Tamer Boyaci

Journal Article
Forthcoming

Consumer choice under limited attention when alternatives have different information costs

Operations Research
Frank Huettner, Tamer Boyaci, Yalçın Akçay
Abstract:
Subject(s): Product and operations management
Keyword(s): Discrete choice, rational inattention, information acquisition, non-uniform information costs, market inference
JEL Code(s): D40, D80

Consumers often do not have complete information about the choices they face and therefore have to spend time and effort in acquiring information. Since information acquisition is costly, consumers trade-off the value of better information against its cost, and make their final product choices based on imperfect information. We model this decision using the rational inattention approach and describe the rationally inattentive consumer’s choice behavior when she faces alternatives with different information costs. To this end, we introduce an information cost function that distinguishes between direct and implied information. We then analytically characterize the optimal choice probabilities. We find that non-uniform information costs can have a strong impact on product choice, which gets particularly conspicuous when the product alternatives are otherwise very similar. There are significant implications on how a seller should provide information about its products and how changes to the product set impacts consumer choice. For example, non-uniform information costs can lead to situations where it is disadvantageous for the seller to provide easier access to information for a particular product, and to situations where the addition of an inferior (never chosen) product increases the market share of another existing product (i.e., failure of regularity). We also provide an algorithm to compute the optimal choice probabilities and discuss how our framework can be empirically estimated from suitable choice data.

© 2018, INFORMS


Journal Article
New

Did Europe move in the right direction on e-waste legislation?

Production and Operations Management 28 (1): 121–139
Shumail Mazahir, Vedat Verter, Tamer Boyaci, Luk N. Van Wassenhove (2019)
Abstract:
Subject(s): Product and operations management
Keyword(s): Legislation, product recovery, remanufacturing, recycling, end-of-life products

This paper presents an analytical framework of the product take back legislation in the context of product reuse. We characterize existing and proposed forms of E-waste legislation and compare their environmental and economic performance. Using stylized models, we analyze an OEM’s decision about new and remanufactured product quantity in response to the legislative mechanism. We focus on the 2012 waste electrical and electronic equipment directive in Europe, where the policy-makers intended to create additional incentives for the product reuse. Through a comparison to the original 2002 version of the directive, we find that these incentives translate into improved environmental outcomes only for a limited set of products. We also study a proposed policy that advocates a separate target for the product reuse. Our analysis reveals that from an environmental standpoint, the recast version is always dominated either by the original policy or by the one that advocates a separate target for the product reuse. We show that the benefits of a separate reuse target scheme can be fully replicated with the aid of fiscal levers. Our main message is that there can not be a single best environmental policy that is suitable for all products. Therefore, the consideration of product attributes is essential in identification of the most appropriate policy tool. This can be done either by the implementation of different policies on each product category or by implementation of product based target levels.

© 2018 Production and Operations Management Society

Volume 28
Issue 1
Pages 121–139

Journal Article

Brand positioning and consumer taste information

European Journal of Operational Research 268 (2): 555–568
Arcan Nalca, Tamer Boyaci, Saibal Ray (2018)
Abstract:
Subject(s): Product and operations management
Keyword(s): Supply chain management, uncertain consumer taste, product introduction, product positioning, store brands, national brands, information acquisition, information sharing, vertical differentiation, horizontal differentiation

In this paper, we study how a retailer can benefit from acquiring consumer taste information in the presence of competition between the retailers store brand (SB) and a manufacturers national brand (NB). In our model, there is ex-ante uncertainty about consumer preferences for distinct product features, and the retailer has an advantage in resolving this uncertainty because of his close proximity to consumers. Our focus is on the impact of the retailers information acquisition and disclosure strategy on the positioning of the brands. Our analysis reveals that acquiring taste information allows the retailer to make better SB positioning decisions. Information disclosure, however, enables the manufacturer to make better NB positioning decisions – which in return may benefit or hurt the retailer. For instance, if a particular product feature is quite popular, then it is beneficial for the retailer to incorporate that feature into the SB, and inform the manufacturer so that the NB also includes this feature. Information sharing, in these circumstances, benefits both the retailer and the manufacturer, even though it increases the intensity of competition between the brands. But, there are situations in which the retailer refrains from information sharing so that a potentially poor positioning decision by the NB makes the SB the only provider of the popular feature. The retailer always benefits from acquiring information. However, it is beneficial to the manufacturer only if the retailer does not introduce an SB due to the associated high fixed cost.

With permission of Elsevier

Volume 268
Issue 2
Pages 555–568

Journal Article

Pricing when customers have limited attention

Management Science 64 (7): 2995–3014
Tamer Boyaci, Yalçın Akçay (2018)
Abstract:
Subject(s): Product and operations management
Keyword(s): Pricing, choice behavior, rational inattention, information acquisition, signaling game

We study the optimal pricing problem of a monopolistic firm facing customers with limited attention and capability to process information about the value (quality) of a single offered product. We model customer choice based on the theory of rational inattention in the economics literature, which enables us to capture not only the impact of true quality and price, but also the intricate effects of customer’s prior beliefs and cost of information acquisition and processing. We formulate the firm’s price optimization problem assuming that the firm can also use the price to signal the quality of the product to customers. To delineate the economic incentives of the firm, we first characterize the pricing and revenue implications of customer’s limited attention without signaling, and then use these results to explore Perfect Bayesian Equilbiria (PBE) of the strategic pricing signaling game. As an extension, we consider heterogeneous customers with different information costs as well as prior beliefs. We discuss the managerial implications of our key findings and prescribe insights regarding information provision and product positioning.

© 2017, INFORMS

Volume 64
Issue 7
Pages 2995–3014

Journal Article

Joint procurement and demand-side bidding strategies under price volatility

Annals of Operations Research 257 (1–2): 121–165
Xiaofeng Nie, Tamer Boyaci, Mehmet Gumus, Saibal Ray, Dan Zhang (2017)
Abstract:
Subject(s): Product and operations management
Keyword(s): Supply chain management, procurement, bidding, supply risk, price volatility, price-dependent base-stock policy

We consider a firm buying a commodity from a spot market as raw material and selling a final product by submitting bids. Bidding opportunities (i.e., demand arrivals) are random, and the likelihood of winning bids (i.e., selling the product) depends on the bid price. The price of the commodity raw material is also stochastic. The objective of the firm is to jointly decide on the procurement and bidding strategies to maximize its expected total discounted profit in the face of this demand and supply randomness. We model the commodity prices in the spot market as a Markov chain and the bidding opportunities as a Poisson process. Subsequently, we formulate the decision-making problem of the firm as an infinite-horizon stochastic dynamic program and analytically characterize its structural properties. We prove that the optimal procurement strategy follows a price-dependent base-stock policy and the optimal bidding price is decreasing with respect to the inventory level. We also formulate and analyze three intuitively appealing heuristic strategies, which either do not allow for carrying inventory or adopt simpler bidding policies (e.g., a constant bid price or myopically set bid prices). Using historical daily prices of several commodities, we then calibrate our models and conduct an extensive numerical study to compare the performances of the different strategies. Our study reveals the importance of adopting the optimal integrative procurement and bidding strategy, which is particularly rewarding when the raw material prices are more volatile and/or when there is significant competition on the demand side (the probability of winning is much smaller when submitting the same bid price). We establish that the relative performances of the three heuristic strategies depend critically on the holding cost of raw material inventory and the competitive environment, and identify conditions under which the shortfalls in profits from adopting such strategies are relatively less significant.

© Springer Science+Business Media New York 2015. With permission of Springer

Volume 257
Issue 1–2
Pages 121–165

Journal Article

United we stand or divided we stand? Strategic supplier alliances under order default risk

Management Science 62 (5): 1297–1315
Xiao Huang, Tamer Boyaci, Mehmet Gumus, Saibal Ray, Dan Zhang (2016)
Abstract:
Subject(s): Management sciences, decision sciences and quantitative methods, Product and operations management
Keyword(s): Cooperation, competition, supply risk, coalition stability, supplier alliances

We study the alliance formation strategy among suppliers in a framework with one downstream firm and n upstream suppliers. Each supplier faces an exogenous random shock that may result in an order default. Each of them also has access to a recourse fund that can mitigate this risk. The suppliers can share the fund resources within an alliance, but they need to equitably allocate the profits of the alliance among the partners. In this context, suppliers need to decide whether to join larger alliances that have better chances of order fulfillment or smaller ones that may grant them higher profit allocations. We first analytically characterize the exact coalition-proof Nash-stable coalition structures that would arise for symmetric complementary or substitutable suppliers. Our analysis reveals that it is the appeal of default risk mitigation, rather than competition reduction, that motivates cooperation. In general, a riskier and/or less fragmented supply base favors larger alliances, whereas substitutable suppliers and customer demands with lower pass-through rates result in smaller ones. We then characterize the stable coalition structures for an asymmetric supplier base. We establish that grand coalition is more stable when the supplier base is more homogeneous in terms of their risk levels, rather than divided among a few highly risky suppliers and other low-risk ones. Going one step further, our investigation of endogenous recourse fund levels for the suppliers demonstrates how financing costs affect suppliers’ investments in risk-reducing resources and, consequently, their coalition formation strategy. Last, we discuss model generalizations and show that, in general, our insights are quite robust.

© 2016 INFORMS

Volume 62
Issue 5
Pages 1297–1315

Journal Article

Effects of upstream and downstream mergers on supply chain profitability

European Journal of Operational Research 249 (1): 131–143
Jing Zhu, Tamer Boyaci, Saibal Ray (2016)
Abstract:
Subject(s): Product and operations management
Keyword(s): Mergers, supply chain, differentiated products, market power, operational synergy

This paper studies the implications of upstream and/or downstream horizontal mergers on suppliers, retailers and consumers, in a bilateral oligopolistic system. We especially focus on market power and operational synergy benefits that such mergers engender. Starting with a benchmark pre-merger scenario in which firms compete on prices at each level, we find that the above two consequences individually almost have opposite effects on the merging and non-merging firms’ optimal decisions/profits after a merger. Furthermore, even though the effects of upstream and downstream mergers are different, the vertical supply chain partners will always try to reduce their losses if the market power effect dominates, but will take actions that improve their profits if the synergy effect is stronger. The above results are robust enough to hold even when taking into account intra-brand competition among retailers.

With permission of Elsevier

Volume 249
Issue 1
Pages 131–143

Journal Article

Product reuse in innovative industries

Production and Operations Management 22 (4): 1011–1033
Michael R. Galbreth, Tamer Boyaci, Vedat Verter (2013)
Abstract:
Subject(s): Product and operations management
Keyword(s): Innovation, reusability, product design, remanufacturing, upgrading

Most models of product reuse do not consider the fact that firms might be required to innovate their products over time in order to continue to appeal to the tastes of customers. We consider how the rate of this required innovation, which might be fast or slow depending on the product, affects reuse decisions. We consider two types of reuse—remanufacturing to original specifications, and upgrading used items by replacing components that have experienced innovation since the item was originally produced. We find that optimal reuse decreases with the rate of innovation, implying that models that ignore innovation overestimate the optimal amount of reuse that a company should pursue. Furthermore, we show that reuse can be encouraged in two ways—the intuitive approach of increasing end-of-life costs, and the less intuitive approach of raising the cost to make items reusable. We also examine the environmental impact of reuse, measured in terms of virgin material usage, finding that reuse can actually increase total virgin material usage in some cases. In an extension, we show how the results and insights change when the rate of innovation is uncertain.

© 2012 Production and Operations Management Society

Volume 22
Issue 4
Pages 1011–1033

Journal Article

Selling with money-back guarantees: The impact on prices, quantities, and retail profitability

Production and Operations Management 22 (4): 777–791
Yalçın Akçay, Tamer Boyaci, Dan Zhang (2013)
Abstract:
Subject(s): Product and operations management
Keyword(s): Money-back guarantees, consumer returns, open-box sales, pricing, ordering

In this paper, we consider a retailer adopting a “money-back-guaranteed” (MBG) sales policy, which allows customers to return products that do not meet their expectations to the retailer for a full or partial refund. The retailer either salvages returned products or resells them as open-box items at a discount. We develop a model in which the retailer decides on the quantity to procure, the price for new products, the refund amount, as well as the price of returned products when they are sold as open-box. Our model captures important features of MBG sales including demand uncertainty, consumer valuation uncertainty, consumer returns, the sale of returned products as open-box items, and consumer choice between new and returned products and possibility of exchanges when restocking is considered. We show that selling with MBGs increases retail sales and profit. Furthermore, the second-sale opportunity created by restocking returned products enables the retailer to generate additional revenues. Our analysis identifies the ideal conditions under which this practice is most beneficial to the retailer. Offering an MBG without restocking increases the new product price. We show that if the retailer decides to resell the returned items as open-box, the price of the new product further increases, while open-box items are sold at a discount. On the other hand, customers enjoy more generous refunds along with lower restocking fees. The opportunity to resell returned products also generally decreases the initial stocking levels of the retailer. Our extensive numerical study substantiates the analytical results and sharpens our insights into the drivers of performance of MBG policies and their impact on retail decisions.

© 2012 Production and Operations Management Society

Volume 22
Issue 4
Pages 777–791

Journal Article

Competitive price-matching guarantees: Equilibrium analysis of the availability verification clause under demand uncertainty

Management Science 59 (4): 971–986
Arcan Nalca, Tamer Boyaci, Saibal Ray (2013)
Abstract:
Subject(s): Product and operations management
Keyword(s): Price-matching guarantees, inventory, availability, stochastic demand, pricing, verification of availability

Price-matching guarantees involve a retailer matching the lower price of a competitor for an identical product. In reality, retailers often make such guarantees contingent on the verification of product availability at the competitor's location, and decline a price-match request if the product is not available there. This creates certain consternation on the part of customers. In this paper, we investigate the availability contingency strategy from the perspectives of both the retailers and the customers. Our analysis shows that availability contingency clauses intensify inventory competition between retailers and reinstitutes price ompetition, which is otherwise eliminated by unconditional price-matching guarantees. Consequently, despite what customers may think about the availability verification, it actually increases their surplus. On the other hand, such a clause reduces profits and, hence, is not the equilibrium strategy for retailers. Subsequently, we discuss how a likely customer behaviour pattern may be a plausible explanation regarding the use of the clause by the retailers in practice.

© 2013 INFORMS

Volume 59
Issue 4
Pages 971–986

Journal Article

Investing in reusability of products of uncertain remanufacturing cost: The role of inspection capabilities

International Journal of Production Economics 140 (1): 385–395
Andreas Robotis, Tamer Boyaci, Vedat Verter (2012)
Abstract:
Subject(s): Product and operations management
Keyword(s): Remanufacturing, closed loop supply chains, reverse logistics

We consider a firm equipped with the flexibility to produce and sell both new and remanufactured products and has to invest in (a) increasing the reusability level of its product and (b) collecting used products and remanufacturing them. Our focus is on the effects that the uncertainty in the remanufacturing cost, which originates from the uncertainty in the quality condition of used and potentially remanufacturable products, has on these investments. We show that, contrary to the general belief, the uncertainty in the remanufacturing cost does not necessarily hinder these investments, but the precise effects depend on the inspection capabilities and technologies at the firm's disposal as well as the market parameters.

With permission of Elsevier

Volume 140
Issue 1
Pages 385–395

Journal Article

An analysis of monopolistic and competitive take-back schemes for WEEE recycling

Production and Operations Management 20 (6): 805–823
Fuminori Toyasaki, Tamer Boyaci, Vedat Verter (2011)
Abstract:
Subject(s): Product and operations management
Keyword(s): WEEE, take-back schemes, end-of-life products, recycling

We study two prevailing types of take-back schemes for electrical and electronic equipment waste recycling: monopolistic and competitive. We address key market and operating factors that make one scheme preferable to the other from the viewpoints of recyclers, manufacturers, and consumers. To this end, we model competitive decision making in both take-back schemes as two-stage sequential games between competing manufacturers and recyclers. Deriving and computing equilibria, we find that the competitive take-back scheme often accomplishes a win–win situation, that is, lower product prices, and higher recycler and manufacturer profits. Exceptionally, recyclers prefer the monopolistic scheme when the substitutability level between the manufacturers' original products is high or economies of scale in recycling are very strong. We show that consolidation of the recycling industry could benefit all stakeholders when the economies of scale in recycling are strong, provided that manufacturer's products are not highly substitutable. Higher collection rates also render recycler consolidation desirable for all stakeholders. We also identify a potential free rider problem in the monopolistic scheme when recyclers differ in operational efficiency, and propose mechanisms to eliminate the discrepancy. We show that our results and insights are robust to the degree of competition within the recycling industry.

© 2010 Production and Operations Management Society

Volume 20
Issue 6
Pages 805–823

Journal Article

Competitive price-matching guarantees under imperfect store availability

Quantitative Marketing and Economics 8 (3): 275–300
Arcan Nalca, Tamer Boyaci, Saibal Ray (2010)
Abstract:
Subject(s): Marketing, Product and operations management
Keyword(s): Price-matching guarantees, competition, availability, retail operations
JEL Code(s): C72, D43, L41
Volume 8
Issue 3
Pages 275–300

Journal Article

Information acquisition for capacity planning via pricing and advance selling: When to stop and act?

Operations Research 58 (5): 1328–1349
Tamer Boyaci, Özalp Özer (2010)
Abstract:
Subject(s): Product and operations management
Keyword(s): Advance selling, capacity, stochastic demand, dynamic pricing, optimal stopping, demand learning

This paper investigates a capacity planning strategy that collects commitments to purchase before the capacity decision and uses the acquired advance sales information to decide on the capacity. In particular, we study a profit-maximization model in which a manufacturer collects advance sales information periodically prior to the regular sales season for a capacity decision. Customer demand is stochastic and price sensitive. Once the capacity is set, the manufacturer produces and satisfies customer demand (to the extent possible) from the installed capacity during the regular sales period. We study scenarios in which the advance sales and regular sales season prices are set exogenously and optimally. For both scenarios, we establish the optimality of a control band or a threshold policy that determines when to stop acquiring advance sales information and how much capacity to build. We show that advance selling can improve the manufacturer's profit significantly. We generate insights into how operating conditions (such as the capacity building cost) and market characteristics (such as demand variability) affect the value of information acquired through advance selling. From this analysis, we identify the conditions under which advance selling for capacity planning is most valuable. Finally, we study the joint benefits of acquiring information for capacity planning through advance selling and revenue management of installed capacity through dynamic pricing.

© 2010 INFORMS

Volume 58
Issue 5
Pages 1328–1349

Journal Article

Retail–collection network design under deposit–refund

Computers and Operations Research 34 (2): 324–345
Rico Wojanowski, Vedat Verter, Tamer Boyaci (2007)
Abstract:
Subject(s): Product and operations management
Keyword(s): Reverse logistics, collection, deposit–refund, network design, continuous mode, discrete choice model

This paper studies the interplay between industrial firms and government concerning the collection of used products from households. The focus is on the use of a deposit–refund requirement by the government when the collection rate voluntarily achieved by the firms is deemed insufficient. We present a continuous modeling framework for designing a drop-off facility network and determining the sales price that maximize the firm's profit under a given deposit–refund. The customers’ preferences with regards to purchasing and returning the product are incorporated via a discrete choice model with stochastic utilities. Through parametric analyses, we determine the net value that can be recovered from a returned product as a key driver for the firm to voluntarily engage in collection. We show that a minimum deposit–refund requirement would not achieve high collection rates for products with low return value and point out two complementary policy tools that can be used by the government.

With permission of Elsevier

Volume 34
Issue 2
Pages 324–345

Journal Article

Coordination and priority decisions in hybrid manufacturing/remanufacturing systems

Production and Operations Management 15 (4): 528–543
Necati Aras, Vedat Verter, Tamer Boyaci (2006)
Abstract:
Subject(s): Product and operations management
Keyword(s): Inventory, reverse logistics, remanufacturing, simulation-based optimization

Companies are increasingly realizing the need to coordinate their manufacturing and remanufacturing operations. This can be a challenge due to the inherent variability in the condition and amount of returns, which has a direct impact on remanufacturing costs and leadtimes. In this paper, we develop a modeling framework to compare two alternative strategies that use either manufacturing or remanufacturing as the primary means of satisfying customer demand. Of course, in the event that the demand cannot be met by the prioritized process, the secondary process is used as a contingency. In our basic model, the priority decisions are made at the component level in replenishing the serviceable inventory, while the disposal and new component ordering decisions are made independently. The second model represents the coordination of remanufacturable and new component inventory control decisions. Using simulation-based optimization on a large number of experiments, we observe that when prioritization is in the upstream echelon and there is no coordination in managing component stocks, there exists a critical return ratio, below which it is beneficial to give priority to manufacturing and above which it is beneficial to give priority to remanufacturing. We also see that coordinated control of the component inventories considerably reduces the importance of prioritization. These observations remain valid when congestion in the shop floor is also taken into account. We also study the benefits of state-dependent dispatching policies in a realistic case.

© 2006 Production and Operations Management Society

Volume 15
Issue 4
Pages 528–543

Journal Article

The impact of capacity costs on product differentiation in delivery time, delivery reliability, and price

Production and Operations Management 15 (2): 179–197
Tamer Boyaci, Saibal Ray (2006)
Abstract:
Subject(s): Product and operations management
Keyword(s): product differentiation, capacity management, time-based, customer service, delivery time guarantee, pricing

We develop an analytical framework for studying the role capacity costs play in shaping the optimal differentiation strategy in terms of prices, delivery times, and delivery reliabilities of a profit-maximizing firm selling two variants (express and regular) of a product in a capacitated environment. We first investigate three special cases. The first is an existing model of price and delivery time differentiation with exogenous reliabilities, which we only review. The second focuses on time-based (i.e., length and reliability) differentiation with exogenous prices. The third deals with deciding on all features for an express variant when a regular product already exists in the marketplace. We subsequently address the integrative framework of time-and-price-based differentiation for both products in a numerical study. Our results shed light on the role that customer preferences towards delivery times, reliabilities and prices, and the capacity costs (absolute and relative) have on the firm's optimal product positioning policy.

© 2006 Production and Operations Management Society

Volume 15
Issue 2
Pages 179–197

Journal Article

Optimal prices and trade-in rebates for durable, remanufacturable products

Manufacturing and Service Operations Management 7 (3): 208–228
Saibal Ray, Tamer Boyaci, Necati Aras (2005)
Abstract:
Subject(s): Product and operations management
Keyword(s): Trade-in rebates, pricing, remanufacturing, durable products, product-age profile

Most durable products have two distinct types of customers: first-time buyers and customers who already own the product, but are willing to replace it with a new one or purchase a second one. Firms usually adopt a price-discrimination policy by offering a trade-in rebate only to the replacement customers to hasten their purchase decisions. Any return flow of products induced by trade-in rebates has the potential to generate revenues through remanufacturing operations. In this paper, we study the optimal pricing/trade-in strategies for such durable, remanufacturable products. We focus on the scenario where the replacement customers are only interested in trade-ins. In this setting, we study three pricing schemes: (i) uniform price for all customers, (ii) age-independent price differentiation between new and replacement customers (i.e., constant rebate for replacement customers), and (iii) age-dependent price differentiation between new and replacement customers (i.e., age-dependent rebates for replacement customers). We characterize the roles that the durability of the product, the extent of return revenues, the age profile of existing products in the market, and the relative size of the two customer segments play in shaping the optimal prices and the amount of trade-in rebates offered. Throughout the paper we highlight the operational decisions that might influence the above factors, and we support our findings with real-life practices. In an extensive numerical study, we compare the profit potential of different pricing schemes and quantify the reward (penalty) associated with taking into account (ignoring) customer segmentation, the price-discrimination option, return revenues, and the age profile of existing products. On the basis of these results, we are able to identify the most favorable pricing strategy for the firm when faced with a particular market condition and discuss implications on the life-cycle pricing of durable, remanufacturable products.

© 2005 INFORMS

Volume 7
Issue 3
Pages 208–228

Journal Article

Competitive stocking and coordination in a multiple-channel distribution system

IIE Transactions 37 (5): 407–427
Tamer Boyaci (2005)
Abstract:
Subject(s): Product and operations management
Volume 37
Issue 5
Pages 407–427

Journal Article

The effect of categorizing returned products in remanufacturing

IIE Transactions 36 (4): 319–331
Necati Aras, Tamer Boyaci, Vedat Verter (2004)
Abstract:
Subject(s): Product and operations management
Volume 36
Issue 4
Pages 319–331

Journal Article

Supply chain coordination in a market with customer service competition

Production and Operations Management 13 (1): 3–22
Tamer Boyaci, Guillermo Gallego (2004)
Abstract:
Subject(s): Product and operations management
Keyword(s): Supply chain management, duopoly, customer service, competition, inventory management, coordination, prisoner's dilemma

We consider a market with two competing supply chains, each consisting of one wholesaler and one retailer. We assume that the business environment forces supply chains to charge similar prices and to compete strictly on the basis of customer service. We model customer service competition using game-theoretical concepts. We consider three competition scenarios between the supply chains. In the uncoordinated scenario, individual members of both supply chains maximize their own profits by individually selecting their service and inventory policies. In the coordinated scenario, wholesalers and retailers of each supply chain coordinate their service and inventory policy decisions to maximize supply chain profits. In the hybrid scenario, competition is between one coordinated and one uncoordinated supply chain. We discuss the derivation of the equilibrium service strategies, resulting inventory policies, and profits for each scenario, and compare the equilibria in a numerical study. We find that coordination is a dominant strategy for both supply chains, but as in the prisoner's dilemma, both supply chains are often worse off under the coordinated scenario relative to the uncoordinated scenario. The consumers are the only guaranteed beneficiaries of coordination.

© 2004 Production and Operations Management Society

Volume 13
Issue 1
Pages 3–22

Journal Article

Product differentiation and capacity cost interaction in time and price sensitive markets

Manufacturing and Service Operations Management 5 (1): 18–36
Tamer Boyaci, Saibal Ray (2003)
Abstract:
Subject(s): Product and operations management
Keyword(s): product differentiation, pricing, delivery-time guarantees, time-based competition, capacity management, substitution

In this paper, we study a profit-maximizing firm selling two substitutable products in a price and time sensitive market. The products differ only in their prices and delivery times. We assume that there are dedicated capacities for each product and that there is a standard industry delivery time for the regular (slower) product. The objective of the firm is to determine the delivery time of the express (faster) product and appropriately price the two products, taking into consideration the impact of delivery time reduction on capacity requirements and costs. We develop a model that integrates pricing and delivery time decisions with capacity requirements and costs, and study scenarios where the firm is constrained in capacity for none, one, or both product(s). We show how product differentiation decisions are influenced by capacity costs, and how the firm should adapt its differentiation strategy in response to a change in its operating dynamics. We first identify a market characteristic that governs the optimal pricing structure. We then show that the degree of product differentiation depends on both the absolute, as well as the relative values of the capacity costs. Provided that the capacity cost differential remains the same, higher capacity costs induce less time differentiation and less price differentiation. An increase in capacity cost differential increases price differentiation, but decreases time differentiation. The optimal prices depend, in addition to the above, on the market characteristic. We find that prices can actually decrease when the firm incurs capacity-related costs. We also explore the impact of substitutability on product differentiation, and illustrate our results in a numerical study.

© 2003 INFORMS

Volume 5
Issue 1
Pages 18–36

Journal Article

Managing waiting times of backordered demands in single-stage (Q,r) inventory systems

Naval Research Logistics 49 (6): 557–573
Tamer Boyaci, Guillermo Gallego (2002)
Abstract:
Subject(s): Product and operations management

We present a service constrained (Q, r) model that minimizes expected holding and ordering costs subject to an upper bound on the expected waiting time of demands that are actually backordered. We show that, after optimizing over r, the average cost is quasiconvex in Q for logconcave continuous lead time demand distributions. For logconcave discrete lead time demand distributions we find a single-pass efficient algorithm based on a novel search stopping criterion. The algorithm also allows for bounds on the variability of the service measure. A brief numerical study indicates how the bounds on service impact the optimal average cost and the optimal (Q, r) choice. The discrete case algorithm can be readily adapted to provide a single pass algorithm for the traditional model that bounds the expected waiting time of all demands (backordered or not).

© 2002 Wiley Periodicals, Inc.

Volume 49
Issue 6
Pages 557–573

Journal Article

Coordinating pricing and inventory replenishment policies for one wholesaler and one or more geographically dispersed retailers

International Journal of Production Economics 77 (2): 95–111
Tamer Boyaci, Guillermo Gallego (2002)
Abstract:
Subject(s): Product and operations management
Keyword(s): Inventory, Pricing, Channel coordination, Consignment selling

We analyze coordination issues in a supply chain consisting of one wholesaler and one or more retailers under deterministic price-sensitive customer demand. Operating costs include purchasing, setup, order processing, and inventory costs. We consider both pricing and lot sizing decisions and take special care to correctly account for the impact of transfer prices and ownership of retail-inventory. We show that a solution that maximizes channel profits can be interpreted as consignment selling. We also show that separating pricing and lot sizing decisions is near optimal when the demand rate is sufficiently large.

With permission of Elsevier

Volume 77
Issue 2
Pages 95–111

Journal Article

Minimizing holding and ordering costs subject to a bound on backorders is as easy as solving a single backorder cost model

Operations Research Letters 29 (4): 187–192
Tamer Boyaci, Guillermo Gallego (2001)
Abstract:
Subject(s): Product and operations management
Keyword(s): Stochastic inventory, Service measures, Expected backorders, Waiting times

Minimizing average ordering and holding cost subject to a constraint on expected backorders has required to iteratively solve the backorder cost model with different backorder a penalty rates until the constraint is satisfied. Here we present a direct approach, that is as simple as solving a single backorder cost model.

With permission of Elsevier

Volume 29
Issue 4
Pages 187–192

Journal Article

Serial production/distribution systems under service constraints

Manufacturing and Service Operations Management 3 (1): 43–50
Tamer Boyaci, Guillermo Gallego (2001)
Abstract:
Subject(s): Product and operations management
Keyword(s): Inventory/Production, multistage, serial, fill rate, base-stock policy, solution and heuristics

We analyze the problem of minimizing average inventory costs subject to fill-rate type of service-level constraints in serial and assembly production/distribution systems. We propose optimal and heuristic procedures to solve this problem. Our model and solution procedures can be used to manage the fill rate or fill rate within a “time window” service measures. We also relate our service-constrained model to the traditional model with back-order costs and show that it is possible to prespecify backorder cost rates to achieve desired service levels. We explore the inventory cost impact of such a practice, and we find that the cost penalty can be very high.

© 2001 INFORMS

Volume 3
Issue 1
Pages 43–50