HANDBOOK OF QUANTITATIVE SUPPLY CHAIN ANALYSIS: Modeling in the E-Business Era

HANDBOOK OF QUANTITATIVE SUPPLY CHAIN ANALYSIS: Modeling in the E-Business Era Edited by DAVID SIMCHI-LEVI Massachusetts Institute of Technology S. DAVID WU Lehigh University ZUO-JUN (MAX) SHEN University of Florida Kluwer Academic Publishers Boston/Dordrecht/London

Contents Chapter 1 Supply Chain Analysis and E-Business: An Overview 1 David Simchi-Levi, S. David Wu and Z. Max Shen 1. Introduction 1 2. Main Components of the Handbook 3 2.1 Emerging Paradigms for Supply Chain Analysis 3 2.2 Auctions and Bidding 4 2.3 Supply Chain Coordinations in E-Business 5 2.4 Multi-Channel Coordination 7 2.5 Network Design, IT, and Financial Services. 8 3. Conclusions 9 Acknowledgments 9 Part I Emerging Paradigms for Supply Chain Analysis Chapter 2 Game Theory in Supply Chain Analysis 13 Gérard P. Cachon and Serguei Netessine 1. Introduction 13 1.1 Scope and relation to the literature 14 2. Non-cooperative static games 14 2.1 Game setup 15 2.2 Best response functions and the equilibrium of the game 17 2.3 Existence of equilibrium 21 2.4 Uniqueness of equilibrium 29 2.5 Multiple equilibria 35 2.6 Comparative statics in games 36 3. Dynamic games 40 3.1 Sequential moves: Stackelberg equilibrium concept 40 3.2 Simultaneous moves: repeated and stochastic games 41 3.3 Differential games 45 4. Cooperative games 48 4.1 Games in characteristic form and the core of the game 49 4.2 Shapley value 50 4.3 Biform games 51 5. Signaling, Screening and Bayesian Games 52 5.1 Signaling Game 53 5.2 Screening 56 5.3 Bayesian games 57

vi 6. Summary and Opportunities 58 References 59 Chapter 3 Supply Chain Intermediation: A Bargaining Theoretic Framework 67 S. David Wu 1. Introduction 67 2. Supply Chain Intermediation 70 3. Supply Chain Intermediary Theory 73 3.1 The Basic Settings 73 3.2 Mechanism Design and the Revelation Principle 74 3.3 Models of Supply Chain Intermediation 76 4. Bilateral Bargaining with Complete Information 77 4.1 Bilateral Bargaining to Divide the System Surplus 79 4.2 A Bilateral Supply-Chain Bargaining Model 81 4.3 The Subgame Perfect Equilibrium 82 4.4 Analysis of the Bargaining Game 85 4.5 Intermediary s Role in Price Setting, Searching, and Matching 87 5. Bilateral Bargaining with Incomplete Information 89 5.1 The Basic Setting 90 5.2 The Direct Revelation Mechanism 92 6. Multilateral Trade with Incomplete Information 97 6.1 Multilateral Trade with Vertical Integration 97 6.2 Multilateral Trade with Markets 101 7. Related Work in the Supply Chain Literature and Research Opportunities 105 References 112 Chapter 4 Decentralized Decision Making in Dynamic Technological Systems: The Principal-Agent Paradigm 117 Stefanos Zenios 1. Background and Motivation 117 2. The Static Principal-Agent Model 119 3. The Dynamic Principal-Agent Model 121 3.1 The Principal s Problem 123 3.2 Step 1: The Static Problem. 125 3.3 Step 2: The Dynamic Problem. 126 4. A Model with Multiple Agents 127 5. A Production-Inventory System 129 6. A Service Delivery System 133 7. The Past and the Future 137 8. Concluding Remarks 138 Acknowledgments 138 References 139 Part II Auctions and Bidding Chapter 5 Auctions, Bidding and Exchange Design 143

Contents vii Jayant Kalagnanam and David C. Parkes 1. Introduction 143 1.1 A framework for auctions 144 1.2 Outline 146 2. Economic Considerations 146 2.1 Preliminaries 147 2.2 Mechanism Design 148 2.3 Competitive Equilibrium 157 2.4 Indirect Revelation Mechanisms 159 3. Implementation Considerations 164 3.1 Bidding Languages 164 3.2 Winner-Determination Complexity 166 4. Interactions between Computation and Incentives 179 4.1 Strategic Complexity 180 4.2 Communication Complexity 181 4.3 Valuation Complexity 182 4.4 Implementation Complexity 183 5. Specific Market Mechanisms 186 5.1 Combinatorial Auctions 186 5.2 Multi-unit Auctions 189 5.3 Multiattribute Auctions 192 5.4 Procurement Reverse Auctions 194 5.5 Capacity constrained allocation mechanisms 196 5.6 Double Auctions and Exchanges 197 6. Discussion 200 References 204 Chapter 6 Auctions and Pricing in E-Marketplaces 213 Wedad Elmaghraby 1. B2B E-Marketplaces 213 2. Current State of Pricing in B2B Marketplaces 215 3. Customizing Auctions - A Case Study of FreeMarkets 219 3.1 Auction Formats 221 3.2 Combating Collusion 224 4. Bidder Support in Auctions - Manugistics NetWORKS Target Pricing T M 227 5. Future Directions for Research in Auction Theory 230 6. Precision Pricing - Manugistics Networks Precision Pricing 232 7. Future Directions for Research in Price Discrimination 238 8. Conclusion 240 References 243 Chapter 7 Design of Combinatorial Auctions 247 Sven de Vries and Rakesh V. Vohra 1. Introduction 247 2. Mechanism Design Perspective 249 3. Optimal Auctions 250 4. Efficient Auctions 254 4.1 The VCG Auction 255

viii 5. Implementing an Efficient Auction 257 5.1 Winner Determination 257 5.2 Supposed Problems with VCG 261 5.3 Ascending Implementations of VCG 264 5.4 Threshold and Collusion Problems 276 5.5 Other Ascending Auctions 277 5.6 Complexity of Communication 278 6. Interdependent Values 278 7. Two Examples 281 7.1 The German UMTS-Auction 281 7.2 Logistics Auctions 284 References 287 Part III Supply Chain Coordinations in E-Business Chapter 8 The Marketing-Operations Interface 295 Sergio Chayet, Wallace J. Hopp and Xiaowei Xu 1. Product Development 298 1.1 Conjoint Analysis For Concept Development 299 1.2 System Level and Detailed Design 301 1.3 Prototyping and Testing 304 1.4 Macro-Level Research 305 2. Sales 306 2.1 Pricing 307 2.2 Lead Time Quoting 309 2.3 Quality Management 311 2.4 Product Variety 312 3. Production/Delivery 313 4. Service 316 4.1 Previous Research 316 4.2 Research Opportunities 317 5. Conclusions 319 References 322 Chapter 9 Coordination of Pricing and Inventory Decisions: A Survey and Classification 335 L. M. A. Chan, Z. J. Max Shen, David Simchi-Levi and Julie L. Swann 1. Introduction 335 1.1 Motivation 335 1.2 Scope 336 1.3 Classification and Outline 338 2. Single Period Models 340 3. Multiple Period Models 343 3.1 Models to Explain Price Realizations 343 3.2 General Pricing and Production Models 344 3.3 Retail, Clearance, and Promotion 351 3.4 Fixed Pricing 358 4. Extension Areas 359 4.1 Multiple Products, Classes, and Service levels 359 4.2 Capacity as a Decision 366

Contents ix 4.3 Supply Chain Coordination 367 4.4 Competition 369 4.5 Demand Learning and Information 373 5. Industry 376 5.1 Dynamic Pricing Practice 376 5.2 Related Research 376 5.3 Price Discrimination in Practice 377 5.4 Potential problems with Dynamic Pricing 378 6. Conclusions and Future Research 379 References 382 Chapter 10 Collaborative Forecasting and its Impact on Supply Chain Performance 393 Yossi Aviv 1. Notation and Preliminaries 402 2. Common Approaches for Modeling Demand Uncertainty and Forecast Evolution in the Inventory Management Literature 404 2.1 Demand models with unknown parameters 404 2.2 A Markov-modulated demand process 406 2.3 A linear state-space model 407 3. Common Types of Single-Location Inventory Control Policies 410 3.1 Dynamic models for inventory management 410 3.2 Heuristic policies 416 3.3 An adaptive replenishment policy for the linear statespace model 419 4. Models for Decentralized Forecasting Processes 421 4.1 The orders generated by the retailer 422 4.2 Enriched information structures 425 4.3 Assessment of the benefits of information sharing 428 5. An inventory model of collaborative forecasting 429 5.1 Installation-based inventory systems 430 5.2 Echelon-based inventory systems 432 6. Cost analysis 435 6.1 Cost assessment 435 6.2 Policy coordination in the supply chain 437 6.3 Decoupled two-level inventory systems 439 6.4 Results from the study of CF 440 7. Summary 442 References 443 Chapter 11 Available to Promise 447 Michael O. Ball, Chien-Yu Chen and Zhen-Ying Zhao 1. Introduction 447 1.1 Push-Pull Framework 448 1.2 Available to Promise (ATP) 449 2. Business Examples 449 2.1 Overview of Conventional ATP 449 2.2 Toshiba Electronic Product ATP System 451 2.3 Dell Two-stage Order Promising Practice 452 2.4 Maxtor ATP Execution for Hard Disk Drive 453 2.5 ATP Functionality in Commercial Software 454 3. ATP Modelling Issues 455

x 3.1 ATP Implementation Dimensions 455 3.2 Factors Affecting ATP Implementations 456 3.3 Push vs. Pull ATP Models 459 4. Push-Based ATP Models 461 4.1 Push ATP Rules and Policy Analysis 462 4.2 Deterministic Optimization-Based Push ATP Models 463 4.3 Stochastic Push ATP Models 467 5. Pull-Based ATP Models 469 5.1 Pull-Based ATP Models for an MTS Production Environment 470 5.2 Real Time Order Promising and Scheduling 471 5.3 Optimization-Based Batch ATP Models 473 5.4 Experimental Implementation 477 6. Conclusions 480 Acknowledgments 480 References 481 Chapter 12 Due Date Management Policies 485 Pınar Keskinocak and Sridhar Tayur 1. Characteristics of a Due Date Management Problem 487 1.1 Due Date Management Decisions 487 1.2 Dimensions of a Due Date Management Problem 489 1.3 Objectives of Due Date Management 490 1.4 Solution Approaches for Due Date Management Problems 494 2. Scheduling Policies in Due Date Management 494 3. Offline Models for Due Date Management 499 3.1 Equal Order Arrival Times 500 3.2 Distinct Order Arrival Times 501 4. Online Models for Due Date Management 503 4.1 Due-Date Setting Rules 506 4.2 Choosing the Parameters of Due Date Rules 520 4.3 Mathematical Models for Setting Due Dates 521 5. Due Date Management with Service Constraints 523 6. Due Date Management with Price and Order Selection Decisions 530 6.1 Due Date Management with Order Selection Decisions (DDM-OS) 531 6.2 Due Date Management with Price and Order Selection Decisions (DDM-P) 536 7. Conclusions and Future Research Directions 542 References 547 Part IV Multi-Channel Coordination Chapter 13 Modeling Conflict and Coordination in Multi-channel Distribution 557 Systems: A Review Andy A. Tsay and Narendra Agrawal 1. Introduction 557 1.1 Business Setting 557

Contents xi 1.2 Scope of Discussion 559 1.3 Contribution 561 2. Related Literature 562 2.1 Descriptive research 562 2.2 Analytical research 564 3. Analytical Research on Conflict and Coordination in Multi- Channel Systems With Both Manufacturer-Owned And Intermediated Channels 571 3.1 Manufacturer-owned channel is direct sales 574 3.2 Manufacturer-owned channel contains physical stores 582 3.3 Discussion 585 4. Research Opportunities 586 4.1 Representing channel characteristics 586 4.2 Evaluating distribution strategies 594 4.3 Concluding remarks 595 Acknowledgments 595 References 597 Chapter 14 Supply chain structures on the Internet and the role of marketingoperations interaction 607 Serguei Netessine and Nils Rudi 1. Introduction 607 2. Literature survey 611 3. Notation and modeling assumptions 614 4. Supply chain models without coordination 616 4.1 Model I - vertically integrated supply chain 616 4.2 Model T - traditional supply chain 618 4.3 Model D drop-shipping 619 4.4 Comparative analysis of the stationary policies 625 5. Supply chain coordination 629 6. Numerical experiments 632 7. Conclusions and discussion 636 References 639 Chapter 15 Coordinating Traditional and Internet Supply Chains 643 Kyle D. Cattani, Wendell G. Gilland and Jayashankar M. Swaminathan 1. Introduction 643 1.1 Overview of Research 644 1.2 Procurement 644 1.3 Pricing 646 1.4 Distribution / Fulfillment 647 2. Procurement 648 2.1 Coordinating Traditional and Internet Procurement 648 2.2 Formation of Consortia 655 3. Pricing 656 3.1 Independent Competition 656 3.2 Bricks and Clicks 660 3.3 Forward Integration 665 3.4 Full Integration 668 4. Distribution / Fulfilment 668

xii 4.1 Direct channel as outlet 669 4.2 Direct channel as Service buffer 671 5. Conclusion 674 References 675 Part V Network Design, IT, and Financial Services Chapter 16 Using a Structural Equations Modeling Approach to Design and Monitor Strategic International Facility Networks 681 Panos Kouvelis and Charles L. Munson 1. Introduction 681 1.1 A conceptual framework to Classify Global Network Structures 681 1.2 Literature Review 682 1.3 Research Contributions 685 2. Structural Equations Model 686 2.1 Problem Statement 686 2.2 Motivation for the Structural Equations Modeling Approach 686 2.3 Framework Measures (Independent Variables) 687 2.4 Proxies for the Global Network Structure Dimensions (Dependent Variables) 689 2.5 Model Development 689 2.6 Model Validation 695 2.7 Other Products 696 3. Government Incentives: Tax Holidays and Subsidized Loans 696 4. Conclusion 701 Acknowledgments 702 Appendix: MIP Model for Facility Location 702 References 708 Chapter 17 Integrated Production and Distribution Operations: Models, and Review Taxonomy, 711 Zhi-Long Chen 1. Introduction 711 2. Model Classification 713 3. Production - Transportation Problems 715 4. Joint Lot Sizing and Finished Product Delivery Problems 717 5. Joint Raw Material Delivery and Lot Sizing Problems 720 6. General Tactical 721 7. Joint Job Processing and Finished Job Delivery Problems 729 8. Directions for Future Research 732 Acknowledgments 734 References 735 Chapter 18 Next Generation ERP Systems: Scalable and Decentralized Paradigms 747 Paul M. Griffin and Christina R. Scherrer 1. Introduction 747

Contents xiii 2. A Brief History 749 3. Current ERP Functionality 751 4. Implementation Issues 755 5. Scalability and ERP 759 5.1 New Developments in Enterprise Scalability 759 5.2 Standards in ERP 763 6. Decentralized ERP 766 6.1 e-market Intermediaries 767 6.2 Outsourced ERP Systems 770 7. Current Enterprise Issues: ERPII and ECM 772 8. Conclusions 775 References 778 Chapter 19 Delivering e-banking services: An emerging internet business model and a case study 783 Andreas C. Soteriou and Stavros A. Zenios 1. Introduction 783 2. The changing landscape of demand for financial services 785 3. The changing landscape of supply of financial services 787 4. An Emerging e-banking Model 790 5. The design of a web-based personal asset allocation system 794 5.1 The integrated decision support system 796 5.2 Business plan for the deployment of the system 797 5.3 Bringing it altogether: Lessons from the implementation of the system 800 6. Concluding Remarks 802 References 803 Index 805