RFID (Radio-Frequency Identification) technology has shown itself to be a promising technology to track movements of goods in a supply chain. As such, it can give unprecedented visibility to the supply chain. Such visibility can save labor cost, improve supply chain coordination, reduce inventory and increase product availability. Industry reports and white papers are now filled with estimates and proclamations of the benefits and quantified values of RFID. Early adopters are now rallying more and more followers. However, most such claims are educated guesses at best and are not substantiated, that is, they are not based on detailed, model-based analysis. This paper argues that there is a huge credibility gap of the value of RFID, and that a void exists in showing how the proclaimed values are arrived at, and how those values can be realized. The paper shows that this credibility gap must be filled with solid model analysis, and therefore presents a great opportunity for the Production and Operations Management (POM) research community. The paper reviews some of the ongoing research efforts that attempt to close the credibility gap, and suggests additional directions for further strengthening the POM's contribution to help industry realize the full potentials of RFID.

/pdf/unlocking-the-value-of-rfid-y7l2dfvsue.pdf

Unlocking the Value of RFID

Performance-based contracting is reshaping service support supply chains in capital-intensive industries such as aerospace and defense. Known as “power by the hour” in the private sector and as “performance-based logistics” (PBL) in defense contracting, it aims to replace traditionally used fixed-price and cost-plus contracts to improve product availability and reduce the cost of ownership by tying a supplier's compensation to the output value of the product generated by the customer (buyer).

To analyze implications of performance-based relationships, we introduce a multitask principal-agent model to support resource allocation and use it to analyze commonly observed contracts. In our model the customer (principal) faces a product availability requirement for the “uptime” of the end product. The customer then offers contracts contingent on availability to n suppliers (agents) of the key subsystems used in the product, who in turn exert cost reduction efforts and set spare-parts inventory investment levels. We show that the first-best solution can be achieved if channel members are risk neutral. When channel members are risk averse, we find that the second-best contract combines a fixed payment, a cost-sharing incentive, and a performance incentive. Furthermore, we study how these contracts evolve over the product deployment life cycle as uncertainty in support cost changes. Finally, we illustrate the application of our model to a problem based on aircraft maintenance data and show how the allocation of performance requirements and contractual terms change under various environmental assumptions.

/pdf/performance-contracting-in-after-sales-service-supply-chains-z32p6zeaws.pdf

Performance Contracting in After-Sales Service Supply Chains

This paper studies government subsidies for green technology adoption while considering the manufacturing industry’s response. Government subsidies offered directly to consumers impact the supplier’s production and pricing decisions. Our analysis expands the current understanding of the price-setting newsvendor model, incorporating the external influence from the government, who is now an additional player in the system. We quantify how demand uncertainty impacts the various players (government, industry, and consumers) when designing policies. We further show that, for convex demand functions, an increase in demand uncertainty leads to higher production quantities and lower prices, resulting in lower profits for the supplier. With this in mind, one could expect consumer surplus to increase with uncertainty. In fact, we show that this is not always the case and that the uncertainty impact on consumer surplus depends on the trade-off between lower prices and the possibility of underserving customers with h...

/pdf/the-impact-of-demand-uncertainty-on-consumer-subsidies-for-371af9lexz.pdf

The Impact of Demand Uncertainty on Consumer Subsidies for Green Technology Adoption

Supply chain contracting and the use of information are undoubtedly two critical and influential areas in modern supply chain management. However, relatively little is known about supply chain cont...

A review on supply chain contracting with information considerations: information updating and information asymmetry

This paper addresses the concept of quality risk in outsourcing. Recent trends in outsourcing extend a contract manufacturer's (CM's) responsibility to several functional areas such as research and development and design in addition to manufacturing. This trend enables an original equipment manufacturer (OEM) to focus on sales and pricing of its product. However, increasing CM responsibilities also suggest that the OEM's product quality is mainly determined by its CM. We identify two factors that cause quality risk in this outsourcing relationship. First, the CM and the OEM may not be able to contract on quality; second, the OEM may not know the cost of quality to the CM. We characterize the effects of these two quality risk factors on the firms' profits and on the resulting product quality. We determine how the OEM's pricing strategy affects quality risk. We show, for example, that the effect of noncontractible quality is higher than the effect of private quality cost information when the OEM sets the sales price after observing the product's quality. We also show that committing to a sales price mitigates the adverse effect of quality risk. To obtain these results, we develop and analyze a three-stage decision model. This model is also used to understand the impact of recent information technologies on profits and product quality. For example, we provide a decision tree that an OEM can use in deciding whether to invest in an enterprise-wide quality management system that enables accounting of quality related activities across the supply chain.

https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1442908_code999133.pdf?abstractid=1121444&mirid=3

Quality Risk in Outsourcing: Noncontractible Product Quality and Private Quality Cost Information

We study the important problem of how a supplier should optimally share the consequences of demand uncertainty (i.e., the cost of inventory excesses and shortages) with a retailer in a two-level supply chain facing a finite planning horizon. In particular, we characterize a multiperiod contract form, the promised lead-time contract, that reduces the supplier's risk from demand uncertainty and the retailer's risk from uncertain inventory availability. Under the contract terms, the supplier guarantees on-time delivery of complete orders of any size after the promised lead time. We characterize the optimal promised lead time and the corresponding payments that the supplier should offer to minimize her expected inventory cost, while ensuring the retailer's participation. In such a supply chain, the retailer often holds private information about his shortage cost (or his service level to end customers). Hence, to understand the impact of the promised lead-time contract on the supplier's and the retailer's performance, we study the system under local control with full information and local control with asymmetric information. By comparing the results under these information scenarios to those under a centrally controlled system, we provide insights into stock positioning and inventory risk sharing. We quantify, for example, how much and when the supplier and the retailer overinvest in inventory as compared to the centrally controlled supply chain. We show that the supplier faces more inventory risk when the retailer has private service-level information. We also show that a supplier located closer to the retailer is affected less by information asymmetry. Next, we characterize when the supplier should optimally choose not to sign a promised lead-time contract and consider doing business under other settings. In particular, we establish the optimality of a cutoff level policy. Finally, under both full and asymmetric service-level information, we characterize conditions when optimal promised lead times take extreme values of the feasible set, yielding the supplier to assume all or none of the inventory risk---hence the name all-or-nothing solution. We conclude with numerical examples demonstrating our results.

http://www.utdallas.edu/~oozer/pdf/Ozer-Lutze_PLT_OperationsResearch.pdf

Holly Lutze

Papers

Promised Lead-Time Contracts Under Asymmetric Information