Three Problems in Operations Management

Abstract

Three problems in operations management are examined in this dissertation, with methodologies ranging from theoretical modeling and empirical research. The topics focus on quality issues as well as remanufacturing decisions. In Chapter 2, we investigate how to contract on quality with private information. Supply chains today routinely use third parties for many strategic activities, such as manufacturing, R&D, or software development. These activities often include relationship-specific investment on the part of the vendor, while final outcomes can be uncertain. Therefore, writing complete contracts for such arrangements is often not feasible, but incomplete contracts, especially when relationshipspecific investment is required, may leave the supplier vulnerable to a version of the “hold-up problem,” which is known to result in sub-optimal levels of investment. We model the phenomenon as a sequential move game with asymmetric information. Absent behavioral considerations, the unique Perfect Bayesian Equilibrium implies zero investment. However, with social preferences, the hold-up problem may be mitigated. We propose a model that incorporates social preferences and random errors, and solve for the equilibrium. In addition, we look at reputation and find it to be effective for increasing investment. We conduct laboratory experiments with human subjects and find that a model with social preferences and random errors organizes our data well. In Chapter 3, we study investigated the problem of process quality improvement between a buyer and a supplier in a supply chain. The key words include supply chain contracts, behavioral economics, game theory, quality improvement. Products a supplier produces might be defective depending on the process’ quality, and such products may incur a loss both to the supplier and buyer because of factors such as the warranty, loss of customer goodwill, or the loss of potential market share. We show that when the buyer’s share of the loss is sufficiently large, it should be his full responsibility to improve the process quality optimally. In contrast, when the buyer’s share of the loss is low, it should be the supplier’s full responsibility to improve the process quality to the optimal level. These predictions were tested in the laboratory and systematic deviations from them were found. Specifically, when the buyer’s share of the loss is low, he still contributes to process quality improvement, while theory predicts free riding. Moreover, when the buyer’s share of the loss is high, the supplier still contributes to process quality improvement, while theory predicts otherwise. Moreover, the centralized supply chain served as the benchmark, and illustrated that negotiation can be used to improve system performance. This new mechanism was tested in the laboratory and found to be superior. In Chapter 4, we investigate firms’ remanufacturing strategies in the case of a Cournot duopoly. Keywords include pricing, remanufacturing, competition, and operations-marketing interface. On the one hand, remanufactured products cannibalize sales of new products of the same firm thereby hurting its profits. On the other hand, they can be part of a profitable marketing strategy that targets different customer preferences by providing a larger number of alternatives to customers. This paper studies the tradeoff between these effects and how it is influenced by competition. We develop a model where demand functions for new and remanufactured products of each firm are derived from utility maximization by a representative consumer. This allows us to capture preference and substitution effects between all offered products in the market. We discuss how equilibrium strategies are affected by factors such as competition, substitutability, production cost as well as remanufacturing cost. For example, when competitive intensity (between new and new products, and remanufactured and remanufactured products, is low (respectively, high), both (respectively, neither) firms offer remanufactured products in a symmetric equilibrium.