Coordination and competition in resource-constrained channels

This thesis deals with five important ideas pertaining to supply chains and supply contracts: coordination, flexibility in allocating profit, the push-pull boundary, the valuation of capacity, and cooperation versus competition and its efects on profit and prices. Throughout the thesis, we focus on capacity-constrained supply channels, motivated by the fact that most real-world supply chains have physical or monetary constraints. In the first part of this thesis, we show that when a supply channel is capacityconstrained and the constraint is tight, there is a set of linear wholesale price contracts that coordinates the channel while allowing the supplier to make a profit. We prove this for the one-supplier/one-newsvendor supply channel as well as the manysupplier/one-newsvendor channel configuration (with each supplier selling a unique product). We analyze how this set of wholesale prices changes as we change the channel's capacity constraint. We also explore conditions under which these channelefficient linear wholesale price contracts result from the equilibrium behavior of a newsvendor procurement game. Our newsvendor procurement game generalizes the Stackelberg game introduced in Lariviere and Porteus (2001) to allow for multiple suppliers as well as a capacity constraint at the newsvendor. In order to convey the worst-case channel performance when these channel-efficient contracts are not used in equilibrium, we quantify the worst-case efficiency loss for the supply channel using a distribution-free method. We also identify the set of Pareto-dominated contracts in a negotiation setting. Furthermore, unlike the unconstrained setting, we show that in the constrained setting wholesale price contracts can be flexible in allocating the channel profit without necessarily sacrificing coordination. Finally, we find the set of risk-sharing contracts (such as buy-back and revenue-sharing contracts) that coordinate a constrained supply channel and contrast that set with the set of risk-sharing contracts that coordinate an unconstrained channel. We show that in a capacity constrained channel, even risk-sharing contracts gain extra flexibility because for any given level of risk, there is now a range of possible allocations of the system optimal profit between the supplier and retailer. (Without a capacity constraint, for any given level of risk, there is only one allowable allocation of channel optimal profit between the supplier and retailer.) In other words, in a capacity-constrained environment, using risk-sharing contracts, for any given level of risk, we show there is flexibility in allocating the channel optimal profit. In the second part of this thesis, we consider a supply channel with a capacity constraint in which the retailer makes an order quantity decision that depends only on realized demand rather than a forecast, and instead the supplier is the newsvendor for the channel making a stocking decision based on a forecast. In other words, the retailer now 'pulls' inventory from the supplier as demand is realized which differs from the model in the first part of this thesis wherein the supplier 'pushes' inventory onto the retailer before the sales season begins. We find that for the new supply channel similar results hold. Namely, when the retailer is operating in 'pull-mode', there is a set of 'pull' wholesale price contracts that coordinates the channel while allowing the retailer to make a profit. We analyze how this set of wholesale prices changes as we change the channel's capacity constraint. We also explore conditions under which these channel-efficient 'pull' wholesale price contracts result from the equilibrium behavior of a newsvendor procurement game. Our newsvendor procurement game generalizes the Stackelberg game introduced in Cachon and Lariviere (2001) to allow for multiple retailers as well as a capacity constraint at the newsvendor. We assess the worst-case channel performance in equilibrium when these channel-efficient contracts are not selected. Furthermore, we identify the set of Pareto-dominated 'pull' contracts in a negotiation setting. Finally, we identify the wholesale price contracts that coordinate regardless of the supply chain's mode of operation. In the third part of this thesis, we consider a supply channel, operating in 'push'mode, with multiple suppliers selling differentiated products to one newsvendor with limited capacity, using wholesale price contracts. We show that both in a negotiation setting as well as in an equilibrium setting, with the suppliers selecting wholesale prices followed by the newsvendor choosing order quantities, each supplier incurs an endogenous price for their share of the newsvendor's capacity. We intrepret this price as the value of the newsvendor's capacity and analyze the capacity's price in both a negotiation and an equilibrium setting. Furthermore, we show that our capacity valuation technique can be applied to different supply chain settings by analyzing the capacity price for a different supply chain, operating in 'pull'-mode, with one supplier with limited capacity selling differentiated products to multiple retailers. Finally, we analyze the effects of collusion on prices and profits in both these settings. Thesis Supervisor: Yossi Sheffi Title: Professor of Engineering Systems and Civil & Environmental Engineering Thesis Supervisor: John N. Tsitsiklis Title: Clarence J Lebel Professor of Electrical Engineering Acknowledgments First and foremost, I am extremely grateful to both of my thesis advisors, Professor Sheffi and Professor Tsitsiklis. Their advice, encouragement, enthusiasm, insights, support, and mentorship have been immensely valuable. From the first day that they started guiding me, I knew that I was extremely fortunate to be privy to their deep research vision and vast experiences. I am very thankful for their genuine concern, efforts, and patience towards my development from a student to a researcher. I am deeply indebted to them. I am also very much in the debt of Professor Cachon and Professor Lariviere for their leadership and contributions to the supply contracts literature. Professor Sheffi introduced me to this amazing literature when he handed me Professor Cachon's survey article on supply contracts. This thesis might have been in an entirely different area, if they did not publish the papers that we cite in this thesis. I thank them for being clear, patient, motivated, and inspirational in this literature. I am very grateful to my thesis committee members, Professor Cachon and Professor Ozdaglar. Their insightful feedback led to many improvements for the final version of this thesis. Special thanks go to the administrators in the Course 6 Graduate Student Office and the Laboratory for Information and Decision Systems. I am very grateful for their support and thoughtfulness throughout my time at MIT. This research was supported by the MIT-Zaragoza Project funded by the government of Aragon.