Supply chain coordination by contracts under binomial production yield

Supply chain coordination is enabled by adequately designed contracts so that decision making by multiple actors avoids efficiency losses in the supply chain. From literature it is known that in newsvendor type settings with random demand and deterministic supply the activities in supply chains can be coordinated by sophisticated contracts while the simple wholesale price contract fails to achieve coordination due to the double marginalization effect. Advanced contracts are typically characterized by risk sharing mechanisms between the actors, which have the potential to coordinate the supply chain. Regarding the opposite setting with random supply and deterministic demand, literature offers a considerably smaller spectrum of solution schemes. While contract types for the well-known stochastically proportional yield have been analyzed under different settings, other yield distributions have not received much attention in literature so far. However, practice shows that yield distributions strongly depend on the industry and the production process that is considered.This paper analyzes a buyer-supplier supply chain in a random yield, deterministic demand setting. It is shown how under binomially distributed yields risk sharing contracts can be used to coordinate buyer’s ordering and supplier’s production decision. Both parties are exposed to risks of overproduction and under-delivery. In contrast to settings with stochastically proportional yield, however, the impact of yield uncertainty can be quite different in the binomial yield case. Under binomial yield, the output uncertainty decreases with larger production quantities while it is independent from lot sizes under stochastically proportional yield. Consequently, the results from previous contract analyses on other yield types may not hold any longer. The current study reveals that, like under stochastically proportional yield, coordination is impeded by double marginalization if a simple wholesale price contract is applied. However, more sophisticated contracts which penalize or reward the supplier can change the risk distribution so that supply chain coordination is possible under binomial yield. Thus, even though risk diminishes with larger lot sizes, the supply chain benefits from advanced risk sharing contracts because they trigger coordinated behavior

Coordinating a Supply Chain with a Loss-Averse Retailer under Yield and Demand Uncertainties

This paper investigates the channel coordination of a supply chain (SC) consisting of a loss-averse retailer and a risk-neutral supplier under yield and demand uncertainties. Three existing contracts are analyzed. Our results demonstrate that the buyback (BB) and quantity flexibility (QF) contracts can not only coordinate the supply chain but also lead to Pareto improvement for each player, while the wholesale price (WP) contract fails to coordinate the chain due to the effects of double marginalization and risk preference. For comparison, a chain with a risk-neutral retailer is also analyzed. Furthermore, numerical examples are provided to demonstrate the effectiveness of the coordination contracts, and the impacts of loss aversion and random yield on the decision-making behaviors and system performance are then discussed

Stay by thy neighbor? Social organization determines the efficiency of biodiversity markets with spatial incentives

Market-based conservation instruments, such as payments, auctions or tradable permits, are environmental policies that create financial incentives for landowners to engage in voluntary conservation on their land. But what if ecological processes operate across property boundaries and land use decisions on one property influence ecosystem functions on neighboring sites? This paper examines how to account for such spatial externalities when designing market-based conservation instruments. We use an agent-based model to analyze different spatial metrics and their implications on land use decisions in a dynamic cost environment. The model contains a number of alternative submodels which differ in incentive design and social interactions of agents, the latter including coordinating as well as cooperating behavior of agents. We find that incentive design and social interactions have a strong influence on the spatial allocation and the costs of the conservation market.Comment: 11 pages, 6 figure

Job Selection in a Network of Autonomous UAVs for Delivery of Goods

This article analyzes two classes of job selection policies that control how a network of autonomous aerial vehicles delivers goods from depots to customers. Customer requests (jobs) occur according to a spatio-temporal stochastic process not known by the system. If job selection uses a policy in which the first job (FJ) is served first, the system may collapse to instability by removing just one vehicle. Policies that serve the nearest job (NJ) first show such threshold behavior only in some settings and can be implemented in a distributed manner. The timing of job selection has significant impact on delivery time and stability for NJ while it has no impact for FJ. Based on these findings we introduce a methodological approach for decision-making support to set up and operate such a system, taking into account the trade-off between monetary cost and service quality. In particular, we compute a lower bound for the infrastructure expenditure required to achieve a certain expected delivery time. The approach includes three time horizons: long-term decisions on the number of depots to deploy in the service area, mid-term decisions on the number of vehicles to use, and short-term decisions on the policy to operate the vehicles

Middlemen: the visible market makers

This paper presents a search-theoretic model where middlemen can emerge endogenously to intermediate between ex ante homogeneous buyers and sellers in the presence of coordination frictions. Middlemen set price to compete in the market, and hold an inventory to provide a high matching service. I show that middlemen's inventories can mitigate trade imbalances and interact with price competition, generating an interesting tradeoff for the equilibrium price determination. The competitive limit emerges when middlemen guarantee excess demand will never occur. Conditions are characterized under which middlemen carry out the short-side principle for the market price to be Walrasian

Integrating Closed-loop Supply Chains and Spare Parts Management at IBM

Ever more companies are recognizing the benefits of closed-loop supplychains that integrate product returns into business operations. IBMhas been among the pioneers seeking to unlock the value dormant inthese resources. We report on a project exploiting product returns asa source of spare parts. Key decisions include the choice of recoveryopportunities to use, the channel design, and the coordination ofalternative supply sources. We developed an analytic inventory controlmodel and a simulation model to address these issues. Our results showthat procurement cost savings largely outweigh reverse logistics costsand that information management is key to an efficient solution. Ourrecommendations provide a basis for significantly expanding the usageof the novel parts supply source, which allows for cutting procurementcosts.supply chain management;reverse logistics;product recovery;inventory management;service management

The crisis of 1998 and the role of the central bank

Following the Russian default and devaluation in August 1998, financial markets were characterized by a withdrawal of liquidity, a flight to the safest assets, increased concerns about credit quality, and large declines in asset values. However, the crisis ended following a rather modest interest rate cut by the Federal Reserve. Why did the central bank's action have this effect? This article argues that the crisis was an episode of potential coordination failure, triggered by, but distinct from, the events in Russia. The Federal Reserve's action signaled a policy change that serve to eliminate the coordination failure equilibrium.Financial crises ; Banks and banking, Central

Competing for Contacts: Network Competition, Trade Intermediation and Fragmented Duopoly

A two-sided, pair-wise matching model is developed to analyse the strategic interaction between two information intermediaries who compete in commission rates and network size, giving rise to a fragmented duopoly market structure. The model suggests that network competition between information intermediaries has a distinctive market structure, where intermediaries are monopolistic service providers to some contacts but duopolists over contacts they share in their network overlap. the intermediaries' inability to price discriminate between the competitive and non-competitive market segments, gives rise to an undercutting game, which has no pure strategy Nash equilibrium. The incentive to randomise commission rates yields a mixed strategy Nash equilibrium. Finally, competition is affected by the technology of network development. The analysis shows that either a monopoly or a fragmented duopoly can prevail in equilibrium, depending on the network-building technology. Under convexity assumptions, both intermediaries invest in a network and compete over common matches, while randomising commission rates. In contrast, linear network development costs can only give rise to a monopolistic outcome.International Trade, Pairwise Matching, Information Cost, Intermediation, Networks