Essays in interfaces of operations and finance in supply chains

Thesis (Ph. D.)--University of Rochester. William E. Simon Graduate School of Business Administration, 2009. "While all work in this dissertation is original, Chapters 2 and 3 are joint work with Professors Nils Rudi and Harry Groenevelt respectively, and Chapter 4 is solo work"--Acknowledgments.This dissertation is a collection of three essays addressing interface issues of operations and finance in supply chains. In the first essay, we study pricing of financial hedging contracts used by firms to better respond to uncertainty in product markets. We consider a single-period problem in which a firm has only one opportunity for resource acquisition before demand uncertainty is resolved, and he makes the product pricing decision based on the realized demand function. To offset the risk of his real investment, the firm buys a tailor-made hedging contract from an issuer with an underlying payoff partially correlated with the uncertainty in the product market. We show the contract effect by formulating the negotiation process between both parties in the framework of a Stackelberg game and price equilibrium. For each game-theoretic setting, we derive the equilibrium solution and present the comparative statics. We also investigate the case in which the issuer lays off her risk from one contract by writing another contract with a second firm, and compare contract performance with a benchmark case in which two firms trade directly rather than through the issuer. In the second essay, we study a supply chain in which a retailer faces a classic newsvendor problem with a financial constraint on his capacity to order inventory. To sell more products, the manufacturer teams up with a bank to offer an interest-free loan program. We formulate the interaction between the retailer and the manufacturer as a Stackelberg game in which the manufacturer has the dominant pricing power. Our results indicate that the loan program can significantly improve each party's profit. The retailer becomes more aggressive in ordering when equilibrium order quantity is low but demand risk is high. We also investigate open account financing in which the manufacturer allows a partial and delayed payment, equivalent to a loan to the retailer. Compared with open account financing, bank financing improves the entire supply chain profit. Numerical experiments demonstrate the supply chain performance under bank financing and indicate that demand volatility may actually improve contract efficiency. We propose two contract forms that coordinate the supply chain of these three parties. In the last essay, we continue to consider such a supply chain in a multi-period setting. The retailer may be financially constrained or even distressed in each period. Either the manufacturer or the bank can offer a loan program and ultimately bear the retailer's bankruptcy risk. Formulating these two scenarios in Markov decision processes with a finite horizon and employing a Stackelberg game in each period, we show that the bank may "under-lend" to the small retailer in bank-led financing and that manufacturer-led financing outperforms its counterpart. The manufacturer, however, may "over-lend" to the retailer, which raises a concern of excessive credit risk. Debt relief is a better alternative to the manufacturer who is more willing to save the retailer from bankruptcy