Showing papers by "Fuqiang Zhang published in 2016"

To Share or Not to Share: Demand Forecast Sharing in a Distribution Channel

Abstract: This paper studies information sharing in a distribution channel where the manufacturer possesses better demand-forecast information than the downstream retailer. We examine three information-sharing formats: no information sharing (i.e., the manufacturer ex ante commits to not sharing its forecast), voluntary information sharing (i.e., the manufacturer makes the sharing decision ex post after receiving the forecast), and mandatory information sharing (i.e., the manufacturer is mandated to share its forecast). We characterize the equilibrium outcomes under the three sharing formats and investigate the firms’ preferences regarding these formats. It is shown that when the retailer is risk-neutral, both firms are indifferent between voluntary and mandatory sharing. Among the three formats, ex ante, the retailer prefers the no-sharing format whereas the manufacturer prefers the mandatory-sharing format. In addition, we find that a more accurate forecast benefits both firms under voluntary- and mandatory-shari...

Contracting for On-Time Delivery in the U.S. Influenza Vaccine Supply Chain

Abstract: Although influenza vaccine shortage is often attributed to low supply, it has been observed that even with abundant supply, a major shortage can still occur because of late delivery. In this paper, motivated by the influenza vaccine industry, we study a supply chain contracting problem in the presence of uncertainties surrounding design, delivery, and demand of the influenza vaccine. In this supply chain, a manufacturer has insufficient incentive to initiate at-risk early production prior to the design freeze because it is a retailer who reaps the most benefits from selling more vaccines delivered on time. Anticipating that late delivery will lead to potential loss in demand, the retailer tends to reduce the order size, which further discourages the manufacturer from making an effort to improve its delivery performance. To break this negative feedback loop, a supply contract needs to achieve two objectives: incentivize at-risk early production and eliminate double marginalization. We find that two commonly observed supply contracts in practice, the delivery-time-dependent quantity flexibility (D-QF) contract and the late-rebate (LR) contract, may fail to coordinate the supply chain because of the tension between these two objectives. To resolve such a tension, we construct a buyback-and-late-rebate (BLR) contract and show that a properly designed BLR contract can not only coordinate the supply chain but also can provide full flexibility of profit division between members of the supply chain. Numerical experiments further demonstrate that the BLR contract significantly improves supply chain efficiency compared to the contracts used in the industry.

Delegation vs. Control in Supply Chain Procurement under Competition

Abstract: This paper studies the optimal component procurement strategies of two competing OEMs selling substitutable products. The OEMs outsource their production to a common contract manufacturer, who in turn needs an input from a component supplier. Each OEM may either directly procure the input from the component supplier, or delegate the procurement task to the contract manufacturer. We first analyze the OEMs' procurement game under a non-strategic supplier whose component price is exogenously given. It is found that symmetric equilibria arise for most situations, that is, both OEMs either control or delegate their component procurement in equilibrium. Interestingly, despite the commonly-held belief that the contract manufacturer would be worse off as OEMs gain component procurement control, we show that the contract manufacturer may enjoy a higher profit. Then we study the OEMs' procurement game under a strategic supplier who can set its component price. We find that the supplier's strategic pricing behavior plays a critical role in the equilibrium procurement structure. In particular, in the equilibrium under strategic supplier, the larger OEM always uses delegation while the smaller OEM may use either delegation or control. By identifying the driving forces behind the OEMs' procurement choices, this research helps explain observed industry practices and offer useful guidelines for firms' component sourcing decisions. [ABSTRACT FROM AUTHOR]

Service Outsourcing: Capacity, Quality and Correlated Costs

Abstract: This paper studies how to design service outsourcing contracts to ensure fast, quality services from an independent service provider. The outsourcer does not have perfect information about either the service provider's capacity cost (i.e., cost for providing fast service), or her quality cost (i.e., cost of achieving a high quality level). Moreover, the two unknown costs may be correlated with each other. We solve for the outsourcer's optimal outsourcing contract, and show that the structure of the optimal contract depends on the relationship between the costs. Specifically, we highlight the following observations when the two costs are negatively correlated: First, under certain conditions, the outsourcer may be able to squeeze the supplier's profit (information rent) to zero for an intermediate range of cost realizations; second, it is possible that the service supply chain is coordinated by using the outsourcer's optimal contract. We then examine the performance of two classes of commonly observed contracts that are relatively simple to implement. It has been found that these simple contracts generally perform well when the costs are positively correlated, but they could perform much worse when the costs are negatively correlated. Our results therefore caution outsourcing companies that the potential trade-off between capacity cost and quality cost may require a careful design of outsourcing contracts.

3D Printing vs. Traditional Flexible Technology: Implications for Manufacturing Strategy

Abstract: We study a firm's manufacturing strategy under two types of flexible production technologies: the traditional flexible technology and 3D printing. Under the traditional flexible technology, capacity becomes more expensive as it handles more product variants; under 3D printing, however, capacity cost is independent of the number of product variants processed. The firm adopts a dedicated technology and one type of flexible technology, either the traditional one or 3D printing. It needs to choose an assortment from a potential set of variants, assigns each chosen variant to a production technology, and finally invests in capacities. We first establish that the optimal assortment must contain a number of the most popular variants from the potential set. Based on the variants' popularity rankings, we find that the optimal technology assignment can follow an unexpected reversed structure under the traditional flexible technology, while the optimal assignment always follows an ordered structure under 3D printing. Surprisingly, we find that adopting the traditional flexible technology in addition to the dedicated one may reduce product variety chosen by the firm. 3D printing, by contrast, always enhances product variety. Furthermore, 3D printing allows the firm to choose a much larger assortment than optimal without significant profit loss. These results demonstrate that the rising 3D printing has significantly different implications for firms' assortment and production strategy than the traditional flexible technology.

Strategic Sourcing Under Competition and Asymmetric Cost Information

Abstract: Driven by increasing costs in the traditionally-regarded low-cost manufacturing bases (e.g., China), many firms have started to outsource their production to the regions of even lower costs (e.g., Southeast Asia). However, a new environment may involve higher cost uncertainty and severer information asymmetry. Motivated by these observations, we study a sourcing game where competing firms choose between a supplier with certain cost (C-supplier) and a supplier with potentially lower but uncertain cost (U-supplier). We find that a larger market size will make firms favor C-supplier more despite its higher average cost. However, the effect of cost uncertainty is ambiguous: Reducing the cost uncertainty may either improve or reduce the attractiveness of U-supplier, depending on the current uncertainty level. The intensity of competition may also influence the firms' sourcing choice: More intense competition will make the diversified sourcing strategy more likely to be chosen if the cost uncertainty of U-supplier is sufficiently large; otherwise, intensified competition can favor either C-supplier or U-supplier. Interestingly, it has been found that increasing the cost of C-supplier (e.g., a cost hike in China) may make both sourcing firms better off because it can lead to a new sourcing equilibrium. Finally, this paper contributes to the mechanism design literature by showing that the direction of quantity distortion under the optimal competitive mechanism differs from that under the traditional monopolistic setting.