Upstream Manufacturer Research Articles

The Impact of Upfront Payments on Assortment Decisions in Retailing

There is a contentious debate about the exclusionary effects of upfront payments to be made by manufacturers to place their products on retailers’ shelves. Analyzing a two-stage bargaining process with one downstream retailer and a pool of upstream manufacturers, we find that upfront payments lead to a smaller assortment if the retailer’s bargaining power is high enough and the suppliers’ products are close substitutes.

Multi-period risk minimization purchasing models for fashion products with interest rate, budget, and profit target considerations

Traditionally, in the fashion industry, purchasing decisions for retailers are made based on various factors such as budget, profit target, and interest rate. Since the market demand is highly volatile, risk is inherently present and it is critically important to incorporate risk consideration into the decision making framework. Motivated by the observed industrial practice, we explore via a mean-variance approach the multi-period risk minimization inventory models for fashion product purchasing. We first construct a basic multi-period risk optimization model for the fashion retailer and illustrate how its optimal solution can be determined by solving a simpler problem. Then, we analytically find that the optimal ordering quantity is increasing in the expected profit target, decreasing in the number of periods of the season, and increasing in the market interest rate. After that, we propose and solve several extended models which consider realistic and timely industrial measures such as minimum ordering quantity, carbon emission tax, and carbon quota. We analytically derive the necessary and sufficient condition(s) for the existence of the optimal solution for each model and show how the purchasing budget, the profit target, and the market interest rate affect the optimal solution. Finally, we investigate the supply chain coordination challenge and analytically illustrate how an upstream manufacturer can offer implementable supply contracts to optimize the supply chain.

The Profit‐Maximizing Case for Corporate Social Responsibility in a Bilateral Monopoly

We analyze a stylized distribution channel (bilateral monopoly) model where an upstream manufacturer sells output to a downstream retailer. In a two‐stage linear demand game setting, we show that a two‐part contract, consisting of a wholesale price and corporate social responsibility (CSR) component, can be utilized by the manufacturer to fully coordinate and control its retailer. Thus, a CSR contract can be used in place of the traditional two‐part tariff scheme (wholesale price and fixed franchise fee) to optimally coordinate the marketing channel. Our model provides a novel theoretical profit‐maximizing rationale for the strategic use of CSR. Copyright © 2013 John Wiley & Sons, Ltd.

Determination of optimal lot size and production rate for multi-production channels with limited capacity

Due to the constantly changing business environment, producers often have to deal with customers by adopting different procurement policies. That is, manufacturers confront not only predictable and regular orders, but also unpredictable and irregular orders. In this study, from the perspective of upstream manufacturers, both regular and irregular orders are considered in coping with the situation in which an uncertain demand is faced by the manufacturer, and a capacity confirming mechanism is used to examine such demand. If the demand is less than or equal to the capacity of the ordinary production channel, the general supply channel is utilised to fully account for the manufacturing process, but if the demand is greater than the capacity of the ordinary production channel, the contingency production channel would be activated along with the ordinary channel to satisfy the upcoming high demand. Besides, the reproductive property of the probability distribution is employed to represent the order quantity of the two types of demand. Accordingly, the optimal production rates and lot sizes for both channels are derived to provide managers with insights for further production planning.

Analyzing Investment Regions in Mainland China for Taiwanese Firms by Association Rule Mining

Mainland China has the largest production capacity for printed circuit board (PCB) globally, as well as the most complete supply chain. Taiwanese businesses are the main supplier in the Chinese PCB supply chain. Based on the existing investment data, this study aims to explore and forecast the areas which are worth developing for Taiwanese PCB businesses. Through the association rules to explore data, this research intends to identify the association among the PCB industrial areas in which Taiwanese businesses are invested. Data for this study are obtained from the Taiwan Economic Journal to analyze Taiwan Stock Exchange Companies and over-the-counter-listed firms on PCB investment by Taiwanese businesses in Mainland China. The main findings include that Kunshan, Suzhou, and Shenzhen are the investment focus for the upstream and mid-stream manufacturers, and the investment level in Shanghai is higher than in the other places for the downstream manufacturers. For the upstream and mid-stream manufacturers, Changshu is another area worthy of investment for firms. Changshu and Dongguan can be the choice for the midstream manufacturers. The research results can serve as a valuable reference for Taiwanese businesses.

Multilateral Bargaining and Downstream Competition

We examine multilateral bargaining in vertical supply relationships that involve an upstream manufacturer who sells through two competing retailers. In these relationships the negotiations are interdependent, and bargaining externality may arise across the retailers. In addition, the timing by which the manufacturer negotiates with the retailers becomes important. In simultaneous bargaining the retailers negotiate without knowing if an agreement has been reached in the other retail channel, whereas in sequential bargaining the retailer in the second negotiation is able to observe whether an agreement was reached in the first negotiation. We show that simultaneous bargaining is optimal for the manufacturer when the retail prices (and profitability) are similar, and sequential bargaining is preferred when the dispersion in the retail prices is sufficiently large. As a result of ex post renegotiations, the manufacturer may strategically stock out the less profitable retailer who charged a relatively low retail price and exclusively supply only the retailer who charged a relatively high retail price and maintained high channel profitability. Moreover, ex post multilateral bargaining can buffer downstream competition and thus lead to positive retail profits even in markets that are close to perfect competition.

POLITICIANS AT WORK: THE PRIVATE RETURNS AND SOCIAL COSTS OF POLITICAL CONNECTIONS

We quantify the private returns and social costs of political connections exploiting a unique longitudinal dataset that combines matched employer–employee data for a representative sample of Italian firms with administrative archives on the universe of individuals appointed in local governments over the period 1985–1997. According to our results, the revenue premium granted by political connections amounts to 5.7% on average, it is obtained through changes in domestic sales but not in exports, and it is not related to improvements in firm productivity. The connection premium is positive for upstream producers for the public administration only, and larger (up to 22%) in areas characterized by high public expenditure and high levels of corruption. These findings suggest that the gains in market power derive from public demand shifts towards politically connected firms. We estimate that such shifts reduce the provision of public goods by approximately 20%. (JEL: D21, D73, H72, J31).

Substitution Effects in Supply Chains with Asymmetric Information Distribution and Upstream Competition

Inventory management in markets with substituting customers is extremely challenging, not only for a downstream wholesaler, but also for upstream manufacturers. Motivated by the structures in the agrochemical market, we analyze the optimal production and stocking quantities of a manufacturer and a wholesaler, respectively, in a two-stage supply chain with upstream competition and vertical information asymmetries. We characterize a monopolistic wholesaler's optimal stocking quantities and show that these quantities are not necessarily monotonic, neither in the available production quantities nor in the customers' substitution rates. We further derive the optimal production quantities of a monopolistic and a competitive manufacturer when they are incompletely informed about the wholesaler's stocking quantities. We find that the introduction of competition may lead to decreasing production quantities for some products. Furthermore, a product's end-of-season inventories at the manufacturer which arise due to information asymmetries may decrease even when initial production levels increase. Key words: customer substitution; supply chain; asymmetric information; competition; inventory management

SUPPLY CHAIN COORDINATION WITH UNCERTAINTY IN TWO-ECHELON YIELDS

This paper researches the coordination models in the supply chain where there are uncertain two-echelon yields and random demand. We analyzed three contracts of revenue sharing (RS), overproduction risk sharing (OS), and combination of RS and OS (RO), and contrasted them with uncoordinated model. We studied the optimal order decision for downstream manufacturer and the optimal production decision for upstream manufacturer. Numerical examples were presented to illustrate the results. The study showed that the RS contract and OS sharing contract both have their advantages and disadvantages and the RO contract could benefit the whole supply chain best. We found out that the OS contract gives the upstream manufacturer incentive to produce more so as to maximize the profit value, but the upstream manufacturer may receive less as the price of overproduced part increases. We also found out that under most scenarios, the supply chain benefits from the yields and demand risks reduction and generates a higher profit. But sometimes in the OS contract the downstream manufacturer profit can increase as yields randomness increases. And, in the uncoordinated case and OS contract, the upstream manufacturer profit can increase as demand randomness increases.

Game theoretic analysis of a multi-period fashion supply chain with a risk averse retailer

This paper studies a single-manufacturer single-retailer multi-period fashion supply chain which sells a category of short-life highly fashionable products. The retailer is risk averse and the supply chain is led by the upstream manufacturer. This paper studies two commonly seen contracts in the fashion industry, namely the pure wholesale pricing contract (PWPC) and the markdown money contract (MDMC). The efficient region for the risk averse retailer’s optimal ordering quantity for each contract is found and this region will: 1) become smaller if the wholesale price increases (under both PWPC and MDMC); 2) get larger when the markdown money increases (under MDMC). We introduce the concept of ‘risk averse quantity reduction level’ (RAQRL). Our analytical findings further indicate that: 1) under scenario one in which the manufacturer’s goal is to maximise the supply chain’s expected profit, the appropriately set MDMC can coordinate the supply chain whereas PWPC cannot; 2) under scenario two in which the manufacturer’s goal is to maximise the supply chain’s expected profit while ensuring the variance of profit is within a limit, both PWPC and MDMC can coordinate the supply chain.

Upstream collusion and downstream managerial incentives

We investigate the effects of downstream firms’ managerial incentives on upstream collusion. Downstream profit-and-revenue incentive schemes make upstream manufacturers easier to collude than a pure-profit incentive scheme does when retailers compete in prices. However, the opposite occurs under quantity competition.

Supply Chain Management of Fresh Products with Producer Transportation*

ABSTRACTThis article considers a class of fresh‐product supply chains in which products need to be transported by the upstream producer from a production base to a distant retail market. Due to high perishablility a portion of the products being shipped may decay during transportation, and therefore, become unsaleable. We consider a supply chain consisting of a single producer and a single distributor, and investigate two commonly adopted business models: (i) In the “pull” model, the distributor places an order, then the producer determines the shipping quantity, taking into account potential product decay during transportation, and transports the products to the destination market of the distributor; (ii) In the “push” model, the producer ships a batch of products to a distant wholesale market, and then the distributor purchases and resells to end customers. By considering a price‐sensitive end‐customer demand, we investigate the optimal decisions for supply chain members, including order quantity, shipping quantity, and retail price. Our research shows that both the producer and distributor (and thus the supply chain) will perform better if the pull model is adopted. To improve the supply chain performance, we propose a fixed inventory‐plus factor (FIPF) strategy, in which the producer announces a pre‐determined inventory‐plus factor and the distributor compensates the producer for any surplus inventory that would otherwise be wasted. We show that this strategy is a Pareto improvement over the pull and push models for both parties. Finally, numerical experiments are conducted, which reveal some interesting managerial insights on the comparison between different business models.

Price strategy, information sharing, and firm performance in a market channel with a dominant retailer

PurposeThe purpose of this paper is to provide a framework to help the manufacturers to find the optimal decisions regarding the choice of channel member for information sharing.Design/methodology/approachA game‐theoretical model plus Bayesian forecasting is developed to determine the optimal decisions for the manufacturer.FindingsThe results show that the optimal strategy for the manufacturer is to engage in information sharing with one small retailer exclusively, such that the manufacturer can gain the most benefit from information sharing arrangement in a marketing channel with a dominant retailer.Research limitations/implicationsThe present study is analyzed by a theoretical model. Future research can explore the same study by collecting data to engage in an empirical test.Practical implicationsThis paper provides a useful model framework and pricing strategy for upstream manufacturers who are engaging or planning to engage in information sharing with their retailers.Originality/valueThis paper provides practical and solid advice and examples demonstrating the optimal decisions regarding the choice of channel member for information sharing to best benefit of the manufacturer.

How to Pass a Pass-Through Test: The Case of Input Subsidies

The pass-through principle evolved from countervailing duty cases means that where a producer of a downstream product obtains a subsidized input from an upstream producer at arm’s length, the investigating authority cannot presume, but rather must establish whether and to what extent the benefit of the input subsidy has actually been passed through downstream. The positive pass-through determination enables the importing country to impose a countervailing duty on the downstream product found to be indirectly subsidized. In this article, we show that the legal basis for the input subsidy pass-through goes beyond the scope of Part V of the SCM Agreement. We also argue that what necessitates the pass-through test is a market price paid by the downstream producer to the upstream producer, rather than the fact of corporate non-affiliation. Furthermore, the pass-through determination for all elements of the input subsidy should, in our opinion, be made at the levels of both direct and indirect subsidization. Finally, in the light of our observations, we suggest a few amendments to a proposed Doha Round text on the subsidy pass-through.

Mitigating bankruptcy propagation through contractual incentive schemes

With the increasing interdependence among supply chain members on material, information and capital, interactions and decisions characterized by operational parameters are important causes of bankruptcy propagation in supply chain. This paper investigates the methods for mitigating bankruptcy propagation through supply chain coordination. Based on a two-stage supply chain network that consists of multiple upstream manufacturers and multiple downstream retailers, the effectiveness of some typical contractual incentive schemes, including revenue sharing, price discount and quantity flexibility contracts, in mitigating bankruptcy propagation among supply chain members is examined. Through agent-based simulation experiments, it has been revealed that: 1) the three typical supply chain contracts with properly designed contract parameters are effective in mitigating bankruptcy propagation, but their effectiveness depends on operational parameters of the supply chain; 2) horizontal competition among retailers is an important factor in determining the effectiveness of these contracts; 3) revenue sharing contract turns out to be more effective in mitigating bankruptcy propagation than the other two contracts. By comparing the optimal contract parameters with and without considering bankruptcy risks, it has also been found that, a set of contract parameters that can maximize the profit of the supply chain may increase the occurrence of bankruptcy in supply chain, leading to the phenomenon of a risk–profit tradeoff.

Two Level Price Discrimination and Vertical Relationship

If an upstream manufacturer can use coupons to price discriminate, the downstream retailer can also use coupons to price discriminate. In doing so, the retailer takes a share of the price discrimination profit from the manufacturer. To gain a larger profit share, the retailer has an incentive to commit to double coupon offers, rather than to issue separate retailer coupons. While coupon usage is endogenous, output effect is different from other second-degree price discrimination such as quantity discounts. Price discrimination using coupons reduces welfare, and there is a second dimension of double marginalization. Implications for vertical coordination are discussed.

Joint Private Safety Standards and Vertical Relationships in Food Retailing

In recent years, it has become common for downstream firms to impose Joint Private Standards (JPSs) on upstream producers. In this paper, we present an original model of a vertical relationship, explaining the incentives for and the effects of such JPSs with an example concerning food safety. The risk of a food crisis is endogenously determined. Using the concept of cartel stability (d’Aspremont et al., 1983), it is shown that liability rules are crucial for JPSs to emerge, that a JPS can become a minimum quality standard, and that a more stringent JPS does not necessarily reduce the market risk.

Indirect Subsidization Under WTO Disciplines: Financial Contribution to One Entity, Benefit to Another

Indirect subsidization of domestic industries can occur where, for example, a financial contribution is provided to one entity but the associated benefit goes to another. This may materialize where (1) a financial contribution to an upstream producer results in a benefit to a downstream producer, or (2) privatization of a subsidized state-owned enterprise leads to the transmission of the subsidy to a post-privatization enterprise. A number of dispute cases initiated in the World Trade Organization have addressed both situations and resulted in substantial jurisprudence that cast light on some controversial issues on indirect subsidies. This paper examines the main findings made in case law, discusses subject-related Doha Round proposals and their possible implications for Korea.

Strategic Information Sharing in Competing Supply Chains

This study investigates strategic information sharing in supply chains where a retailer can ex post decide whether to share private demand information with an upstream manufacturer after the content of information becomes known. We highlight the equilibrium interaction between the retailer’s incentive to induce lower wholesale prices through strategic information sharing and the manufacturer’s rational inference about the retailer’s optimal disclosure strategy. We find that the retailer should share more information when his capability to acquire information improves. However, the retailer may not always want to pursue perfect information capability even when doing so does not incur any direct cost. In addition, we find that retailers should disclose less information when the market becomes more competitive. We also examine the role of inter-chain externality in the firms’ profitability and the retailers’ efforts to improve information capability. In particular, we show that firms can benefit from the rival retailer’s efforts to improve information capability, and a retailer’s incentive for information capability improvement can increase with the intensity of competition or with the rival retailer’s information capability.

A PSO Weighted Estimating the Mean Downstream Demand to Mitigate the Bullwhip Effect in a Supply Chain

Bullwhip Effect, Particle Swarm Optimization, Supply Chain, Demand Information Abstract. A deformation phenomenon occurring in business activity, called the bullwhip effect which comes from the demand information is not fully shared among the members of a supply chain, conducts the upstream manufacturer to excessively anticipate the demand capacity of the downstream retailer. The manufacturer improperly decides the amount of the products not only to raise the inventory cost on the way of poorly handling the actually downstream demand, but also to lose the chance of business deals due to its backordering. To cope with the bullwhip effect by taking into account the holding and backorder costs, an evolutionary method based on the Particle Swarm Optimization (PSO) algorithm to estimate the critical parameter, mean downstream demand, is proposed and computer validated in this paper such that the estimated inventory level could be close the really batch ordering of the manufacturer.