Three Essays on Incentive Problems of Parties with Potential Conflict of Interest

I study the impact of different incentives on strategic decisions of parties that have the option of cooperating with each other. Incentive problems are well studied in various contexts, such as supply chain management and healthcare operations management. However, in the fast-changing business environment, there is a need to study and understand the new and emerging strategic behaviors of firms to adopt better incentive mechanisms and reach desired outcomes. This dissertation consists of three essays that examine the strategic behavior of parties under different incentive schemes. In the first essay, I study the supply chain partnership of two potential competitors and evaluate the impact of limited capacity on their strategic behavior. An increasing number of original brand manufacturers (OBMs) do not have in-house production capability, and thus rely on competitive contract manufacturers (CCMs) on the supply side. This increasing demand puts CCMs in a capacity allocation dilemma between their own product and the OBM’s product. I derive the conditions that incentivize the two potential competitors to cooperate and compete (coopetition), compete, or only cooperate (supply chain partnership). I show that the OBM might multi-source its component demand only when competition in the final-product market is intense. Moreover, the CCM can be worse off from having more capacity, even when that CCM’s capacity is available for free. The second and third essays are inspired by changes in healthcare funding models that reward quality care. In the second essay, I examine performance-based payment contracts to promote the optimal use of an optional diagnostic test for cancer patients. This essay is inspired by three ongoing trends: tremendous increases in the cost of new advanced cancer drugs, development of new diagnostic tests to allow physicians to tailor treatments to patients, and changes in healthcare funding models that reward quality care. I model the interaction between two parties—a healthcare payer and an oncologist—where the oncologist has private information about the patient’s characteristics (adverse selection) and the payer does not know whether the optimal course of action is used by the oncologist (moral hazard). I demonstrate that, in the presence of information asymmetry, an oncologist should never test all patients, even when the diagnostic test is available for free. I also show that it is not iii always socially optimal to make a diagnostic test compulsory, even if such a policy can be implemented for free. In the third essay, I study gain-sharing agreements between a hospital and a healthcare provider that can only treat a patient and achieve the desired quality of care with collective effort. The Centers for Medicare and Medicaid Services (CMS) introduced a bundled payment model for lower extremity joint replacement (LEJR) that offers hospitals a fixed bundled payment for a patient’s treatment expenses during acute and post-acute care. This bundled payment model aims to incentivize hospitals to enter into agreements with providers to ensure that the total treatment cost and care quality meets the bundled payment requirements. However, I show that the bundled payment does not always incentivize a hospital to offer gain-sharing agreements to the provider. Furthermore, I show that the provider prefers a low bundled payment, such that the hospital needs the provider to reduce the total cost of treatment

Coordinating Contracts in SCM: A Review of Methods and Literature

Supply chain coordination through contracts has been a burgeoning area of re- search in recent years. In spite of rapid development of research, there are only a few structured analyses of assumptions, methods, and applicability of insights in this field. The aim of this paper is to provide a systematic overview of coordinating contracts in supply chain through highlighting the main concepts, assumptions, methods, and present the state-of-the- art research in this field

Three Essays on Pricing and Risk Management in Industrial Practice.

In this dissertation, I study three types of uncertainties in industrial practice: the demand uncertainty, the earnings uncertainty and the external market uncertainty. In particular, Chapter 2 prices the demand uncertainties in the just-in-time (JIT) outsourcing between an original equipment manufacturer (OEM) and a contract manufacturer (CM) with flexible production capacity. Under this JIT outsourcing arrangement, the OEM transfers uncertain market demand to the CM without explicitly compensating the latter for the cost due to demand risks. I propose a model that prices the CM's cost of bearing this demand risk and the OEM's benefit of transferring it. I show that when the outsourcing demand is positively correlated with the either party's existing business, the higher risk it carries, the more it benefits the OEM and costs the CM. Chapter 3 proposes a model for a managed print services (MPS) provider to manage his earnings uncertainties by selecting contract terms. MPS is the unified management over institutional customers’ hardcopy device fleets. Using a proprietary dataset of Xerox, I study the optimal contracts from a risk-averse provider’s perspective. On the customer's side, I demonstrate that the customer's printing demand is insensitive to service prices. Furthermore, I show that a linear model can adequately characterize the customer's service payments. Using this linear model as an input, I build an optimization model that yields the optimal contracts that minimize the provider’s earnings variability while maximizing the expected earnings. Finally, I provide empirical evidence that the provider is better modeled as being risk-averse rather than risk-neutral. Chapter 4 aims to understand the uncertainties of the external market trends and market responses using resale prices of a particular type of used durable goods. I identify the market trends within each functionality segment, across the industry, and within each brand and OEM. I observe that the external market trends capture up to 81.4% of the volatility of an arbitrary product’s resale price, indicating strong comovements among different products. I also show there is no material impact on product resale prices due to brand termination. A big product recall, however, results in significant product price drops.PhDIndustrial & Operations EngineeringUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/100031/1/jien_1.pd

Managing Emerging Market Operations

Emerging markets have been a critical part of global business, with high share of global GDP and rapid economy growth. My dissertation research focuses on studying risks and opportunities in emerging market operations. One critical characteristic of emerging markets is that agriculture remains an essential sector. The world looks to emerging countries to meet the increasing food demand. However, the output remains significantly below the potential due to limited financial, technology and policy support. Scientific agriculture such as effective planting and mechanization could potentially help farmers achieve higher yields. In the first chapter of my dissertation, we study the optimal seeding policy under rainfall uncertainty. Utilizing field weather data from Southern Africa, we investigate the advantage of the optimal planting schedule and the impact of climate conditions on this advantage in a real-size large-scale problem. Another critical characteristic of emerging markets is the low labor cost. This makes emerging markets attractive bases for global manufacturing and service operations. However, the globalization of supply chains complicates the logistics and procurement operations. In the second chapter, we focus on the warehouse outsourcing strategy in global supply chains. We establish the optimal warehousing strategy and demonstrate that excluding the logistics dynamics from contracting and making warehousing decisions unilaterally afterwards can lead to a suboptimal warehousing strategy for the retailer. Furthermore, a variety of threats such as supplier failure and transportation disruption could delay or even disrupt the operations, offsetting the low-cost benefit of emerging economies. In the third chapter, we study the optimal sourcing strategy under disruption in global supply chains. We establish the optimal sourcing strategy and provide insights on the roles of the nearshore supplier in response to supply chain disruption. Overall, my dissertation concentrates on the application of scientific methods to planting and farm machinery procurement to improve agricultural productivity in Africa and leveraging low-cost benefits in emerging markets.Doctor of Philosoph

Capacity Management: Intra-Firm and Inter-Firm Perspectives.

Capacity management is challenging. Many decisions regarding capacity are made before full information is known, often requiring large and irrevocable expenditures. Moreover, the consequences of wrong capacity decisions critically affect the firm’s bottom line. In recent years, the capacity decision has become of particular interest, reflecting two principal trends. First, advances in information technology that provide huge amounts of data about operations and demand offer firms potential to utilize this big data in making capacity decisions. Second, although supply chains today are highly decentralized with complex topologies, many buying firms and suppliers aim to maintain tight relationships with initiatives such as supplier development, among which capacity investment is an important strategic decision. Corresponding to the two streams, we analyze a firm’s capacity management decision, how much capacity a firm should have and why, at both intra-firm and inter-firm levels. At the intra-firm level, we investigate how a firm should learn demand information and leverage the information in capacity decisions. In Chapter II, we formulate a firm’s capacity adjustment plan when the demand distribution is unknown as a stochastic dynamic program, and derive the optimal policy and date-driven heuristics. At the inter-firm level, using game theory, we examine how a firm should manage its capacity at a shared supplier given two contractual constraints: exclusive, where other firms cannot access the leftover, and first-priority, where they can. In Chapter III where firms compete and the capacity cost consists of a fixed and a variable portion, we find that firms tend to invest more aggressively under the exclusive contract. Therefore, sometimes the firm may benefit from letting a competitor free-ride on the invested capacity. In Chapter IV where firms may or may not compete and the capacity cost has a variable portion, we characterize two equilibria: a prisoner’s dilemma, where both firms choose the exclusive capacity which is not Pareto-optimal, and a free-rider equilibrium, where one firm chooses the first-priority capacity and allows the other with exclusive capacity to free ride. Both equilibria can be sustained when the firms serve independent markets, but not when they compete in a Cournot market.PhDBusiness AdministrationUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/108902/1/anyqi_1.pd

Risk Ownership in Contract Manufacturing

We consider a supply chain where a contract manufacturer (CM) serves a number of original equipment manufacturers (OEMs). Investment into productive resources is made before demand realization, hence the supply chain faces the risk of under- or overinvestment. The CM and OEMs differ in their forecast accuracy and in their resource pooling capabilities, leading to a disparity in their ability to minimize costs due to demand uncertainty. We consider two scenarios in which this risk is borne by the OEM and CM, respectively. We determine which party should bear the risk so that maximum supply chain profits are achieved. We investigate the effectiveness of premium-based schemes in inducing the best party to bear the risk, and conclude that they function well despite information asymmetry when double marginalization is not very high.information asymmetry, risk ownership, contract manufacturing, resource pooling