Competition and coordination in supply chains

The dissertation consists of three independent essays. Essay 1 examines the coordination issues in a supply chain whose members are Production and Marketing of the same firm. Replenishment and pricing strategies are determined by Production and Marketing, respectively. Simple performance measure such as setting a linear transfer price between these two functions in general leads to misaligned incentives. We compare two games, which differ in whether Production commits to a level of inventory or a level of service to Marketing. Although these two forms of commitment from Production are equivalent operationally in the integrated system, they lead to different strategic behaviors. We propose a mechanism that aligns the functional managers' incentives to be compatible to the firm. We further investigate the value of perfect demand information of these two games and the integrated system, and study Stackelberg games to address situations where either Marketing or Production is the dominant function. Essay 2 studies the effect of uncertainty on the expected profit and operating cost in the same setting as Essay 1, but further considers the situation where the pricing decision can be postponed until randomness in the demand function is realized. We show that the impact of uncertainty on the operating cost cannot be used to predict the direction and magnitude of the impact on the expected profit, unlike in a price-taking firm. Also in contrast to models ignoring pricing, the essay shows that a better-coordinated system does not necessarily have a lower operating cost. Essay 3 studies capacity allocation games in a fashion (style) goods setting. When production capacity is in limited supply, allocation schemes are typically employed to ration capacity among distinct product lines. The sale and distribution of the product lines are often managed on a decentralized basis through independent units, which we call retailers. Retailers will accordingly order in a way that suits the specific capacity allocation scheme employed. The essay studies the consequent capacity allocation game in a fashion goods supply chain setting. We discuss the adverse consequence of each scheme and strategic implication of capacity flexibility. We also show that increasing capacity may intensify the competition between retailers.Business, Sauder School ofGraduat