Showing papers by "Fuqiang Zhang published in 2014"

Home or Overseas? An Analysis of Sourcing Strategies Under Competition

Abstract: Motivated by the recent backshoring trend, this paper studies a sourcing game where competing firms may choose between efficient sourcing e.g., sourcing from overseas and responsive sourcing e.g., sourcing from a home country. Efficient sourcing usually provides a cost advantage, whereas responsive sourcing allows a firm to obtain more accurate demand information when making procurement decisions. By characterizing the equilibrium outcome, we find some interesting results driven by the strategic interaction between the firms. First, a firm may still use efficient sourcing in equilibrium even when the cost advantage associated with efficient sourcing does not exist. This is because the firm can dampen competition by reducing the correlation between its own demand information and the competitor's. Second, a cost hike in efficient sourcing e.g., the rising labor cost in Asia may benefit all the firms in the industry. The reason is that the cost hike may alleviate competition by inducing a new equilibrium sourcing structure. This paper also sheds some light on the recent backshoring trend. First, our analysis indicates that more firms will shift from efficient sourcing to responsive sourcing in equilibrium i.e., backshore if the market size shrinks, the demand becomes more volatile, or the sourcing costs rise simultaneously. Second, a firm's backshoring behavior reduces the competition on the cost dimension, but it also has an ambiguous informational impact on the other firms in the market. In particular, some firms may benefit from increased correlation of their demand information under Cournot competition with substitutable products. Overall, the backshoring behavior can be beneficial to all the firms sticking to their original sourcing strategies under certain conditions. This paper was accepted by Martin Lariviere, operations management.

Outsourcing Competition and Information Sharing with Asymmetrically Informed Suppliers

Abstract: This paper studies an outsourcing problem where two service providers (suppliers) compete for the service contract from a client. The suppliers face uncertain cost for providing the service because they do not have perfect information about the client's type. The suppliers receive differential private signals about the client type and thus compete under asymmetric information. We first characterize the equilibrium of the supplier competition. Then we investigate two of the client's information sharing decisions. It is shown that less information asymmetry between the suppliers may dampen their competition. Therefore, the client does not necessarily have the incentive to reduce information asymmetry between the suppliers. We characterize the conditions under which leveling the informational ground is beneficial to the client. We also find that under the presence of information asymmetry (e.g., when the suppliers have different learning abilities), sharing more information with both suppliers may enhance the advantage of one supplier over the other and at the same time increase the upper bound of the suppliers' quotes in equilibrium. Consequently, the suppliers compete less aggressively and the client's payoff decreases in the amount of shared information. The findings from this study provide useful managerial implications on information management for outsourcing firms.

The Impact of Modular Assembly on Supply Chain Efficiency

Abstract: This article studies the impact of modular assembly on supply chain efficiency. In the modular assembly approach, a manufacturer acquires pre-assembled modules from its suppliers, rather than the individual components, as in the traditional assembly approach. We analyze the competitive behavior of a two-stage modular assembly system consisting of a manufacturer, and a supplier who pre-assembles two components into a module. The firms can choose their own inventory policies and we show the existence of Nash equilibrium in the inventory game. Moving from the traditional to the modular approach has a twofold effect on the supply chain. First, we investigate the effect of centralizing the component suppliers. It can be shown that when there is no production time shift, the module supplier always holds more component inventories than suppliers do in the traditional approach, which yields a lower cost for the manufacturer. However, the suppliers, and therefore the supply chain may incur a higher cost in the modular approach. Second, we study the effect of a shift in production time from the manufacturing stage to the supplier stage. From numerical studies, it has been found that such a lead time shift always benefits a centralized supply chain, but not necessarily so for a decentralized system. Combining the two effects, we find that the modular approach generally reduces the cost to the manufacturer and the supply chain, which explains the prevalence of modular assembly from the perspective of inventory management. These results also provide some insight into how firms can improve supply chain efficiency by choosing the right decision structure and lead time configuration.

An Empirical Investigation of Dynamic Ordering Policies

Abstract: Adaptive base stock policy is a well-known tool for managing inventories in non-stationary demand environments. This paper presents empirical tests of this policy using aggregate, firm-level data. First, we extend a single-item adaptive base stock policy in previous literature to a multi-item case. Second, we transform the policy derived for the multi-item case to a regression model that relates firm-level inventory purchases to firm-level sales and changes in sales forecasts. We focus on two research questions: Can the adaptive base stock policy explain cross-sectional ordering behaviors under sales growth? To the extent that the adaptive base stock policy fails to explain ordering behaviors under sales growth, are there frictions that explain such a finding? Our empirical results demonstrate disparities in ordering behaviors between firms experiencing high and moderate sales growth. Contrary to theoretical prediction, this implies inventory purchases are a function of not only current sales and changes in sales forecasts, but also past sales growth. As potential explanations for this departure from theoretical prediction, we show that both future demand dynamics and inventory holding risks depend on past sales growth. In addition, we find that firms' inventory holding risks may also be affected by purchasing constraints imposed by supply chain contracts. Our results provide managerial implications for practitioners and inform future theoretical research.