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In recent years, there has been an increasing trend in supply chains to employ a "control tower" approach to improve supply chain performance. One such strategy is customer-managed inventory (CMI) in which the customer (the downstream party) controls the inventory of the supplier (the upstream party). However, the optimal design of the inventory control policy and the required incentive structure for CMI has not been fully explored in the related literature. In this paper, we develop a two-echelon model consisting of a supplier and a customer that captures the interaction between both decision makers. Analysis of this model indicates that achieving the potential benefits of CMI requires suitable incentive mechanisms to be put in place. The two-echelon inventory system model, however, does not give closed-form solutions, which are required to generate an optimal solution to the inventory control and incentive problem. To address this challenge, we propose an approximate model, which decouples the two-echelon model into two newsvendor-type models with each party operating a single-echelon system. This approximate model requires the introduction of additional cost parameters so that the decoupled model captures the cost implications of supplier shortages in the original two-echelon model. By developing appropriate values for these cost parameters, the approximate model yields near optimal results. Analysis of the solution reveals important operational factors that determine which environments are conducive for CMI and conditions for Pareto improvement of all stakeholders. This paper was accepted by Jayashankar Swaminathan, operations management. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.03658. [ABSTRACT FROM AUTHOR]

Using textual analysis techniques, including seeded word embedding and bag-of-words-based content analysis, I develop a firm-level measure of supply chain risk exposure from a novel source of unstructured data—the discussion between managers and equity analysts on supply chain-related topics during firms' quarterly earnings conference calls. I validate the measure by showing that (1) the measure exhibits intuitive variations over time and across firms, successfully capturing both routine and systematic supply chain risk events; and (2) the measure is about risk exposure, as it significantly correlates with realized and options-implied stock return volatility, even after controlling for well-known aggregate risk measures. I then demonstrate that the measure is specifically indicative of the supply chain component of risk exposure. (3) Consistent with theoretical predictions, firms facing higher supply chain risks have higher inventory buffers, particularly in raw materials and intermediate inputs, increased cash holdings in lieu of investments, and significantly lower trade credit received from suppliers. Moreover, (4) during unexpected risk episodes, such as the Tohoku earthquake, firms with higher ex ante risk exposure have worse operating and financial performance. These results indicate that the text-based measure provides a credible quantification of firm-level exposure to supply chain risks and can thus be reliably utilized as outcome or explanatory variables in empirical supply chain research. This paper was accepted by Jeannette Song, operations management. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4927. [ABSTRACT FROM AUTHOR]

Acquisition announcements coincide with upward value revisions for the target firms' technology peers, which are not due to economic relations based on product market, supply chain, or geographical location. Such a phenomenon is robust across subsample periods, not specific to merger or technology waves, and not related to product-market structure and the unique innovation features of certain technology-intensive industries. Firms experience more dramatic value revisions when they have deeper technology overlaps with their targets, are more dependent on technology, or when a transaction features higher premium or greater technology overlap between the acquirer and target. Our mechanism analysis provides evidence that is primarily consistent with the acquisition-probability hypothesis whereby acquisition announcements elevate expected technology synergies and merger prospects for peers and partially in line with the enhanced-investment hypothesis that peers' revaluations correlate with increased technology investments. We do not find any evidence in line with the competition-balance hypothesis that attributes peers' value revisions to the change in industrial competition intensity. Overall, our results demonstrate that acquisition announcements disseminate novel information about the value of technology that is of common interest among firms with close technologies. This paper was accepted by Gustavo Manso, finance. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2023.4890. [ABSTRACT FROM AUTHOR]

Several features of automotive procurement distinguish it from the prototypical supply chain in the academic literature: pass-through pricing that reimburses suppliers for raw material costs, market frictions that prohibit cost transparency and imbue suppliers with pricing power, and contractual commitments that span multiple production periods. In this context, we formalize a procurement model by considering an automaker that buys components from an upstream supplier to assemble cars over several production periods in an environment where period demands and raw material costs are both stochastic. Our paper clarifies how information asymmetry and market factors that amplify or weaken this asymmetry affect the firms' procurement protocol preferences. Then, using proprietary contract and supplier data from BMW, we empirically validate this model and show that it reflects BMW's reality: the factors that should theoretically go into automotive procurement decisions do so. Our analysis also reveals that existing contracting protocols in this context are not optimal for procurement under asymmetric information, and so we propose an alternative contracting method. We calibrate our model and estimate an automaker's performance improvement from this optimal contract over the status quo. This paper was accepted by Vishal Gaur, operations management. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2023.4880. [ABSTRACT FROM AUTHOR]

We deal with the problem of managing a project or a complex operational process by controlling the execution pace of the activities it comprises. We consider a setting in which these activities are clearly defined, are subject to precedence constraints, and progress randomly. We formulate a discrete-time, infinite-horizon Markov decision process in which the manager reviews progress in each period and decides which activities to expedite to balance expediting costs with delay costs. We derive structural properties for this dynamic project expediting problem. These enable us then to devise exact solution methods that we show to reduce computational burden significantly. We illustrate how our method generalizes and can be used to tackle a wide range of so-called stochastic shortest-path problems that are characterized by an intuitive property and can capture other applications, including medical decision-making and disease-modeling problems. Moreover, we also deal with the state identification issue for our problem, which is a challenging task in and of itself, owing to precedence constraints. We complement our analytical results with numerical experiments, demonstrating that both our solution and state identification methods significantly outperform extant methods for a supply chain example and for various randomly generated instances. This paper was accepted by Chung Piaw Teo, optimization. Funding: R. Mogre acknowledges support from the U.S.-UK Fulbright Commission and the Lloyd's Tercentenary Research Foundation through the Fulbright-Lloyd's Scholar Award, which allowed him to spend an extended period of time at Massachusetts Institute of Technology. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4876. [ABSTRACT FROM AUTHOR]

Companies that are investing in blockchain technology to enhance supply chain transparency face challenges in fostering collaborations with others and deciding what information to share. Transparency over the actions of supply chain partners can improve operational decisions, but sharing own data on the blockchain can put firms at a competitive disadvantage. In this paper, we investigate the resulting questions of when blockchain should be adopted in a supply chain and how it should be designed by analyzing two ways that it can enhance supply chain transparency: making the manufacturer's sourcing cost transparent to the buyers (i.e., vertical cost transparency) and making the ordering status of buyers transparent to each other (i.e., horizontal order transparency). Given such transparency, firms can design a smart contract that automates transactions contingent on the revealed information and enables them to realize better equilibrium outcomes. We find that blockchain increases supply chain profit only when the manufacturer's capacity is large and decreases supply chain profit otherwise. If the capacity is sufficiently large to eliminate the buyers' competition, blockchain leads to a win–win–win and the incentives of all participants are naturally aligned. If the capacity is only moderately large, the manufacturer needs to compensate the buyers to facilitate a blockchain implementation. However, if the capacity is small, horizontal order transparency enabled by the blockchain mitigates the buyers' overorder incentive to compete for the manufacturer's capacity and increases double marginalization. For such cases, we show that a blockchain that only enables vertical cost transparency should (and can) still be adopted in a range of small capacity cases, and we propose an access control layer for the logistics data to implement such a blockchain. This paper was accepted by David Simchi-Levi, operations management. Funding: J. Liu was supported by the National Natural Science Foundation of China [Grant 72101110] and The MOE (Ministry of Education in China) Project of Humanities and Social Sciences [Grant 20YJC630084]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2023.4851. [ABSTRACT FROM AUTHOR]

Because of many firms' lack of collateral, banks have imposed loan limits as a form of risk-control regulations of bank financing. In response, loan insurance has emerged as a useful instrument to lift loan limits. To study the joint value of bank loans and loan insurance, this article investigates a supply chain composed of one supplier and one capital-constrained buyer who takes out a bank loan and potentially purchases loan insurance. The analysis reveals that both the supplier and the buyer can benefit from the bank financing with loan insurance in an insurance-cooperation region wherein the supplier is willing to reduce the wholesale price to entice the buyer to purchase insurance. Further still, in the insurance-cooperation region, worse contract terms of the bank loan benefit the supplier, whereas worse policy terms of loan insurance help the buyer. Such benefits can lead to a higher order quantity than the capital-abundant one and partially coordinate the entire supply chain. However, when production cost is low, the supplier and the buyer can encounter a Stackelberg prisoner's dilemma, in which both firms no longer cooperate with each other, and both are worse off. Nevertheless, a government subsidy for the insurance premium can not only reduce the Stackelberg prisoner's dilemma, but also improve the social welfare although it is not always optimal for the government to provide that subsidy. The main qualitative results are robust in a variety of extensions. This paper was accepted by Jayashankar Swaminathan, operations management. Funding: The first author acknowledges support from the National Natural Science Foundation of China (NSFC) [Grant 72171162] and the Humanity and Social Science Youth Foundation of Ministry of Education of China [Grant 20YJC630148], and the second author acknowledges support from the NSFC [Grant 72232001]. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4827. [ABSTRACT FROM AUTHOR]

Is it feasible to build desalination plants for the coproduction of salt and fresh water from U.S. seawater that could lead to a restructuring of supply chains for salt imports? As it is predicted that climate change will increase water stress worldwide, an increasing number of countries are using desalination plants to generate fresh water. In most such cases, residual concentrates must be disposed of, and the disposal cost is increasing as countries are becoming more environmentally conscious. Selective salt recovery can help to alleviate this issue as it reduces the need for concentrate disposal and generates additional revenue. To gain some insights into the costs and benefits of coproduction plants, we have collected data on current desalination practices and salt imports in the United States along with the manufacturing costs and energy requirements for coproduction plants. We have used this data to build an optimization model to determine an optimal number and location of coproduction plants in the United States and their potential markets for the sale of coproduced salt. In our analysis, we consider a different total number of coproduction facilities, and for each configuration, we evaluate the resulting net water cost and carbon emissions impact. Our results indicate that there exists the potential for building several coproduction plants in the United States that would be both financially competitive with existing desalination plants and lead to a reduction in carbon emissions. This information might be of use to both governments and businesses when they make decisions about the type of desalination facilities built and the implemented "polluter pays" policies. This paper was This paper was accepted by Beril Toktay, Special Section of Management Science on Business and Climate Change. Supplemental Material: Data are available at https://doi.org/10.1278/mnsc.2021.4109. [ABSTRACT FROM AUTHOR]

Real-world contractual agreements between firms are often incomplete, leading to suboptimal investment and loss of value in supply chain relationships. To what extent can blockchain technology help alleviate problems arising from contractual incompleteness? We examine this issue by exploiting a quasi-natural experiment based on the staggered adoption of U.S. state laws that increased firms' in-state ability to develop, adopt, and use blockchain technology. We find that, after exposure to a pro-blockchain law, firms with greater asset specificity exhibit more positive changes to Tobin's Q, research and development, and blockchain-related innovation. Also, such firms appear to rely less on vertical integration, form more strategic alliances, and shift their emphasis to less geographically proximate customers. Overall, our results suggest that blockchain technology can help firms remedy constraints and inefficiencies arising from contractual incompleteness. This paper was accepted by Will Cong, Special Section of Management Science: Blockchains and Crypto Economics. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2022.04139. [ABSTRACT FROM AUTHOR]

Partial vertical ownership describes a situation in which a firm holds financial shares in either its supplier (referred to as partial backward integration) or its customer (partial forward integration). We study the effect of such financial interconnectedness on two operational decisions: capacity investment and information exchange. In our model, a retailer, who has superior information about the future market demand, has passive financial holdings in the supplier. Although this passive financial investment does not enable the retailer to directly influence the supplier's operational decisions, it does affect the market equilibrium. Specifically, financial interconnectedness between the firms can result in the retailer financing the entire capacity in the market. In addition, we characterize the conditions that ensure that information between the retailer and the supplier can be exchanged via cheap-talk communication. Interestingly, a high level of information asymmetry facilitates the exchange of information via cheap talk in the presence of these financial links. When cheap talk is not possible, we study the separating equilibrium that is achieved through the retailer's commitment to order in advance. In this case, the separating quantity can either increase or decrease with the level partial vertical ownership, and this trend does not depend the actual level of the financial holdings. We further analyze the incentive of the retailer to conceal demand information by choosing a pooling equilibrium and conclude with discussing the effect of the financial interconnectedness on the parties' operational payoffs. This paper was accepted by Jayashankar Swaminathan, operations management. Funding: N. Shamir gratefully acknowledges financial support from the Israel Science Foundation [Grant 2358/22] and The Henry Crown Institute of Business Research in Israel. T. Avinadav gratefully acknowledges financial support from the Israel Science Foundation [Grant 1571/20]. Supplemental Material: Data and the electronic companion are available at https://doi.org/10.1287/mnsc.2023.4673. [ABSTRACT FROM AUTHOR]

Buy-one-get-one (BOGO) promotions have become popular. With BOGO, the first unit is sold for the regular price, and the second unit is discounted. We analyze BOGO in manufacturer–retailer supply chains. We identify conditions under which BOGO outperforms price reduction (PR) and everyday low price (EDLP) policies. We find that, for some products, whether consumers stockpile or not, if BOGO and PR have the same market size, BOGO has a larger retailer profit and the same or larger manufacturer profit because BOGO induces more consumers to buy and consume two units. When consumers stockpile, the retailer sets prices to prevent such behavior, and the retailer's share of supply chain profits is largest under BOGO, whereas consumer surplus with BOGO is smaller than PR. We also find that BOGO reduces double marginalization. When PR expands market size more than BOGO, BOGO's effectiveness diminishes. When consumers stockpile without increasing consumption and/or production cost is high, EDLP is best. Our results are robust to multiperiod with single-promotion-period settings. A large number of regular-price periods following a promotion period increases stockpiling, which erodes the retailer's profit and favors EDLP. If promotions are offered for consecutive periods, a larger number of promotion periods increases PR's efficacy relative to BOGO. Time-inconsistent consumers increase stockpiling and make PR outperform BOGO. Heterogeneous consumers' holding cost and marginal utility prevent retailers from perfectly discriminating among consumers who make profit-reducing choices. Compared with retailers' BOGO, manufacturers' BOGO increases double marginalization and decreases retailers' and manufacturers' profits and consumer surplus. This paper was accepted by Jayashankar Swaminathan, operations management. Funding: This work was partially supported by the National Science Foundation of China [Grants 71972026, 72101102]. Y. Li's work was supported by the China Scholarship Council [Grant 201806070094]. Supplemental Material: The online companion and data are available at https://doi.org/10.1287/mnsc.2022.4638. [ABSTRACT FROM AUTHOR]

We show that intensified competition changes the location of business activity and, in turn, affects supply chain relationships. Using establishment-level data, we find that, when upstream product markets become more competitive, suppliers are more likely to relocate their establishments closer to customers. Following the supplier's relocation, its sales to the customer increase, its relationship with the customer is less likely to be terminated, and its innovation is more aligned with the customer's innovation. The relocated supplier also experiences more analyst following and institutional ownership that are in common with the customer and is more likely to issue equity than debt. However, the improved relationship, by causing the supplier to engage more in innovation dedicated to the customer, adversely affects creative innovation, which is known to drive growth. This paper was accepted by Gustavo Manso, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4586. [ABSTRACT FROM AUTHOR]

In after-sales product support, both literature and practice have highlighted the advantages of paying for performance under performance-based contracts (PBC) over the more traditional transaction-based contracts (TBC) that tie supplier payments to each repair incident. Although PBC is believed to better align incentives in the supply chain when the supplier's private effort is difficult to verify, emerging technologies can make the repair process more transparent, which can eliminate the supplier's moral hazard problem. Meanwhile, fast growth of service outsourcing for established products makes information asymmetry with regards to product failure rates a new challenge for maintenance, repair, and overhaul (MRO) operations. To analyze this changing environment, we build a stylized adverse selection model and explore which contract is more efficient in dealing with information asymmetry. We assume that equipment failure rates are only known by the customer, whose outside options are type dependent. The uninformed supplier has to design appropriate mechanisms to overcome the disadvantages of this information structure while maximizing profits. We show that the two contracts demonstrate different screening ability, and TBC may be preferred over PBC. Type-dependent outside options can lead to countervailing incentives, making PBC immune to information asymmetry and enabling it to achieve the first-best outcome. When the differential of outside options has a relatively stronger effect compared with the differential of failure rates, TBC can bring the supplier a higher ex ante payoff than PBC. Our paper brings to light a heretofore unknown advantage of TBC, and we demonstrate when these contracts are likely to be observed in the third-party MRO market. This paper was accepted by Vishal Gaur, operations management. Funding: This work was supported by the Fishman-Davidson Center at the Wharton School, Erasmus Research Institute of Management, and the National Natural Science Foundation of China [Grant 71801228]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4606. [ABSTRACT FROM AUTHOR]

We construct an economic framework for understanding the incentives of the participants of a permissioned blockchain for supply chains and other related industries. Our study aims to determine whether adoption of blockchain is socially beneficial and whether such adoption arises in equilibrium. We find that blockchain reduces information asymmetry for consumers, thereby enhancing consumer welfare. Consumer welfare gains can be sufficiently large that blockchain adoption is socially beneficial; nonetheless, we find that blockchain adoption does not arise in equilibrium. This situation arises because blockchain adoption costs are borne by manufacturers, and manufacturers cannot extract consumer gains through prices due to the competitive nature of the manufacturing sector. We offer a system of transfers to generate blockchain adoption in equilibrium when it is socially beneficial. This paper was accepted by Vishal Gaur, operations management. Funding: This research was partially supported by a seed grant from the Columbia–IBM Center for Blockchain and Data Transparency. Supplemental Material: The online appendix is available at https://doi.org/10.1287/mnsc.2022.4532. [ABSTRACT FROM AUTHOR]

Improving traceability in food supply chains has been a big part of ongoing effort to reduce contamination risks and food waste. Recent technology advancement such as blockchain technology has propelled innovative retailers to promote food traceability system adoption in their supply chains. We develop a three-tier supply chain model with multiple upstream (tier 2) suppliers to investigate how traceability technology adoption affects incentives of supply chain members and whether and how its anticipated benefits can be realized. We find that full traceability brings direct revenue benefit to every supply chain member by saving uncontaminated food from disposal (pure traceability effect) but also leaves each tier of the supply chain vulnerable to its immediate downstream buyer's exploitation through strategically lowering the purchasing price (strategic pricing effect). The interplay of the two effects may result in some of the supply chain members (even the retailer) being worse off with traceability adoption and the system being exposed to higher contamination risk; the latter is because of the weakened upstream supplier's incentive to exert contamination risk-reduction effort. Moreover, we find that the supply chain network structure also influences the benefit distribution of traceability adoption: The retailer always benefits from traceability adoption in network structures where the tier 1 supplier's strategic pricing power is eliminated or weakened; all supply chain members benefit from traceability adoption in a network with a large number of tier 2 suppliers. Finally, we show that alternative risk-mitigation schemes such as tier 2 coordination can diminish the value of traceability adoption, and partial traceability enabled by tier 1 product inspection can be more beneficial to the retailer than full traceability. This paper was accepted by Victor Martínez-de-Albéniz, operations management. Supplemental Material: The online appendices are available at https://doi.org/10.1287/mnsc.2022.4440. [ABSTRACT FROM AUTHOR]

When multiple retailers hold inventory to satisfy random demand, retailer inventory-sharing strategies can potentially reduce the supply-demand mismatch and increase overall supply chain performance. In this paper, we experimentally investigate alternative inventory-sharing strategies in a two-tier supply chain with an upstream manufacturer and two downstream retailers. In one setting, retailers act as if they are centralized and use a single quantity to fulfill joint demand. In the other, retailers are decentralized and face separate demands, but they can transfer inventory after demands are realized. In this latter decentralized scenario, we also consider whether the manufacturer or retailers have decision authority over the inventory transfer price. One key result is that when the retailers are decentralized and the manufacturer sets the transfer price, both retailers and the manufacturer earn higher profits than in the centralized retailer strategy, which runs counter to theory. We also find that when retailers are decentralized and set their own transfer price, the most equitable distribution of profits is achieved. In an effort to account for these results, we find that a model of fairness captures decisions well. Overall, by investigating how different inventory-sharing strategies affect the distribution of profits in a two-tier supply chain, our results provide guidance to firms considering how, if at all, they should enter such arrangements. This paper was accepted by Jay Swaminathan, operations management. Funding: The authors acknowledge financial support from Cornell University and the University of Virginia. Supplemental Material: The data files and electronic companion are available at https://doi.org/10.1287/mnsc.2022.4323. [ABSTRACT FROM AUTHOR]

Although innovation sharing between a buyer and a supplier—a common practice in the automotive industry—can increase the efficiency and total profit of a supply chain, suppliers are often reluctant to do so. Sharing innovations would leave the supplier in a vulnerable position if the buyer were to exploit the information (e.g., by resharing the supplier's innovation with competing suppliers). Anecdotal evidence from automotive suppliers tells us that the nature of a supplier-buyer relationship for the most part depends on who (e.g., a short-run-focused procurement manager or a long-term-focused engineer) manages the relationship. In this paper, we examine how the allocation of decision rights to short-run- and long-run-focused employees affects collaboration between the firms. To accomplish this, we model a relationship between a supplier and a buyer where the buyer is a dual decision maker, consisting of long-run- and/or short-run-focused employees. We characterize the equilibrium of this model and show that the frequency of collaborative outcomes is lowest when the procurement manager has full control and highest when the engineer has full control or in a setup where employees can unilaterally enforce collaboration. A laboratory experiment confirms that collaborations occur more frequently when a manager with a long-term focus is in charge of or actively involved in decision making. Depending on how joint control is structured, joint control can help or hurt collaboration: Collaboration is highest when employees can unilaterally enforce it, whereas the random joint-control case results in collaboration that is as low as in the procurement manager control case. This paper was accepted by Serguei Netessine, operations management. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2021.4230. [ABSTRACT FROM AUTHOR]

Using a panel of credit default swap (CDS) spreads and supply chain links, we observe that both favorable and unfavorable credit shocks propagate through supply chains in the CDS market. Particularly, the three-day cumulative abnormal CDS spread change (CASC) is 63 basis points for firms whose customers experienced a CDS up-jump event (an adverse credit shock). The value is 74 basis points if their suppliers experienced a CDS up-jump event. The corresponding three-day CASC values are –36 and –38 basis points, respectively, for firms whose customers and suppliers, respectively, experienced an extreme CDS down-jump event (a favorable credit shock). These effects are approximately twice as large for adverse credit shocks originating from natural disasters. Credit shock propagation is absent in inactive supply chains and is amplified if supply chain partners are followed by the same analysts. Industry competition and financial linkages between supply chain partners, such as trade credit and large sales exposure, amplify the shock propagation along supply chains. Strong shock propagation persists through second and third supply chain tiers for adverse shocks but attenuates for favorable shocks. This paper was accepted by Kay Giesecke, finance. [ABSTRACT FROM AUTHOR]

Supply chain contract negotiation has gained increasing attention in recent years, and the studies involving negotiations in the operations literature almost exclusively apply the concept of the Nash bargaining (NB) solution. The NB solution, however, is derived based on the axiom of independence of irrelevant alternatives (IIA), an unrealistic assumption in many contexts. Indeed, our analysis suggests that the NB solution can lead to unreasonable negotiation outcomes in supply chains with horizontal competition. As an alternative, the Kalai-Smorodinsky (KS) solution has been applied in many fields but has not been introduced to the supply chain contexts. The KS solution is derived under the axiom of individual monotonicity in replacement of the IIA axiom. We perform a comprehensive comparison of contract negotiations under the KS and NB solutions in horizontally competing supply chains. Although the KS solution does not possess the flexibility of explicitly specifying the relative bargaining power as the NB solution does, the KS solution can appropriately capture the negotiation power shift induced by the decision ownership, the negotiation sequence, the vertical relationship, the competition intensity, the trade contingency, and the contract type. Our study sheds lights on the appropriate selection of solution concepts in studying negotiations in competing supply chains. This paper was accepted by David Simchi-Levi, operations management. [ABSTRACT FROM AUTHOR]

Using a network approach that circumvents well-known challenges in estimating peer effects, we show that interactions with a firm's geographic neighbors play a significant causal role in corporate investment behavior and a modest role in financial policies and firm performance. Moreover, these geography network effects are almost entirely driven by propagation effects through product market and supply chain networks. We corroborate our findings in a quasi-experimental framework that allows for spillovers in treatment effects. Our findings help rationalize industrial clusters (e.g., Silicon Valley), as they illustrate that agglomeration economies are substantial and operate predominantly within industry boundaries. This paper was accepted by David Simchi-Levi, finance. [ABSTRACT FROM AUTHOR]

Involving suppliers deep in the supply chain is critical for the success of environmental and social responsibility (ESR) initiatives. Administering ESR programs throughout a complex supply network, however, is challenging. In this paper, we apply a multiunit bilateral bargaining framework to coordinate ESR investments in a general supply network and analyze to what extent an ESR initiator should directly engage the higher-tier suppliers as opposed to delegating that responsibility to the first-tier suppliers. Our bargaining framework not only generalizes the conventional Shapley value approach by allowing the flexibility of modeling imbalanced power distribution among the firms but also provides an explicit way of implementing the resulting gain sharing among the firms through negotiated contract terms. We show that the eventual structure of ESR negotiation relationships can be derived by finding a shortest path tree in the supply network with the arc cost defined as the logarithm of the negotiating parties' relative bargaining power. These developments allow us to analyze ESR implementation in generally extended supply networks. We find that the ESR initiator tends to delegate ESR negotiations to a supplier that is strong in negotiations with higher-tier suppliers. When the supply network is complex (i.e., wide and deep), directly engaging all suppliers can lead to a larger gain by the initiator than fully delegating the negotiations with higher-tier suppliers to the first-tier ones. However, as the network gets increasingly complex, the ESR initiator tends to directly engage a reduced percentage of higher-tier suppliers. We further extend our analysis to situations where the ESR relationships are sequentially formed in a decentralized manner, where the benefit of ESR depends on the collective choice of the firms' investment levels, where multiple ESR programs are implemented in the network, and where ESR investments depend on the negotiation relationships. This paper was accepted by David Simchi-Levi, operations management. [ABSTRACT FROM AUTHOR]

We study a buyer's problem of auditing suppliers within an existing network to ensure social responsibility compliance. The buyer suffers economic damages if a violation at a supplier is exposed (whether by the media, regulator, or nongovernmental organization). To avoid damages, the buyer may audit the network to identify noncompliance. If a supplier fails an audit, the buyer must take one of two costly actions: either rectify the supplier or drop the supplier (along with any dependent suppliers). Dropping a supplier changes the network topology, reducing competition and thereby increasing the buyer's input cost arising from an equilibrium. We show that the buyer's optimal dynamic auditing policy has two subphases: the buyer will first audit and drop some suppliers before either auditing and rectifying all remaining suppliers or halting auditing altogether. By halting, the buyer tolerates some noncompliance in the network ("see no evil, hear no evil"). Within the audit-and-drop subphase, when auditing only in the upper tier, the buyer always audits a least valuable unaudited supplier, yielding greater balance in the network. When the buyer audits both tiers, it might choose a supplier other than the least valuable. The buyer may choose a supplier in a pivotal position to help ascertain the viability of a portion of the network ("litmus test"). In extensions, we find that when violations in tier 1 carry a higher penalty for the buyer, the buyer may audit and rectify only tier 1 suppliers; when audits may be inaccurate, the buyer more likely tolerates a greater level of noncompliance. This paper was accepted by Charles Corbett, operations management. [ABSTRACT FROM AUTHOR]

Since 2016, Canada's federal government has pledged to factor in upstream emissions during the environmental impact assessment of fossil fuel energy projects. The upstream emissions attributable to a proposed project could be compared against a rejection threshold—a maximum permissible level of emissions—or the firm could be mandated to offset the attributed emissions. We adopt a cooperative game-theoretic model and propose the nucleolus mechanism to apportion upstream emission responsibilities in a fossil fuel supply chain, represented by a directed tree, wherein the nodes correspond to various entities in the supply chain such as extractors, distributors, refineries, and end consumers. The nucleolus allocation avoids the distortionary effects of double counting and exhibits a certain consistency property that is especially important in a regulatory context wherein fossil fuel supply chains span multiple legal jurisdictions. We develop a polynomial-time algorithm to compute the nucleolus and further prove that it arises as the unique subgame perfect equilibrium allocation of a noncooperative game induced by two easily stated and verifiable policies, thereby providing an implementation framework. We then demonstrate the strong Nash stability of the nucleolus mechanism subject to the two policies, study its sensitivity to parameter changes, and characterize it on the basis of fairness considerations. Furthermore, under the common assumption that the emissions allocated to a firm and the resulting financial penalties do not impact the revenues from the firm's core operations, we also provide lower-bound guarantees on the welfare gains it delivers to firms in the fossil fuel supply chain and on the incentives it offers such firms to adopt emission abatement technologies. Finally, we contextualize our discussion with a case study on a proposed expansion of the Trans Mountain pipeline in Western Canada. This paper was accepted by Chung Piaw Teo, optimization. [ABSTRACT FROM AUTHOR]

Antitrust regulations are meant to promote fair competition in the market, but balancing administrative and legal costs with enforcement can be difficult when multilayered supply chains are involved. The canonical example of this challenge is the landmark Illinois Brick ruling, which limits antitrust damages to only the direct purchasers of a product; for instance, consumers can file antitrust claims against colluding retailers but not against colluding manufacturers—only retailers can file claims against manufacturers. This controversial ruling was meant to reduce legal costs, but it can clearly lead to missed enforcement opportunities. In this paper, we demonstrate how the Illinois Brick ruling interacts with contracts adopted in the supply chain, and we show that otherwise equivalent supply chain arrangements can have markedly different effects. In particular, we find that wholesale price, minimum order quantity, revenue sharing, and quantity discount contracts lead retailers to take legal action against manufacturers in the event of collusive behavior. However, the wholesale price plus fixed fee contract structure (also known as a two-part tariff or slotting fee contract) facilitates collusion among the manufacturers with retailers compensated by the fixed fee and not filing the antitrust litigation. We further demonstrate that collusion is more likely under high demand uncertainty and high competition at the retail level but is less likely under high competition at the manufacturer level. Our paper helps public enforcers identify market conditions conducive to antitrust violations. This paper was accepted by Vishal Gaur, operations management. [ABSTRACT FROM AUTHOR]

Using data from 38,916 businesses in war-torn Colombia and from 5,138 attacks by the two rebel groups, FARC and ELN, we study how firms manage inventory during civil war. We obtain exogenous variation in the conflict intensity via a difference-in-differences model, which hinges on the peace process between Colombia's government and FARC. Relying on this identification strategy, we hypothesize and show that war causes two effects on firm-level inventories. First, it leads firms to replace physical assets (inventory) with fungible assets (cash), causing them to operate with an oversecured financial buffer, but a fragile operational buffer. Second, this inventory reduction occurs mostly in unprocessed inventories (finished-goods inventories are insensitive to violence), meaning that, although war-torn businesses are equipped to fulfill planned orders, they become inflexible at handling uncertain future demand. We then show that the magnitude of these effects is highly contingent on the firm's position in the supply chain, its proximity to distribution markets, and the type of attacks it is subject to. We then propose policies to address war-related risk in supply chains. This paper was accepted by Vishal Gaur, operations management. [ABSTRACT FROM AUTHOR]

Factoring is a financial arrangement where the supplier sells accounts receivable to the factor against a premium and receives cash for immediate working capital needs. Reverse factoring takes advantage of the retailer's payment guarantee and the credit rating differential between a small supplier and a large retailer, enabling the supplier to receive financing at a more favorable rate. We develop a supply chain theory of (recourse/non-recourse) factoring and reverse factoring showing when these post-shipment financing schemes should be adopted and who really benefits from the adoption. We find that recourse factoring is preferred when the supplier's credit rating is relatively high, whereas non-recourse factoring is preferred within certain medium range of ratings. Both factoring schemes, if adopted, benefit both the supplier and the retailer, and thus the overall supply chain. Further, we find that reverse factoring may not always be preferred by suppliers compared to recourse and non-recourse factorings. Retailers should only offer reverse factoring to suppliers with low (but above a threshold) to medium credit ratings. The optimally designed reverse factoring program can always increase the retailer's profit, but it may leave the supplier indifferent to the current factoring option when followed by an aggressive payment extension. More importantly, contrary to conventional wisdom, our theory implies that reverse factoring could be adopted even when the retailer has no credit rating advantage over the supplier, and it could benefit the retailer even without extending payment terms. This paper was accepted by Victor Martínez-de-Albéniz, operations management. [ABSTRACT FROM AUTHOR]

We consider a setting in which a nonexclusive reseller procures partially substitutable products from two suppliers, one of whom introduces a direct channel. We find that the presence of the second supplier alters many of the existing results about the interactions between a reseller and an encroaching supplier. For instance, the reseller's and the supply chain's benefit from the direct channel disappears when the product substitutability is sufficiently large. In addition, when the reseller is nonexclusive, the encroaching supplier may either sell exclusively through its direct channel even when that channel is less efficient than the reselling channel, or sell through both channels even when its direct channel is more efficient than the reselling channel. Neither of these would occur in an exclusive reselling environment with only one supplier. This paper was accepted by Jayashankar Swaminathan, operations management. [ABSTRACT FROM AUTHOR]

When a supplier fails to comply with social and environmental standards, the buyer's reputation suffers. Reputation costs can typically be very high for the buyer, whereas the supplier's liability is often limited. Conventional procurement strategies such as dual sourcing mitigate the buyer's operational risk, but they often do so at the expense of increasing its reputation risk and sourcing costs. In this paper, we propose a risk-sharing contract for managing the buyer's reputation concerns. We find that by sharing some of the supplier's operational loss, the buyer may (in some conditions) decrease its reputational risk, but this has to be balanced against an increase in the operational risk. Risk sharing also reduces sourcing costs because the buyer takes on some of the worst-case loss of a wealth-constrained supplier. These results suggest that risk sharing can be superior, as a procurement strategy, to conventional approaches such as dual sourcing or penalty contracts. This is true when reputation and sourcing costs are a significant concern and operational costs are not that high. Under some conditions, the buyer may choose risk sharing even if it increases reputation risk in order to reduce procurement costs. This paper was accepted by Victor Martínez-de-Albéniz, operations management. [ABSTRACT FROM AUTHOR]

Because greenhouse-gas (GHG) emissions from the supply chains of just the 2,500 largest global corporations account for more than 20% of global emissions, rationalizing emissions in supply chains could make an important contribution toward meeting the global CO2 emission-reduction targets agreed upon in the 2015 Paris Climate Agreement. Accordingly, in this paper, we consider supply chains with joint production of GHG emissions, operating under either a carbon-tax regime, wherein a regulator levies a penalty on the emissions generated by the firms in the supply chain, or an internal carbon-pricing scheme. Supply chain leaders, such as Walmart, are assumed to be environmentally motivated to induce their suppliers to abate their emissions. We adopt a cooperative game-theory methodology to derive a footprint-balanced scheme for reapportioning the total carbon emissions amongst the firms in the supply chain. This emission responsibility-allocation scheme, which is the Shapley value of an associated cooperative game, is shown to have several desirable characteristics. In particular, (i) it is transparent and easy to compute; (ii) when the abatement-cost functions of the firms are private information, it incentivizes suppliers to exert pollution-abatement efforts that, among all footprint-balanced allocation schemes, minimize the maximum deviation from the socially optimal pollution level; and (iii) the Shapley value is the unique allocation mechanism satisfying certain contextually desirable properties. This paper was accepted by Jayashankar Swaminathan, operations management. [ABSTRACT FROM AUTHOR]

Many operational settings share the following three features: (i) a centralized planning system allocates tasks to workers or service providers, (ii) the providers generate value by completing the tasks, and (iii) the completion of tasks influences the providers' welfare. In such cases, the planning system's allocations often entail trade-offs between the service providers' welfare and the total value that is generated (or that accrues to the system itself), and concern arises that allocations that are good under one metric may perform poorly under the other. We propose a broad framework for quantifying the magnitude of value losses when allocations are restricted to satisfy certain desirable guarantees to the service providers. We consider a general class of guarantees that includes many considerations of practical interest arising (e.g., in the design of sustainable two-sided markets) in workforce welfare and compensation, or in sourcing and payments in supply chains, among other application domains. We derive tight bounds on the relative value loss and show that this loss is limited for any restriction included in our general class. Our analysis shows that when many providers are present, the largest losses are driven by fairness considerations, whereas when few providers are present, they are driven by the heterogeneity in the providers' effectiveness to generate value; when providers are perfectly homogenous, the losses never exceed 50%. We study additional loss drivers and find that less variability in the value of jobs and a more balanced supply-demand ratio may lead to larger losses. Lastly, we demonstrate numerically using both real-world and synthetic data that the loss can be small in several cases of practical interest. This paper was accepted by Chung Piaw Teo, optimization. [ABSTRACT FROM AUTHOR]

This paper shows that decentralized supply chains, in which upstream firms use linear wholesale prices, may experience lower upstream production and downstream sales volatility than vertically integrated supply chains and may be less susceptible to the bullwhip effect by which the variance of upstream production exceeds the variance of downstream sales. The reason is that decentralized supply chains exhibit a price effect, whereby upstream producers raise wholesale prices in the case of positive demand shocks and lower wholesale prices in the case of negative demand shocks. Whereas upstream producers benefit from the price effect and, thus, from a dampening of the bullwhip effect, downstream firms may lose, and overall supply chain profit may decrease. This paper was accepted by Vishal Gaur, operations management. [ABSTRACT FROM AUTHOR]

This paper illustrates how supply chain (SC) analytics could provide strategic and operational insights to evaluate the risk-based allocation of regulatory resources in food SCs, for management of food safety and adulteration risks. This paper leverages data on 89,970 tests of aquatic products extracted from a self-constructed data set of 2.6 million food safety tests conducted by the China Food and Drug Administration (CFDA) organizations. The integrated and structured data set is used to conduct innovative analysis that identifies the sources of adulteration risks in China's food SCs and contrasts them with the current test resource allocations of the CFDA. The analysis highlights multiple strategic insights. Particularly, it suggests potential gaps in the current CFDA testing allocation by SC location, which is heavily focused on retail and supermarkets. Instead, the analysis indicates that high-risk parts of the SC, such as wholesale and wet markets, are undersampled. Additionally, the paper highlights the impact that SC analytics could have on policy-level operational decision making to regulate food SCs and manage food safety. The hope is that the paper will stimulate the interest of academics with expertise in these areas to conduct more work in this important application domain. This paper was accepted by Charles Corbett, operations management. [ABSTRACT FROM AUTHOR]

Unauthorized subcontracting—when suppliers outsource part of their production to a third party without the retailer's consent—has been common practice in the apparel industry and is often tied to noncompliant working conditions. Because retailers are unaware of the third party, the production process becomes obscure and cannot be tracked. In this paper, we present an empirical study of the factors that can lead suppliers to engage in unauthorized subcontracting. We use data provided by a global supply chain manager with more than 30,000 orders, of which 36% were subcontracted without authorization. We find that the frequency of unauthorized subcontracting across factories has a pronounced bimodal distribution. Moreover, the degree of unauthorized subcontracting in the past is highly related to the probability of engaging in unauthorized subcontracting in the future, which suggests that factories behave as if they choose a strategic level of unauthorized subcontracting. At the order level, we find that state dependence (i.e., the status of an order carrying over to the next one) and price pressure are the key drivers of unauthorized subcontracting. Buyer reputation and lead time also play a role. Finally, we show that unauthorized subcontracting can be predicted correctly for more than 80% of the orders in out-of-sample tests and for about 70% of suppliers. This indicates that retailers can use business analytics to predict unauthorized subcontracting and help prevent it. This paper was accepted by Vishal Gaur, operations management. [ABSTRACT FROM AUTHOR]

A persistent question in industrial organization is whether regulations restricting price discrimination in input markets can promote efficiency. Despite the extensive study of the economic effects of input pricing regulations, the literature is bereft of an examination of the role of accounting information. In this paper, we seek to fill the gap by modeling the effects of uniform pricing restrictions in input markets on firms' information generation and disclosure. In doing so, we find that information considerations present an impetus for uniform pricing requirements since they promote incentives for retail firms to both acquire and disclose relevant accounting information. In effect, by shielding retail firms from excessive supplier exploitation, uniform pricing regulations create a richer and more transparent information environment. This, then, leads to welfare gains and even benefits that can accrue naturally to all supply chain partners including the supplier, whose actions are constrained by the uniform pricing regulation. This paper was accepted by Brian Bushee, accounting. [ABSTRACT FROM AUTHOR]

We integrate the results of a social network survey and a forecast information sharing experiment to examine the roles of trust and trustworthiness in impacting high-ranking executives' decisions in supply chain interactions. The members of our executive sample have, on average, 17 years of work experience. A significant portion of them holds positions at the C-level in world-leading organizations that span a wide range of industries. By examining the roles of trust and trustworthiness in the decision making of high-ranking executives, we find strong external validation for as well as demonstrate how these nonpecuniary, behavioral factors impact the outcomes of business interactions. We employ a multimethod research design that allows us to investigate the extent to which the executives' trust beliefs toward a relevant network of exchange partners (which we define as their "network trust") impact their trust behaviors when engaging in business interactions with members of this network. We determine the conditions pertaining to the executives' professional experiences that strengthen or weaken the impact of network trust on the executives' trust behaviors in supply chain interactions. For example, executives with more diverse professional experiences rely more on network trust to shape their trust behaviors. Conversely, executives with prior positive trust experiences rely less on network trust in their trusting behaviors. We quantify that improved trust and trustworthiness can yield up to 41%, 6%, and 5% gain in the expected profit of the supplier, the retailer, and the supply chain. Our results offer tangible implications for how organizations can better leverage executives' knowledge about how much to rely on network trust in business interactions to achieve better outcomes. This paper was accepted by Serguei Netessine, operations management. [ABSTRACT FROM AUTHOR]

We study supply chains where multiple suppliers sell to multiple retailers through a wholesale market. In practice, we often observe that both suppliers and retailers tend to influence the wholesale market price that retailers pay to suppliers. However, existing models of supply chain competition do not capture retailers' influence on the wholesale price (i.e., buyer power) and show that the wholesale price and the order quantity per retailer do not change with the number of retailers. To overcome this limitation, we develop a competition model based on the market game mechanism in which the wholesale price is determined based on both suppliers' and retailers' decisions. When taking into account retailers' buyer power, we obtain the result that is consistent with the observed practice: As the number of retailers increases, each retailer's buyer power decreases, and each retailer is willing to pay more for her order, so the wholesale price increases. In this case, supply chain expansion to include more retailers (or suppliers) turns out to be more beneficial in terms of supply chain efficiency than what the prior literature shows without considering buyer power. Finally, we analyze the integration of two local supply chains and show that although the profit of the integrated supply chain is greater than the sum of total profits of local supply chains, integration may reduce the total profit of firms in a retailer-oriented supply chain that has more retailers than suppliers. This paper was accepted by Charles Corbett, operations management. [ABSTRACT FROM AUTHOR]

We develop a theory that shows signaling a firm's fundamental quality (e.g., its operational capabilities) to lenders through inventory transactions to be more efficient—it leads to less costly operational distortions—than signaling through loan requests, and we characterize how the efficiency gains depend on firm operational characteristics, such as operating costs, market size, and inventory salvage value. Signaling through inventory being only tenable when inventory transactions are verifiable at low enough cost, we then turn our attention to how this verifiability can be achieved in practice and argue that blockchain technology could enable it more efficiently than traditional monitoring mechanisms. To demonstrate, we develop b_verify, an open-source blockchain protocol that leverages Bitcoin to provide supply chain transparency at scale and in a cost-effective way. The paper identifies an important benefit of blockchain adoption—by opening a window of transparency into a firm's supply chain, blockchain technology furnishes the ability to secure favorable financing terms at lower signaling costs. Furthermore, the analysis of the preferred signaling mode sheds light on what types of firms or supply chains would stand to benefit the most from this use of blockchain technology. This paper was accepted by Victor Martínez-de-Albéniz, operations management. [ABSTRACT FROM AUTHOR]

The behavioral literature has demonstrated that the format of supply chain contracts matters even when theoretically it should not and that contracts that in theory coordinate channels fail to do so in laboratory experiments. The existing body of experimental evidence uses an ultimatum bargaining protocol to test analytical models, but there is no reason to think that bargaining in supply chains is in the form of ultimatum offers. We investigate the effect of bargaining on contract performance by extending the bargaining protocol to allow the manufacturer to make concessions. We test coordinating contract with bargaining in the laboratory by comparing wholesale price and the two-part tariff contracts using two different bargaining protocols. We then develop and estimate a statistical model of behavior with bargaining and find that this model organizes our data well. Our main finding is that the contracts that we study are more efficient when participants are allowed to make concessions. The additional channel efficiency is owing to more efficient offers made by manufacturers. The higher channel efficiency primarily benefits the retailer—the weaker party. Our main contribution is the observation that, when testing analytical models of contracts in the laboratory, the way that the bargaining process is implemented, such as the ability to make concessions, has a critical effect on conclusions. This paper was accepted by Vishal Gaur, operations management. [ABSTRACT FROM AUTHOR]

This paper studies an inventory management problem faced by an upstream supplier that is in a collaborative agreement, such as vendor-managed inventory (VMI), with a retailer. A VMI partnership provides the supplier an opportunity to manage inventory for the supply chain in exchange for point-of-sales (POS)- and inventory-level information from the retailer. However, retailers typically possess superior local market information and as has been the case in recent years, are able to capture and analyze customer purchasing behavior beyond the traditional POS data. Such analyses provide the retailer access to market signals that are otherwise hard to capture using POS information. We show and quantify the implication of the financial obligations of each party in VMI that renders communication of such important market signals as noncredible. To help institute a sound VMI collaboration, we propose learn and screen—a dynamic inventory mechanism—for the supplier to effectively manage inventory and information in the supply chain. The proposed mechanism combines the ability of the supplier to learn about market conditions from POS data (over multiple selling periods) and dynamically determine when to screen the retailer and acquire his private demand information. Inventory decisions in the proposed mechanism serve a strategic purpose in addition to their classic role of satisfying customer demand. We show that our proposed dynamic mechanism significantly improves the supplier's expected profit and increases the efficiency of the overall supply chain operations under a VMI agreement. In addition, we determine the market conditions in which a strategic approach to VMI results in significant profit improvements for both firms, particularly when the retailer has high market power (i.e., when the supplier highly depends on the retailer) and when the supplier has relatively less knowledge about the end customer/market compared with the retailer. This paper was accepted by Gad Allon, operations management. [ABSTRACT FROM AUTHOR]

Technology and intellectual property play increasingly critical roles in emerging supply chains by endowing products with sought-after capabilities. In such technology-intensive supply chains, the technology invented by an upstream firm must be embedded in a subsystem that is then integrated into a full system. The technology providers' prevalent royalty-driven business model has gotten complicated in this multilateral supply chain, prompting formal research attention. Moreover, providers also consider forward integration into manufacturing to monetize their intellectual property. We characterize the appropriateness of different business model decisions for markets, which may have varying levels of consumer diversity and competitive intensity at intermediate layers. For the technology provider, our key results show that a subsystem base royalty approach is the optimal business model when dealing with monopolistic intermediaries or having a low degree of consumer diversity. However, a full-system base royalty business model becomes increasingly optimal when the intermediate supply chains face competition and consumer diversity increases. We present conditions under which the technology provider may want to forward integrate. Our formulation and results are relevant to technology providers, policy makers, and industry groups engaged in the prevailing heated global discussion on royalty base. This paper was accepted by Serguei Netessine, operations management. [ABSTRACT FROM AUTHOR]

Economically motivated adulteration (EMA) is a serious threat to public health. In this paper, we develop a modeling framework to examine farms' strategic adulteration behavior and the resulting EMA risk in farming supply chains. We study both "preemptive EMA," in which farms engage in adulteration to decrease the likelihood of producing low-quality output, and "reactive EMA," in which adulteration is done to increase the perceived quality of the output. We fully characterize the farms' equilibrium adulteration behavior in both types of EMA and analyze how quality uncertainty, supply chain dispersion, traceability, and testing sensitivity (in detecting adulteration) jointly impact the equilibrium adulteration behavior. We determine when greater supply chain dispersion leads to a higher EMA risk and how this result depends on traceability and testing sensitivity. Furthermore, we caution that investing in quality without also enhancing testing capabilities may inadvertently increase EMA risk. Our results highlight the limitations of only relying on end-product inspection to deter EMA. We leverage our analyses to offer tangible insights that can help companies and regulators to more proactively address EMA risk in food products. This paper was accepted by Charles Corbett, operations management. [ABSTRACT FROM AUTHOR]

This paper studies multitier supply chain networks in the presence of disruption risk. Firms decide how much to source from their upstream suppliers so as to maximize their expected profits, and prices of intermediate goods are set so that markets clear. We provide an explicit characterization of (expected) equilibrium profits, which allows us to derive insights into how the network structure—that is, the number of firms in each tier, production costs, and disruption risk—affect firms' profits. Furthermore, we establish that networks that maximize profits for firms that operate in different stages of the production process—that is, for upstream suppliers and downstream retailers—are structurally different. In particular, the latter have relatively less diversified downstream tiers and generate more variable output than the former. Finally, we consider supply chains that are formed endogenously. Specifically, we study a setting where firms decide whether to engage in production by considering their (expected) postentry profits. We argue that endogenous entry may lead to chains that are inefficient in terms of the number of firms that engage in production. This paper was accepted by Vishal Gaur, operations management. [ABSTRACT FROM AUTHOR]

This paper determines categories of contracts that facilitate vertical information sharing in a supply chain while precluding horizontal information leakage among competing newsvendors. We consider a supply chain in which retailers replenish inventory from a common supplier to satisfy uncertain demand and are engaged in newsvendor competition. Each retailer has imperfect demand information. Yet one of the retailers (the incumbent) has a more accurate demand forecast than the other (the entrant). Information leakage among such competing retailers precludes vertical information sharing and is often the reason for many retailers to abandon collaborative forecast-sharing initiatives, leading to suboptimized supply chains. We show that whether a contract can prevent information leakage depends on how the inventory risk (i.e., cost of supply–demand mismatch) is allocated among the supplier and retailers in conjunction with the allocation of profits. We categorize contracts according to how they allocate inventory risk among firms when compared with a wholesale‐price contract. This comparison yields four mutually exclusive and collectively exhaustive categories of contracts. A downside-protection contract is one that effectively reduces retailers' cost of excess inventory by shifting some of their overage cost to the supplier. Examples of such contracts include buy-back and revenue-sharing contracts. An upside-protection contract is one that effectively increases retailers' cost of inventory shortage by shifting some of the supplier's underage cost to retailers. Examples of such contracts include penalty and rebate contracts. A two-sided protection contract combines the properties of the previous two categories. A no-protection contract is one that fails to shift firms' cost of inventory shortage or excess from one to the other. Examples of such contracts include wholesale-price and two-part tariff contracts. We show that no-protection contracts, which are extensively used in practice, cannot prevent information leakage, whereas others may do so. We also show that preventing information leakage could be costly for the supply chain (i.e., low channel efficiency). We conclude by illustrating how our unified framework to study a variety of contracts can enable a firm to determine the best-performing contract (among many) that precludes information leakage while almost coordinating the channel. For example, we show why buy‐back contracts perform significantly better than revenue‐sharing or rebate contracts. This paper was accepted by Serguei Netessine, operations management. [ABSTRACT FROM AUTHOR]

We consider a decentralized supply chain consisting of a retailer and a supplier that serves forward-looking consumers in two periods. In each period, the supplier and the retailer dynamically set the wholesale and retail price to maximize their own profits. The consumers are heterogeneous in their evaluations of the product and are strategic in deciding whether and when to buy the product, choosing the option that maximizes their utility, including waiting for a price markdown. We derive the equilibrium and study the value of price and quantity commitments from both the retailer's and the supplier's perspectives. We find that, although a centralized system always benefits from making price and quantity commitments, this is not true for a firm in a decentralized supply chain due to how the other firm responds to these commitments. We show that the retailer suffers from making a price or quantity commitment and that, similarly, the supplier does not benefit from making a price commitment. In these cases, commitments can harm not only the firm itself but also profitability of the other firm in the supply chain, thereby disadvantaging the entire supply chain. This happens because such commitments aggravate double-marginalization inefficiency in the supply chain. Furthermore, we show that eliminating this inefficiency through a coordinating contract (e.g., a two-part tariff or quantity discount) makes commitments beneficial. This paper was accepted by Martin Lariviere, operations management. [ABSTRACT FROM AUTHOR]

We introduce a new class of adaptive policies called periodic-affine policies, which allows a decision maker to optimally manage and control large-scale newsvendor networks in the presence of uncertain demand without distributional assumptions. These policies are data-driven and model many features of the demand such as correlation and remain robust to parameter misspecification. We present a model that can be generalized to multiproduct settings and extended to multiperiod problems. This is accomplished by modeling the uncertain demand via sets. In this way, it offers a natural framework to study competing policies such as base-stock, affine, and approximative approaches with respect to their profit, sensitivity to parameters and assumptions, and computational scalability. We show that the periodic-affine policies are sustainable—that is, time consistent—because they warrant optimality both within subperiods and over the entire planning horizon. This approach is tractable and free of distributional assumptions, and, hence, suited for real-world applications. We provide efficient algorithms to obtain the optimal periodic-affine policies and demonstrate their advantages on the sales data from one of India's largest pharmacy retailers. This paper was accepted by Yinyu Ye, optimization. [ABSTRACT FROM AUTHOR]

We estimate the effect of supply chain proximity on product quality. Merging four automotive data sets, we create a supply chain sample that reports the failure rate of 27,807 auto components, the location of 529 upstream component factories, and the location of 275 downstream assembly plants. We find that defect rates are higher when upstream and downstream factories are farther apart. Specifically, we estimate that increasing the distance between an upstream component factory and a downstream assembly plant by an order of magnitude increases the component's expected defect rate by 3.9%. We find that quality improves more slowly across geographically dispersed supply chains. We also find that supply chain distance is more detrimental to quality when automakers produce early-generation models or high-end products, when they buy components with more complex configurations, or when they source from suppliers who invest relatively little in research and development. [ABSTRACT FROM AUTHOR]

We study hedging cash-flow risks in a supply chain where firms invest internal funds to improve production efficiencies. We offer a decomposition framework to capture the cost-reduction and flexibility effect of hedging. It allows us to understand how a firm's hedging choice depends on its supply chain partner's decision, and how such interaction is affected by supply chain characteristics such as market size, cash-flow volatility, and correlation. When firms' cash flows are independent of each other, they are more likely to hedge with a larger market size. When cash flows are correlated, the impact of market size and volatility on firms' hedging decisions presents multiple patterns, contingent on whether their risks amplify or offset each other. [ABSTRACT FROM AUTHOR]

This paper shows that operational flexibility interacting with informational uncertainty may lead to truthful information exchange in equilibrium even when the communication is nonbinding and unverifiable, i.e., "cheap talk." We consider a model consisting of a manufacturer releasing a new product with uncertain release date and demand, and a retailer who must determine the allocation of limited capacity between a preexisting third-party product and the manufacturer's new product that may or may not be released on time. The manufacturer has a private forecast about the likelihood of the product release and/or about the demand, which he shares (either truthfully or not) with the retailer. We show that under the "traditional" supply chain structure (one-time opportunity to order) no truthful equilibrium can emerge. However, if (1) the supply chain structure allows for postponement, i.e., the ability to delay orders at a certain cost by the retailer, and (2) the manufacturer has informational uncertainty about the retailer's capacity, then truthful information exchange may emerge in equilibrium, where the manufacturer transmits his true forecast and the retailer treats the transmission as truthful. The genesis of this effect is preference reversal, where the manufacturer is not sure which way to distort the forecast to best motivate the retailer to wait for the new product. Thus, we show that a truth-revealing mechanism can emerge from a relatively rich setup featuring two-sided information asymmetry interacting with postponement. This paper was accepted by Gad Allon, operations management. [ABSTRACT FROM AUTHOR]

It is now widely accepted that a retailer's use of strategic inventory can mitigate double marginalization and improve the coordination of a supply chain, potentially benefiting both the downstream retailer and an upstream manufacturer. However, this conclusion has typically been based on the assumption that the manufacturer can observe the retailer's level of inventory before making wholesale pricing decisions. In reality, there are many situations in which neither the retailer's sales nor inventory are observable to the manufacturer, effectively concealing the action taken by the retailer. We investigate the implications of such a lack of observability on the use of strategic inventory in a supply chain consisting of a single retailer and a single manufacturer. We find that the manufacturer's inability to observe inventory has significant implications for the amount of inventory and the range of holding cost for which it is held in equilibrium. In addition, we find that, in the absence of any form of uncertainty, which the manufacturer could benefit from responding to, he may prefer not to observe the retailer's inventory. On the other hand, the retailer's willingness to make her inventory visible depends on the holding cost. The electronic companion is available at https://doi.org/10.1287/mnsc.2018.3033. This paper was accepted by Gad Allon, operations management. [ABSTRACT FROM AUTHOR]

We model the interaction of a single buyer with a single supplier within a market in a developing country with homogeneous local suppliers and homogeneous buyers from developed nations. The buyer sources a product from a supplier and then inspects and sells it on the market, subject to quality standards such as regulations about chemical content. Suppliers decide how much effort to exert to ensure compliance with quality standards. Buyers are assumed to comply with contracts because they are based in countries with strong legal systems. We assume that legal enforcement of the supplier's contractual obligations is not possible. We model the interaction between buyer and supplier as a repeated game in which the partnership can be terminated by the buyer if the supplier refuses to pay penalties for quality violations. After termination, the buyer and supplier each search for a new business partner. We model the interaction between buyer and supplier using relational contacts in which penalties for quality failures are set so that the supplier voluntarily pays them. We show that optimal relational contracts have dynamic form in this setting because the value of the outside option available to the parties, if the relationship is terminated, is determined by the contract terms. We characterize the properties of the optimal dynamic equilibria and analyze the use of third-party quality certifications within this framework. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2990. This paper was accepted by Martin Lariviere, operations management. [ABSTRACT FROM AUTHOR]