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Date of Award

Summer 8-15-2016

Author's School

Graduate School of Arts and Sciences

Author's Department

Business Administration

Additional Affiliations

Olin Business School

Degree Name

Doctor of Philosophy (PhD)

Degree Type

Dissertation

Abstract

The main purpose of this dissertation is to focus on designing and evaluating operational strategies to effectively mitigate both the production yield and the commodity price risks, which are among the primary challenges firms need to battle against in today's global economy.

In the first chapter, we investigate the fundamental question about how to allocate supply risk within a bilateral supply chain. More specifically, we consider a supplier-retailer supply chain with supply random yield and deterministic demand. We study the impact of three commonly used implementations of single wholesale price contracts on allocating supply yield risk between supply chain parties and on channel performance. In a push contract, the retailer controls the production decision and bears all the risk; in a pull contract, the supplier controls the production decision and bears all the risk; and in a hybrid contract, the retailer decides the order quantity whereas the supplier decides the production quantity. We completely characterize the firms' optimal decisions and contract preferences under both exogenous and endogenous wholesale prices. Our analysis shows that all the hybrid contracts are Pareto efficient within its own type, survive the challenges from both push and pull contracts, and maintain high channel efficiency, i.e., around 96% ~ 97% on average based on our numerical and worst case analysis. We then argue that the good performance of the hybrid contracts is not primarily due to the common wisdom of risk sharing, but lies in its unique structure property. More specifically, the hybrid contract implementation utilizes production inflation as an instrument to effectively combine all the Pareto efficient push and pull segments within their joint Pareto set into a single contract type. Consequently, when negotiating among wholesale price contracts, firms only need to restrict their negotiation within the hybrid contract type alone, which is simple, easy to implement, and efficient.

In the second chapter, we examine the interplay between supply diversification and price postponement as risk mitigation tools for a price-setting monopoly firm to deal with supply yield risk. We compare the optimal sourcing decisions under both ex ante pricing and responsive pricing (ex post) schemes and investigate the impact of pricing timing on the firm’s optimal sourcing and diversification decisions. For the case of one unreliable supplier, we show that responsive pricing mitigates the overage and underage risks imposed by yield uncertainty, and results in a lower [higher] optimal order quantity than that under ex ante pricing when the procurement cost is low [high]. For the case of one unreliable and one reliable suppliers, we find that an ex ante pricing firm finds no value in supply diversification, but responsive pricing gives rise to the need for supply diversification. For the case of two unreliable suppliers, we prove that responsive pricing promotes [discourages] supply diversification when supply reliability is low [high]. When supply reliability is moderate, responsive pricing promotes [discourages] supply diversification when the unit procurement cost is low [high]. Finally, we demonstrate that when facing strongly positively correlated yields, the firm ranks reliability higher than cost in supplier selection, and it may skip the cheaper supplier to select the expensive supplier if the latter is more reliable.

In the third chapter, we propose two technical assumptions to ensure the unimodality of the objective function in two classes of price and quantity decision problems with one procurement opportunity under supply random yield and deterministic demand in a price-setting environment. We provide appealing economic interpretations and easy-to-verify sufficient conditions for our proposed technical assumptions. We show that most commonly used continuous yield distributions satisfy both of our technical assumptions. Finally, we provide several examples to show that our technical Assumption 1 applies to a large class of random yield problems involving a single firm's price and quantity decisions under different contracts, payment schemes and supplier portfolios, and that our technical Assumption 2 applies to a large class of random yield problems involving a decentralized supply chain/assembly system under different configurations.

In the fourth chapter, we study two symmetric firms’ production lead time (long vs. short) and selling timing (forward vs. spot) choices in a competitive market with uncertain input commodity cost. We consider Cournot competition and model the cost uncertainty via a two-point distribution. Our results are summarized as follow: First, regarding to the production lead time choice, as the cost volatility or the ex ante cost increases, both firms simultaneously switch from long lead time to short lead time to enjoy the benefit of being responsive in reacting to the procurement cost risk. Second, regarding to the selling timing choice, when the ex ante cost is low, both firms choose sell forward with appropriated hedging strategy adopted to avoid default. When the ex ante cost is high, both firms choose sell forward but strategically default on the high cost realization. In contrast, when the ex ante cost is in an intermediate range, both firms choose to sell spot when the high cost state is more likely to occur. Interesting, when the low cost state is more likely to occur, both firms choose to sell forward with one hedges and the other strategically defaults on high cost state. Finally, when both production lead time and selling timing choices are available, choosing long lead time and carrying inventory without selling forward is always a weakly dominated strategy. Consequently, the market equilibrium structure remains the same as that under the case when only the selling timing choice is available.

Language

English (en)

Chair and Committee

Panos Kouvelis, Lingxiu Dong

Committee Members

John Nachbar, Danko Turcic, Nan Yang

Comments

Permanent URL: https://doi.org/doi:10.7936/K70C4T5Q

Available for download on Saturday, August 15, 2116

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