Manufacturing and Service Operations Management

Two innovative financing schemes have emerged in recent years to enable suppliers to obtain financing for production. The first, purchase order financing (POF), allows financial institutions to offer loans to suppliers by considering the value of purchase orders issued by reputable buyers. Under the second, which we call buyer direct financing (BDF), manufacturers issue both sourcing contracts and loans directly to suppliers. Both schemes are closely related to the supplier’s performance risk (whether the supplier can deliver the order successfully), upon which the repayment of these loans hinges. To understand the relative efficiency of the two emerging schemes, we analyze a game-theoretical model that captures the interactions among three parties (a manufacturer, a financially constrained supplier who can exert unobservable effort to improve delivery reliability, and a bank). We find that, when the manufacturer and the bank have symmetric information, POF and BDF yield the same payoffs for all parties irrespective of the manufacturer’s control advantage under BDF. The manufacturer, however, has more flexibility under BDF in selecting contract terms. In addition, even when the manufacturer has superior information about the supplier’s operational capability, the manufacturer can efficiently signal her private information via the sourcing contract if the supplier’s asset level is not too low. As such, POF remains an attractive financing option. However, if the supplier is severely financially constrained, the manufacturer’s information advantage makes BDF the preferred financing scheme when contracting with an efficient supplier. In particular, the relative benefit of BDF (over POF) is more pronounced when the supply market contains a larger proportion of inefficient suppliers, when differences in efficiency between suppliers are greater, or when the manufacturer’s alternative sourcing option is more expensive.

The online appendix is available at https://doi.org/10.1287/msom.2017.0638 .

This paper has been accepted for the Manufacturing & Service Operations Management Special Issue on Interface of Finance, Operations, and Risk Management.

With an increasingly open global economy and advanced technologies, some third-party logistics providers (3PLs), such as Eternal Asia, have emerged as supply chain orchestrators, linking buyers with manufacturers worldwide. In addition to their traditional transportation services, these orchestrators provide procurement and financial assistance to buyers in the supply network, especially small- and medium-sized enterprises (SMEs) in developing countries. Oftentimes, the 3PLs can obtain payment delay arrangements from the financially stronger manufacturers, which in turn can be partially extended to the SME buyers, alleviating their high costs of capital. To illustrate the efficiency improvements of the aforementioned practice, we use a model to explicitly capture the cash-flow dynamics in a supply chain consisting of a manufacturer, a buyer, and a 3PL firm and explore the conditions under which this innovation benefits all parties in the supply chain so that the business model is sustainable. We characterize these conditions and show that the supply chain profit can be higher under leadership by the 3PL than by the manufacturer. The intermediary role of the 3PL is crucial, in that its benefit may vanish if the manufacturer chooses to directly grant payment delay to the buyers. We demonstrate that the benefit is more likely to occur with more buyers. We further identify the unique Nash bargaining solution for the transportation time and the payment delay grace period.

The online appendix is available at https://doi.org/10.1287/msom.2017.0667 .

This paper has been accepted for the Manufacturing & Service Operations Management Special Issue on Value Chain Innovations in Developing Economies.

In an industry with knowledge spillover and debt financing, equilibrium investments in research and development (R&D) projects are subject to three economic forces. First, knowledge spillover among firms enables free dissemination of new technologies and produces investment synergies. Second, knowledge spillover also causes free riding: in equilibrium, firms underinvest in R&D expecting to benefit from investments by others. Third, debt financing creates incentive for risk shifting: equity holders overinvest in riskier R&D projects. We study how interactions among these forces affect a firm’s investment decisions and equilibrium industry outcomes using a three-stage game between two firms and the external debt market. We characterize subgame perfect, Pareto-dominant equilibria and show that for some parameter choices, free riding and risk shifting cancel each other in the decisions of individual firms, resulting in the first-best investments. Interestingly, for some cases, the equilibrium with first-best investments becomes possible only when risk shifting by one firm enables free riding by the other firm. We also show that debt can be used by firms as a commitment device in a multistage game. This value of debt is shared with investors, who can earn positive profits despite being perfectly competitive. This enriches the understanding of the financial pecking order theory by showing that even firms with unlimited internal capital may prefer external debt financing.

This paper has been accepted for the Manufacturing & Service Operations Management Special Issue on Interface of Finance, Operations, and Risk Management.

Problem description: We study the impact of credit ratings on operational and financial decisions of a supply chain with a supplier and a retailer interacting via an early payment discount contract. The retailer has a single opportunity to order a product from the supplier to satisfy future uncertain demand. Both the retailer and supplier are capital constrained, and the retailer can use both short-term bank loans and trade credits for his financing needs, while the supplier can use short-term bank loans and/or the retailers early payment. We analyze for all relevant operational decisions (wholesale price, trade credit rates, bank loans, and order quantity) for capital-constrained firms. Academic/practical relevance: We add a framework on who should finance inventories, and at what rates, in the presence of differential credit ratings of the supply chain parties. Methodology: Within a modified selling to the newsvendor Stackelberg game with the supplier as the leader, we derive the equilibrium trade credit rates, wholesale price, bank loans, and order quantity. Results: We show there exists a threshold such that if the supplier’s credit rating is above it, then the supplier offers trade credits with zero interest rate and the retailer uses trade credits only. Otherwise, the supplier sets a positive rate, which motivates the retailer to combine trade credits and bank loans. The supplier always benefits from working with good rating retailers. A retailer prefers to work with suppliers outside the supplier’s credit rating hole (a finite set of ratings) over suppliers with ratings within the range. Managerial implications: We provide insights on who should finance supply chain inventories and at what rates when there are differential credit rating between the supplier and retailer. We provide a plausible explanation for the practice of large and good credit rating retailers maintaining a small cash ratio and working with small suppliers in developing countries.

The online appendix is available at https://doi.org/10.1287/msom.2017.0669 .

This paper has been accepted for the Manufacturing & Service Operations Management Special Issue on Interface of Finance, Operations, and Risk Management.

Bài báo này rà soát tài liệu về quản lý công suất chiến lược với nội dung liên quan đến việc xác định kích thước, loại và thời điểm của các khoản đầu tư và điều chỉnh công suất trong điều kiện không chắc chắn. Đặc biệt chú ý đến những phát triển gần đây trong việc tích hợp nhiều quyết định, nhiều loại công suất, phòng ngừa và sự không ưa rủi ro. Công suất là thước đo khả năng và giới hạn xử lý và được biểu diễn dưới dạng một vectơ các cổ phiếu của các nguồn lực xử lý khác nhau, trong khi đó, đầu tư là sự thay đổi công suất và bao gồm mở rộng và thu hẹp. Sau khi thảo luận các vấn đề chung trong vấn đề đầu tư công suất, bài báo này rà soát các mô hình đầu tư công suất dưới điều kiện không chắc chắn trong ba bối cảnh:

Bối cảnh đầu tiên rà soát đầu tư công suất tối ưu bởi các nhà quyết định không ưa rủi ro đơn lẻ và đa dạng trong một môi trường ổn định nơi công suất không thay đổi. Khi chấp nhận nhiều loại công suất, danh mục công suất tối ưu liên quan chỉ định số lượng và địa điểm của công suất an toàn trong một mạng lưới xử lý. Tính năng chủ yếu của nó là nó không cân bằng; nghĩa là, dù cho sự không chắc chắn được hiện thực hóa thế nào, người quản lý công suất thông thường sẽ không bao giờ tận dụng hết tất cả các công suất. Bối cảnh thứ hai rà soát việc điều chỉnh công suất theo thời gian và cấu trúc của động lực đầu tư tối ưu. Bài báo kết thúc bằng việc rà soát cách tích hợp sự không ưa rủi ro trong đầu tư công suất và đối chiếu các chiến lược phòng ngừa liên quan đến phương tiện tài chính so với phương tiện hoạt động.

We consider product and process design problems (hereafter collectively called process design problems) that address issues associated with the assessment of optimum levels for process inputs that influence multiple-process performance measures. While this problem context encompasses many possible applications, we focus primarily on multiple-response design problems that have been widely studied in the quality improvement and quality management literature. For such problems, several optimization criteria have been proposed, including maximization of process yield, maximization of process capability, minimization of process costs, etc. In this research, we propose a method that accounts for many of these criteria via a procedure that interacts with and relies on the preferences of a decision maker (DM). The interactive procedure evolves from the convergence of three areas of research: notably, the research in multiple-response design, the research in multicriteria optimization, and recent developments in global optimization. The proposed interactive method is illustrated and comparatively assessed via two well-known problems in multiple-response design. Although the interactive procedure is developed for application in multiple-response design, it is not limited to this problem context. The concepts and methods developed in this research have applicability to problems that can be characterized by process inputs and process performance, such as supply chain management and multidisciplinary design optimization.

Modular upgradability has been suggested as a strategy for improving environmental performance: as technology improves, it allows for independent replacement of improving subsystems, instead of replacing the entire product. This may extend the useful life of stable subsystems, reducing production and disposal impact. However, this argument ignores the effect of modular upgradability on a firm's development and introduction decisions and the environmental impact during the use phase. In this paper, we investigate when modular upgradability leads to lower environmental impact and higher profits. We do so by endogenizing a firm's development and introduction decisions and considering the product's environmental impact during its entire life cycle. Our results show that although modular upgradability may accelerate the replacement of some subsystems, it delays the replacement of others. We find that modular upgradability can increase the environmental impact for some product categories due to accelerated obsolescence arising from more frequent introduction and replacement. However, we also find that accelerated obsolescence, under some conditions, can actually make modular upgradability greener.

Carbon footprinting is a tool for firms to determine the total greenhouse gas (GHG) emissions associated with their supply chain or with a unit of final product or service. Carbon footprinting typically aims to identify where best to invest in emission reduction efforts, and/or to determine the proportion of total emissions that an individual firm is accountable for, whether financially and/or operationally. A major and underrecognized challenge in determining the appropriate allocation stems from the high degree to which GHG emissions are the result of joint efforts by multiple firms. We introduce a simple but general model of joint production of GHG emissions in general supply chains, decomposing the total footprint into processes, each of which can be influenced by any combination of firms. We analyze two main scenarios. In the first scenario, the social planner allocates emissions to individual firms and imposes a cost on them (such as a carbon tax) in proportion to the emissions allocated. In the second scenario, a carbon leader voluntarily agrees to offset all emissions in the entire supply chain and then contracts with individual firms to recoup (part of) the costs of those offsets. In both cases, we find that, to induce the optimal effort levels, the emissions need to be overallocated, even if the carbon tax is the true social cost of carbon. This is in contrast to the usual focus in the life-cycle assessment (LCA) and carbon footprinting literatures on avoiding double counting. Our work aims to lay the foundation for a framework to integrate the economics- and LCA-based perspectives on supply chain carbon footprinting.

Co-production (simultaneous production of multiple outputs) occurs in some emission-intensive basic material and agricultural industries. This paper is motivated by ones in which a supplier sells its primary product to a buyer that incurs an emissions cost (voluntarily, or due to government-imposed climate policy) and sells co-products into markets without emissions costs. Emission-accounting standards provide three candidate rules for allocating the supplier’s emissions among its products. This paper shows that under the value-based allocation, imposing an emissions tax on the primary product can increase emissions, by motivating the supplier to lower the price and sell a larger quantity. In contrast, with the socially optimal choice of allocation rule characterized in this paper, imposing the emissions tax on the primary product can greatly reduce emissions and increase welfare. In the absence of climate policy, under value-based allocation, a buyer might achieve greater profit by paying to offset its supply chain emissions. That can motivate supplier innovation to reduce its production cost. In numerical examples, considering the rare earth cerium oxide (co-produced with iron) and palm oil (co-produced with palm meal), the choice of allocation rule has a large impact on emissions, a buyer’s profit, and social welfare.

We consider different statistical models for the call arrival process in telephone call centers. We evaluate the forecasting accuracy of those models by describing results from an empirical study analyzing real-life call center data. We test forecasting accuracy using different lead times, ranging from weeks to hours in advance, to mimic real-life challenges faced by call center managers. The models considered are (i) a benchmark fixed-effects model that does not exploit any dependence structures in the data; (ii) a mixed-effects model that takes into account both interday (day-to-day) and intraday (within-day) correlations; and (iii) two new bivariate mixed-effects models, for the joint distribution of the arrival counts to two separate queues, that exploit correlations between different call types. Our study shows the importance of accounting for different correlation structures in the data.