent retailer who always stocks the manufacturer's product and an intermittent deal‐of‐the day retailer who sells the manufacturer's product online for a short time. We find that without a deal‐of‐the‐day (DOTD) retailer, it is suboptimal for the manufacturer to offer a quantity discount while it is optimal for the retailer to offer periodic price discounts to consumers. With the addition of a DOTD retailer, it is likely to be optimal for the manufacturer to offer a quantity discount. We show that even without market expansion, i.e., no exclusive DOTD retailer consumers, opening the intermittent channel can leave the permanent retailer no worse‐off while increasing the manufacturer's profit. We identify the regular and discounted wholesale prices and the threshold quantity at which the manufacturer should give the discount. We also identify the optimal retail prices. We find that opening the intermittent channel increases the profit of the manufacturer, is likely to decrease the average retail price and to increase sales, and may increase the permanent retailer's profit. © 2016 Wiley Periodicals, Inc. Naval Research Logistics 63: 505–528, 2016     

Oligopolistic contracting: Channel coordination under competition

We study contracts between a single retailer and multiple suppliers of two substitutable products, where suppliers have fixed capacities and present the retailer cost contracts for their supplies. After observing the contracts, the retailer decides how much capacity to purchase from each supplier, to maximize profits from the purchased capacity from the suppliers plus his possessed inventory (endowment). This is modeled as a noncooperative, nonzero‐sum game, where suppliers, or principals, move simultaneously as leaders and the retailer, the common agent, is the sole follower. We are interested in the form of the contracts in equilibrium, their effect on the total supply chain profit, and how the profit is split between the suppliers and the retailer. Under mild assumptions, we characterize the set of all equilibrium contracts and discuss all‐unit and marginal‐unit quantity discounts as special cases. We also show that the supply chain is coordinated in equilibrium with a unique profit split between the retailer and the suppliers. Each supplier's profit is equal to the marginal contribution of her capacity to supply chain profits in equilibrium. The retailer's profit is equal to the total revenue collected from the market minus the payments to the suppliers and the associated sales costs.     

Competing with channel partners: Supply chain conflict when retailers introduce store brands

Private‐label products are of increasing importance in many retail categories. While national‐brand products are designed by the manufacturer and sold by the retailer, the positioning of store‐brand products is under the complete control of the retailer. We consider a scenario where products differ on a performance quality dimension and we analyze how retailer–manufacturer interactions in product positioning are affected by the introduction of a private‐label product. Specifically, we consider a national‐brand manufacturer who determines the quality of its product as well the product's wholesale price charged to the retailer. Given the national‐brand quality and wholesale price, the retailer then decides the quality level of its store brand and sets the retail prices for both products. We find that a manufacturer can derive substantial benefits from considering a retailer's store‐brand introduction when determining the national brand's quality and wholesale price. If the retailer has a significant cost disadvantage in producing high‐quality products, the manufacturer does not need to adjust the quality of the national‐brand product, but he should offer a wholesale price discount to ensure its distribution through the retailer. If the retailer is competitive in providing products of high‐quality, the manufacturer should reduce this wholesale price discount and increase the national‐brand quality to mitigate competition. Interestingly, we find the retailer has incentive to announce a store‐brand introduction to induce the manufacturer's consideration of these plans in determining the national‐brand product quality and wholesale price. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Should firms conceal information when dealing with common suppliers?

A firm making quantity decision under uncertainty loses profit if its private information is leaked to competitors. Outsourcing increases this risk as a third party supplier may leak information for its own benefit. The firm may choose to conceal information from the competitors by entering in a confidentiality agreement with the supplier. This, however, diminishes the firm's ability to dampen competition by signaling a higher quantity commitment. We examine this trade‐off in a stylized supply chain in which two firms, endowed with private demand information, order sequentially from a common supplier, and engage in differentiated quantity competition. In our model, the supplier can set different wholesale prices for firms, and the second‐mover firm could be better informed. Contrary to what is expected, information concealment is not always beneficial to the first mover. We characterize conditions under which the first mover firm will not prefer concealing information. We show that this depends on the relative informativeness of the second mover and is moderated by competition intensity. We examine the supplier's incentive in participating in information concealment, and develop a contract that enables it for wider set of parameter values. We extend our analysis to examine firms' incentive to improve information. © 2014 Wiley Periodicals, Inc. 62:1–15, 2015     

Dynamic inventory and pricing models for competing retailers

We address infinite‐horizon models for oligopolies with competing retailers under demand uncertainty. We characterize the equilibrium behavior which arises under simple wholesale pricing schemes. More specifically, we consider a periodic review, infinite‐horizon model for a two‐echelon system with a single supplier servicing a network of competing retailers. In every period, each retailer faces a random demand volume, the distribution of which depends on his own retail price as well as those charged by possibly all competing retailers. We also derive various comparative statics results regarding the impact several exogenous system parameters (e.g., cost or distributional parameters) have on the equilibrium decisions of the retailers as well as their expected profits. We show that certain monotonicity properties, engrained in folklore as well as in known inventory models for centralized systems, may break down in decentralized chains under retailer competition. Our results can be used to optimize the aggregate profits in the supply chain (i.e., those of the supplier and all retailers) by implementing a specific wholesale pricing scheme. © 2003 Wiley Periodicals, Inc. Naval Research Logistics, 2004.     

Strategic outsourcing under technology spillovers

We study a supply chain in which an original equipment manufacturer (OEM) and a contract manufacturer (CM) compete in the finished goods market. The OEM can decide whether to outsource the intermediate good, a critical component for producing the finished good, from the CM or make in‐house production. Technology transition improves the CM's production efficiency, and it can take two different forms: a direct technology transfer from the OEM to the CM or technology spillovers through outsourcing from the OEM to the CM. We document the possibility of strategic outsourcing, that is, the CM supplies the intermediate good to the OEM when she is less efficient than the OEM's in‐house production. We find that technology spillovers can strengthen the incentive for strategic outsourcing. Furthermore, compared with direct technology transfers, outsourcing coupled with technology spillovers may generate more technology transition. Outsourcing is a particularly appropriate channel for implicit collusion when the OEM is not very efficient with the production of the intermediate good. Our results suggest that ex post competition on the finished goods can create room for ex ante collaboration and provide some implications on the OEM's outsourcing strategies when facing a competitive CM.© 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 501–514, 2014     

Impacts of sequential acquisition,market competition mode,and confidentiality on information flow

We investigate information flow in a setting in which 2 retailers order from a supplier and sell to a market with uncertain demand. Each retailer has access to a signal. The retailers can disclose signals to each other (horizontal information sharing), while the supplier can solicit signals by offering retailers differential payments as incentives for signal disclosure (vertical information acquisition). In the base setting, market competition is in quantity, and a retailer can fully infer the signal that the other retailer discloses to the supplier. We show that the supplier prefers to sequentialize the procedure for information acquisition. Moreover, vertical information acquisition by the supplier is a strategic complement to horizontal information sharing between the retailers to establish information flow. In the equilibrium, the retailers have no incentive to exchange signals, but system wide information transparency can be realized through a combination of information acquisition and inference. We further study the signaling effect, whereby the supplier utilizes wholesale pricing as an instrument to affect the retailers' inference of the shared signals, and price competition to explore their impacts on the supplier's preference for sequential acquisition and the sustainability of information flow.     

The effects of customer rebates and retailer incentives on a manufacturer's profits and sales

In some industries such as automotive, production costs are largely fixed and therefore maximizing revenue is the main objective. Manufacturers use promotions directed to the end customers and/or retailers in their distribution channels to increase sales and market share. We study a game theoretical model to examine the impact of “retailer incentive” and “customer rebate” promotions on the manufacturer's pricing and the retailer's ordering/sales decisions. The main tradeoff is that customer rebates are given to every customer, while the use of retailer incentives is controlled by the retailer. We consider several models with different demand characteristics and information asymmetry between the manufacturer and a price discriminating retailer, and we determine which promotion would benefit the manufacturer under which market conditions. When demand is deterministic, we find that retailer incentives increase the manufacturer's profits (and sales) while customer rebates do not unless they lead to market expansion. When the uncertainty in demand (“market potential”) is high, a customer rebate can be more profitable than the retailer incentive for the manufacturer. With numerical examples, we provide additional insights on the profit gains by the right choice of promotion.© 2009 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Supply chain coordination with shelf‐space and retail price dependent demand and heterogeneous retailers

We consider supply chain coordination in which a manufacturer supplies some product to multiple heterogeneous retailers and wishes to coordinate the supply chain via wholesale price and holding cost subsidy. The retail price is either exogenous or endogenous. The market demand is described by the market share attraction model based on all retailers'shelf‐spaces and retail prices. We obtain optimal solutions for the centralized supply chain, where the optimal retail pricing is a modified version of the well‐known cost plus pricing strategy. We further get feasible contracts for the manufacturer to coordinate the hybrid and decentralized supply chains. The manufacturer can allocate the total profit free to himself and the retail market via the wholesale price when the retail price is exogenous, but otherwise he cannot. Finally, we point out that different characteristics of the retail market are due to different powers of the manufacturer, and the more power the manufacturer has, the simpler the contract to coordinate the chain will be. © 2010 Wiley Periodicals, Inc. Naval Research Logistics, 2010     

Resale price maintenance contracts with retailer sales effort: Effect of flexibility and competition

In Resale Price Maintenance (RPM) contracts, the manufacturer specifies the resale price that retailers must charge to consumers. We study the role of using a RPM contract in a market where demand is influenced by retailer sales effort. First, it is well known that RPM alone does not provide incentive for the retailer to use adequate sales effort and some form of quantity fixing may be needed to achieve channel coordination. However, when the market potential of the product is uncertain, RPM with quantity fixing is a rigid contract form. We propose and study a variety of RPM contracts with quantity fixing that offer different forms of flexibility including pricing flexibility and quantity flexibility. Second, we address a long‐time debate in both academia and practice on whether RPM is anti‐competitive in a market when two retailers compete on both price and sales effort. We show that depending on the relative intensity of price competition and sales effort competition, RPM may lead to higher or lower retail prices compared to a two‐part tariff contract, which specifies a wholesale price and a fixed fee. Further, the impact of RPM on price competition and sales effort competition is always opposite to each other. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006     

Trade credit contract in the presence of retailer investment opportunity

This paper presents a model for designing a trade credit contract between a supplier and a retailer that would coordinate a supply chain in the presence of investment opportunity for the retailer. Specifically, we study a newsvendor model where the supplier offers a trade credit contract to the retailer who, by delaying the payment, can invest the accounts payable amount and earn returns. We find that when the channel partners have symmetric information about the retailer's investment return, a conditionally concessional trade credit (CTC) contract, which includes a wholesale price, an interest‐free period, and a minimum order requirement, can achieve channel coordination. We then extend the model to the information asymmetry setting in which the retailer's investment return is unobservable by the supplier. We show that, although the CTC contract cannot achieve the coordination in this setting, it can effectively improve channel efficiency as well as profitability for individual partners.     

Assessing the value of demand sharing in supply chains

We consider the problem of assessing the value of demand sharing in a multistage supply chain in which the retailer observes stationary autoregressive moving average demand with Gaussian white noise (shocks). Similar to previous research, we assume each supply chain player constructs its best linear forecast of the leadtime demand and uses it to determine the order quantity via a periodic review myopic order‐up‐to policy. We demonstrate how a typical supply chain player can determine the extent of its available information in the presence of demand sharing by studying the properties of the moving average polynomials of adjacent supply chain players. The retailer's demand is driven by the random shocks appearing in the autoregressive moving average representation for its demand. Under the assumptions we will make in this article, to the retailer, knowing the shock information is equivalent to knowing the demand process (assuming that the model parameters are also known). Thus (in the event of sharing) the retailer's demand sequence and shock sequence would contain the same information to the retailer's supplier. We will show that, once we consider the dynamics of demand propagation further up the chain, it may be that a player's demand and shock sequences will contain different levels of information for an upstream player. Hence, we study how a player can determine its available information under demand sharing, and use this information to forecast leadtime demand. We characterize the value of demand sharing for a typical supply chain player. Furthermore, we show conditions under which (i) it is equivalent to no sharing, (ii) it is equivalent to full information shock sharing, and (iii) it is intermediate in value to the two previously described arrangements. Although it follows from existing literature that demand sharing is equivalent to full information shock sharing between a retailer and supplier, we demonstrate and characterize when this result does not generalize to upstream supply chain players. We then show that demand propagates through a supply chain where any player may share nothing, its demand, or its full information shocks (FIS) with an adjacent upstream player as quasi‐ARMA in—quasi‐ARMA out. We also provide a convenient form for the propagation of demand in a supply chain that will lend itself to future research applications. © 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 515–531, 2014     

Supply licensing when the manufacturer strategically commits to invest in R&D

This article proposes a strategic reason for a proprietary component supplier to license her technology to a competitor or a manufacturer: her anticipation of the manufacturer's strategic commitment to invest in research and development (R&D). We address this phenomenon with a game theoretic model. Our results show that the manufacturer's full commitment to invest in R&D enables the supplier to license, sell a larger quantity through the supply chain, and charge lower prices. These results are robust to the type of demand uncertainty faced by the manufacturer within the class of increasing generalized failure rate distributions. © 2014 Wiley Periodicals, Inc. Naval Research Logistics 61: 341–350, 2014     

Contracts and coordination: Supply chains with uncertain demand and supply

Considering a supply chain with a supplier subject to yield uncertainty selling to a retailer facing stochastic demand, we find that commonly studied classical coordination contracts fail to coordinate both the supplier's production and the retailer's procurement decisions and achieve efficient performance. First, we study the vendor managed inventory (VMI) partnership. We find that a consignment VMI partnership coupled with a production cost subsidy achieves perfect coordination and a win‐win outcome; it is simple to implement and arbitrarily allocates total channel profit. The production cost subsidy optimally chosen through Nash bargaining analysis depends on the bargaining power of the supplier and the retailer. Further, motivated by the practice that sometimes the retailer and the supplier can arrange a “late order,” we also analyze the behavior of an advance‐purchase discount (APD) contract. We find that an APD with a revenue sharing contract can efficiently coordinate the supply chain as well as achieve flexible profit allocation. Finally, we explore which coordination contract works better for the supplier vs. the retailer. It is interesting to observe that Nash bargaining solutions for the two coordination contracts are equivalent. We further provide recommendations on the applications of these contracts. © 2016 Wiley Periodicals, Inc. Naval Research Logistics 63: 305–319, 2016     

Coordination mechanisms for a three‐stage reverse supply chain to increase profitable returns

In this article, we consider a generic electronic product that can be remanufactured or recycled at the end of its life cycle to generate new profit. We first describe the product return process and then present a customer segmentation model to capture consumers' different behaviors with respect to product return so that the retailer can work more effectively to increase the return volume. In regard to the collaboration between the retailer and the manufacturer, we explore a revenue‐sharing coordination mechanism for achieving a win‐win outcome. The optimality and sensitivity of the critical parameters in four strategies are obtained and examined both theoretically and numerically, which generate insights on how to manage an efficient consumer‐retailer‐manufacturer reverse supply chain, as well as on the feasibility of simplifying such a three‐stage chain structure. © 2012 Wiley Periodicals, Inc. Naval Research Logistics, 2013     

Impact of transfer pricing methods for tax purposes on supply chain performance under demand uncertainty

Transfer pricing refers to the pricing of an intermediate product or service within a firm. This product or service is transferred between two divisions of the firm. Thus, transfer pricing is closely related to the allocation of profits in a supply chain. Motivated by the significant impact of transfer pricing methods for tax purposes on operational decisions and the corresponding profits of a supply chain, in this article, we study a decentralized supply chain of a multinational firm consisting of two divisions: a manufacturing division and a retail division. These two divisions are located in different countries under demand uncertainty. The retail division orders an intermediate product from the upstream manufacturing division and sets the retail price under random customer demand. The manufacturing division accepts or rejects the retail division's order. We specifically consider two commonly used transfer pricing methods for tax purposes: the cost‐plus method and the resale‐price method. We compare the supply chain profits under these two methods. Based on the newsvendor framework, our analysis shows that the cost‐plus method tends to allocate a higher percentage of profit to the retail division, whereas the resale‐price method tends to achieve a higher firm‐wide profit. However, as the variability of demand increases, our numerical study suggests that the firm‐wide and divisional profits tend to be higher under the cost‐plus method than they are under the resale‐price method. © 2013 Wiley Periodicals, Inc. Naval Research Logistics, 2013     

Supply contracts in manufacturer‐retailer interactions with manufacturer‐quality and retailer effort‐induced demand

We consider a decentralized distribution channel where demand depends on the manufacturer‐chosen quality of the product and the selling effort chosen by the retailer. The cost of selling effort is private information for the retailer. We consider three different types of supply contracts in this article: price‐only contract where the manufacturer sets a wholesale price; fixed‐fee contract where manufacturer sells at marginal cost but charges a fixed (transfer) fee; and, general franchise contract where manufacturer sets a wholesale price and charges a fixed fee as well. The fixed‐fee and general franchise contracts are referred to as two‐part tariff contracts. For each contract type, we study different contract forms including individual, menu, and pooling contracts. In the analysis of the different types and forms of contracts, we show that the price only contract is dominated by the general franchise menu contract. However, the manufacturer may prefer to offer the fixed‐fee individual contract as compared to the general franchise contract when the retailer's reservation utility and degree of information asymmetry in costs are high. © 2008 Wiley Periodicals, Inc. Naval Research Logistics, 2008     

Allocation with demand competition: Uniform,proportional, and lexicographic mechanisms

We examine capacity allocation mechanisms in a supply chain comprising a monopolistic supplier and two competing retailers with asymmetric market powers. The supplier allocates limited capacity to retailers according to uniform, proportional, or lexicographic mechanism. We study the impact of these allocation mechanisms on supplier pricing decisions and retailer ordering behavior. With individual order size no greater than supplier capacity, we show that all three mechanisms guarantee equilibrium ordering. We provide precise structures of retailer ordering decisions in Nash and dominant equilibria. Further, we compare the mechanisms from the perspective of the supplier, the retailers, and the supply chain. We show that regardless of whether retailer market powers are symmetric, lexicographic allocation with any priority sequence of retailers is better than the other two mechanisms for the supplier. Further, under lexicographic allocation, the supplier gains more profit by granting higher priority to the retailer with greater market power. We also extend our study to the case with multiple retailers. © 2017 Wiley Periodicals, Inc. Naval Research Logistics 64: 85–107, 2017     

Contractual agreements for coordination and vendor‐managed delivery under explicit transportation considerations

We consider the coordination problem between a vendor and a buyer operating under generalized replenishment costs that include fixed costs as well as stepwise freight costs. We study the stochastic demand, single‐period setting where the buyer must decide on the order quantity to satisfy random demand for a single item with a short product life cycle. The full order for the cycle is placed before the cycle begins and no additional orders are accepted by the vendor. Due to the nonrecurring nature of the problem, the vendor's replenishment quantity is determined by the buyer's order quantity. Consequently, by using an appropriate pricing schedule to influence the buyer's ordering behavior, there is an opportunity for the vendor to achieve substantial savings from transportation expenses, which are represented in the generalized replenishment cost function. For the problem of interest, we prove that the vendor's expected profit is not increasing in buyer's order quantity. Therefore, unlike the earlier work in the area, it is not necessarily profitable for the vendor to encourage larger order quantities. Using this nontraditional result, we demonstrate that the concept of economies of scale may or may not work by identifying the cases where the vendor can increase his/her profits either by increasing or decreasing the buyer's order quantity. We prove useful properties of the expected profit functions in the centralized and decentralized models of the problem, and we utilize these properties to develop alternative incentive schemes for win–win solutions. Our analysis allows us to quantify the value of coordination and, hence, to identify additional opportunities for the vendor to improve his/her profits by potentially turning a nonprofitable transaction into a profitable one through the use of an appropriate tariff schedule or a vendor‐managed delivery contract. We demonstrate that financial gain associated with these opportunities is truly tangible under a vendor‐managed delivery arrangement that potentially improves the centralized solution. Although we take the viewpoint of supply chain coordination and our goal is to provide insights about the effect of transportation considerations on the channel coordination objective and contractual agreements, the paper also contributes to the literature by analyzing and developing efficient approaches for solving the centralized problem with stepwise freight costs in the single‐period setting. © 2006 Wiley Periodicals, Inc. Naval Research Logistics, 2006     

Should competing firms reveal their capacity?

In this article, we explore when firms have an incentive to hide (or reveal) their capacity information. We consider two firms that aim to maximize profits over time and face limited capacity. One or both of the firms have private information on their own capacity levels, and they update their beliefs about their rival's capacity based on their observation of the other firm's output. We focus on credible revelation mechanisms—a firm may signal its capacity through overproduction, compared to its myopic production levels. We characterize conditions when high‐capacity firms may have the incentive and capability to signal their capacity levels by overproduction. We show that prior beliefs about capacity play a crucial, and surprisingly complex, role on whether the firm would prefer to reveal its capacity or not. A surprising result is that, despite the fact that it may be best for the high‐capacity firm to overproduce to reveal its capacity when capacity information is private, it may end up with more profits than if all capacity information were public knowledge in the first place. © 2013 Wiley Periodicals, Inc. Naval Research Logistics, 2013