Extensions of the Newsvendor Model – Incorporating Real Life Scenarios Using Decision Analytics

Decision Analysis is an important topic in the field of Operations Research. This article is a result of discussing the well-known newsvendor model in the classroom over many semesters. We present the newsvendor model in our MBA class but go beyond what textbooks provide. We extend this model by incorporating two specific real-life scenarios. We create the modified payoff table using spreadsheets. We then consider what-if scenarios and perform sensitivity analysis using the Data Table command in Excel. Important concepts like backordering/late shipment, cost of lost customer goodwill, and clearance pricing are discussed. The discussion of these concepts is extremely valuable even without spreadsheets

Efficient Supply Chain Contracting with Loss-averse Players in Presence of Multiple Plausible Breaches

The legal literature distinguishes between the liquidated damage and the penalty clauses in contracts, and holds that penalties designed for the prevention of breach are excessive compared to the liquidated damages. In an efficient supply chain contract, the penalty must satisfy the participation and incentive compatibility constraints of the signatories. Considering loss-averse players, we have calculated optimal penalties in a supply chain contract and compared those with the liquidated damages. Two possible breaches are considered – a breach in quality of the delivery and a breach in the process. In the absence of any penalty, a process breach reduces the supplier’s delivery risk and cost of delivery. Determining the parametric conditions for efficient contracts, numerically we show the effects of various variables on the zone of efficient contract. We show that the optimal penalties need not be excessive compared to the liquidated damages

Economic Order Quantity (EOQ) Inventory Management - Essays in Experimental Economics

This thesis consists of six chapters to experimentally study aspects of how levels of individuals’ cognitive stress, cognitive ability and self-regulatory resource affect their decision making under the Economics Order Quantity (EOQ) inventory management environment. In Chapter 3 we use laboratory experiments to evaluate the effects of cognitive stress on inventory management decisions in a finite horizon economic order quantity model. We manipulate two sources of cognitive stress. First, we vary participants’ participation in a pin memorisation task. This exogenously increases cognitive load. Second, we introduce an intervention to reduce cognitive stress by only allowing participants to order when inventory is depleted. This intervention restricts the policy choice set. Increases in cognitive load negatively impact earnings with and without the intervention, with these impacts occurring in the first year. Participants’ in all treatments tend to adopt near optimal policies. However, only in the intervention and low cognitive load treatment do the majority of choices reach the optimal policy. Our results suggest that higher levels of multitasking lead to lower initial performance when taking on new product lines, and that the benefits of providing support and task simplicity are greatest when the task is first assigned. In Chapter 4 we use laboratory experiments to evaluate the effects of individuals’ cognitive abilities on their behaviour in a finite horizon economic order quantity model. Participants’ abilities to balance intuitive judgement with cognitive deliberations are measured by the Cognitive Reflection Test (CRT). Participants then complete a sequence of five “annual” inventory management tasks with monthly ordering decisions. Our results show that participants with higher CRT scores on average earn greater profit and choose more effective inventory management policies. However these gaps are transitory as participants with lower CRT scores exhibit faster learning. We also find a significant gender effect on CRT scores. This suggests hiring practices incorporating CRT type of instruments can lead to an unjustified bias. In Chapter 5 we use laboratory experiments to evaluate the effects of individuals’ ability to self- regulate on inventory management decisions in a finite horizon economic order quantity model. An ego depletion task is implemented aiming to diminish one’s self-regulatory resources. From a psychological point of view, self-control is impaired when the mental resource has been used up over effortful control of responses. In our experiment, participants complete an ego depletion task followed by a sequence of five “annual” inventory management tasks with monthly ordering decisions. Our results show there is no obvious treatment effect on participants’ self-regulation ability

Business Model Innovation, Social Interactions, and Behavioral Decision Making

University of Minnesota Ph.D. dissertation. August 2019. Major: Industrial and Systems Engineering. Advisors: Guangwen Kong, Saif Benjaafar. 1 computer file (PDF); xiii, 181 pages.This thesis consists of three parts. All chapters are centered around the behavioral decision making and business model innovation. In the first essay, we study a supply chain with a supplier selling products to a retailer who is boundedly rational. Under this setting, we study the impacts of the retailer's bounded rationality on the supplier's choice of contract and the supply chain efficiency. We develop a behavioral model that incorporates the human retailers bounded rationality in a supply chain setting. We then conduct a series of laboratory experiments to test whether the model's predictions are still salient even when the supplier is not necessarily rational. In contrast to a supply chain with a fully rational retailer, where a wholesale price contract usually cannot perform better than more complicated nonlinear contracts, we find that when the retailer is boundedly rational a wholesale price contract can dominate commonly used nonlinear contracts such as buy-back and revenue sharing contracts. We characterize the conditions under which a wholesale price contract outperforms more sophisticated non-linear price contracts for the supplier. In both theoretical model and the experiments, we find that a wholesale price contract is more likely to be implemented by the supplier when the supply chain profit margin is low, the retailer is less rational, the demand variance is high, and the retailer's reservation value is high. The results can explain the prevalence of wholesale price contract in business practice when the rationality of retailers cannot always be guaranteed. We also find that the retailer's bounded rationality plays a more important role in determining supply profit than the supplier's bounded rationality. In the second essay, we consider a setting which involves a service provider who sells access to a service or a product to a unit mass of heterogenous consumers. Such s business model is gaining popularity in recent years. With this growth comes opportunities for peer-to-peer trading marketplaces to emerge. However, there is a debate on whether or not peer-to-peer trading of excess capacity is beneficial to service providers and consumers. The second essay in this thesis aims to shed light on this debate and identifies conditions under which the existence of such marketplaces can be a win-win situation for all parties. We develop a game-theoretic model in which consumers participate in a simultaneous coordination game. Consumers are strategic and take into account the opportunity of purchasing or selling extra capacity on the trading market. Our model captures the heterogeneity of consumers' demand and the service provider's ability to modify service plans in view of this trading among consumers. We compare equilibrium outcomes with and without trading and show that outcomes with regard to service provider profit, consumer surplus, and social welfare are crucially dependent on service cost and trading price. A service provider would benefit from trading as long as the trading price is not too low (a low trading price encourages more consumers to opt for the low plan) and the service cost is not too high (a high service cost makes increased consumption due to trading too costly). A trading price that is too low can decrease consumer surplus and social welfare. Hence, a social planner would be interested in inducing a moderate or high trading price. In settings where the service provider can modify prices, consumers are no longer guaranteed to benefit from trading. In this case, trading can hurt consumers if the trading price is either sufficiently high (resulting in consumers paying a higher price for the higher plan) or sufficiently low (resulting in less consumption because more consumers opt for the low plan). Our results provide guidance to service providers, consumers, and policy makers as to when peer-to-peer trading may or may not be beneficial. The results highlight the important interplay between trading price and cost of service in determining various outcomes. For policymakers, the results can be useful in pointing out when such trading improves outcomes for consumers or social welfare and to potential policy levers that could be deployed to affect outcomes. Finally, in the last essay, we study the interaction between information asymmetry and the reciprocity in a financial crowdfunding setting. Most of the crowdfunding platforms encourage entrepreneurs to tap into their social network and bring investors from their social networks to their crowdfunding campaigns. This is done with the intention of creating the early momentum which appears to be the key to running a crowdfunding campaign. However, the incentives and information of those investors who are attracted to crowdfunding campaign from the entrepreneur's social network could be different from other investors who do not have a social tie with the entrepreneur. On the other hand, the regular investors do not have a social tie with the entrepreneur and their sole investment motivation is financial. In the last essay of this thesis, we develop a signaling game to better understand the interaction between the reciprocity and the information flow in a financial crowdfunding setting. Our main result indicates that the reciprocity may create a situation in which the informed investor (those from the entrepreneur's social network) cannot signal their type via distorting her investment