Will GM Plan Be Short-Term Pain and Long-Term Gain?

Inside Indiana Business  online

2018-12-03

The GM plan, which includes the elimination of six passenger car models, is in response to a massive consumer move away from cars to trucks, SUVs and crossovers. “I think for a long time they have been using incentives to push their money-losing vehicles and now finally they have bitten the bullet and I think it’s past time,” said Rodney Parker, associate professor of operations at the Kelley School. In an interview for this weekend’s edition of Inside INdiana Business with Gerry Dick, Parker said Fort Wayne’s GM Truck Plant should be positioned well because of its product mix. Parker notes that the six models GM is eliminating sold a combined 200,000 units through the first nine months of 2018. By comparison, the Chevrolet Silverado alone sold about 424,000 units during that same period. The Silverado is produced in Fort Wayne...

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Enhancing Kidney Supply Through Geographic Sharing in the United States

2018 The deceased-donor kidney allocation system suffers from a severe shortage of available organs. We illustrate a mechanism which can increase the supply of cadaveric kidneys in the United States. This supply increase exploits the fact that under the current organ allocation policy, some kidneys remain unprocured in some procurement areas but would be highly sought in other areas. The current kidney allocation policy procures within a donor service area (DSA) and offers these kidneys first to patients in the DSA; if these offers are not accepted, the kidney will be offered within the region (a cluster of DSAs); if these offers are not accepted, the kidney will be offered nationally. A deceased-donor organ is procured if there is the belief that the offered organ will be transplanted (known as “intent”). We conduct an empirical analysis of the donor and recipient data (at the DSA level) which reveals that the intent increases significantly with organ quality, the median waiting time for a transplant, and higher competition. In particular, it shows that lower quality organs are likely to be procured at a higher rate in DSAs with longer waiting times. Motivated by a new kidney allocation system, we conduct a counterfactual study which shows that geographically broader sharing the bottom 15% quality kidneys leads to stronger intent for the organ, thus increasing the supply of procured organs available for transplantation. The expected increase in procured organs ranges from 58 (an increase of 0.4% of all procured kidneys) to 174 (an increase of 1.2%), depending on regional or national sharing.

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Innovation and technology diffusion in competitive supply chains

2018 Innovations in consumer products frequently rely on technological advances across multiple tiers in a supply chain. Considering the consumer market demand and downstream investment conditions as input, we model a game in a two-tier supply chain where downstream firms choose to adopt different levels of an upstream technology and an upstream technology leader determines its pricing policy. We identify two necessary but distinct elements for the successful development, adoption, and diffusion of upstream technologies that are sold to lower tiers as components within final products. (1) The level of technology demanded by the market: We develop a measure, Technological Potential, which describes the highest level of an upstream technology demanded by consumer markets. (2) A sufficiently rich return to an upstream innovator, as a function of different levels of technology. From these two elements, we show that the relative magnitudes of two competing sets of consumer market factors determine the Technological Potential whereas the overall magnitude of the factors in both sets determines the return to the upstream developer. We discuss how this difference in consumer market factors’ influence on these two elements may determine how different technologies fare in the supply chain. Our results have managerial implications for: investors in research and development project selection in identifying profitable technologies that are also demanded at higher capability levels; and for governments in defining more targeted public policies – for example in choosing the right tier of a supply chain to provide subsidies – to encourage market support for certain technologies.

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When Customers Anticipate Liquidation Sales: Managing Operations Under Financial Distress

2017 The presence of strategic customers may force an already financially distressed firm into a death spiral: sensing the firm’s financial difficulty, customers may wait strategically for deep discounts in liquidation sales. In turn, such waiting lowers the firm’s profitability and increases the firm’s bankruptcy risk. Using a two-period model to capture these dynamics, this paper identifies customers' strategic waiting behavior as a source of a firm’s cost of financial distress. We also find that customers' anticipation of bankruptcy can be self-fulfilling: when customers anticipate a high bankruptcy probability, they prefer to delay their purchases, making the firm more likely to go bankrupt than when customers anticipate a low probability of bankruptcy. Such behavior has important operational and financial implications. First, the firm acts more conservatively when facing either more severe financial distress or a large share of strategic customers. As its financial situation deteriorates, the firm lowers inventory alone when financial distress is mild or only a small share of customers are strategic and lowers both inventory and price in the presence of severe financial distress and a large fraction of strategic customers. Under optimal price and inventory decisions, strategic waiting accounts for a large part of the firm’s total cost of financial distress, although a larger proportion of strategic customers may result in a lower probability of bankruptcy. In addition to inventory reduction and (immediate) price discount, we find that a deferred discount, in the form of rebates and/or store credits for future purchases, can act as an effective mechanism to mitigate strategic waiting. As a contingent price reduction, deferred discounts align the interests of customers and the firm and are most effective when the fraction of strategic customers is high and the firm’s financial distress is at a medium level.

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The Supply Chain Effects of Bankruptcy

2015 This paper examines how a firm’s financial distress and the legal environment regarding the ease of bankruptcy reorganization can alter product market competition and supplier–buyer relationships. We identify three effects—predation, bail-out, and abetment—that can change firms’ behavior from their actions in the absence of financial distress. The predation effect increases competition before potential bankruptcy as the nondistressed competitor behaves as if it has some first-mover advantage that could benefit a supplier with price control. The bail-out effect reflects the supplier’s incentive to grant the distressed firm concessions to preserve competition, improving supply chain efficiency and providing support for the exclusivity rule in Chapter 11 of the United States Bankruptcy Code when the supplier and the distressed firm are financially linked. The abetment effect is that the supplier may deliberately abet the competitor’s predation, leading to increased operational disadvantages for the distressed firm before bankruptcy. Together these effects stress that a firm’s bankruptcy potential can hurt its competitors and benefit its suppliers/customers. They also provide guidelines for firms’ operational decisions in such situations, a rationale for observed firm actions surrounding bankruptcies, and motivation for policies supporting reorganization and relaxing broad enforcement of nondiscriminatory pricing regulations.

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Inventory Management Under Market Size Dynamics

2008 We investigate the situation where a customer experiencing an inventory stockout at a retailer potentially leaves the firm's market. In classical inventory theory, a unit stockout penalty cost has been used as a surrogate to mimic the economic effect of such a departure; in this study, we explicitly represent this aspect of consumer behavior, incorporating the diminishing effect of the consumers leaving the market upon the stochastic demand distribution in a time-dynamic context. The initial model considers a single firm. We allow for consumer forgiveness where customers may flow back to the committed purchasing market from a nonpurchasing “latent” market. The per-period decisions include a marketing mix to attract latent and new consumers to the committed market and the setting of inventory levels. We establish conditions under which the firm optimally operates a base-stock inventory policy. The subsequent two models consider a duopoly where the potential market for a firm is now the committed market of the other firm; each firm decides its own inventory level. In the first model, the only decisions are the stocking decisions and in the second model, a firm may also advertise to attract dissatisfied customers from its competitor's market. In both cases, we establish conditions for a base-stock equilibrium policy. We demonstrate comparative statics in all models.

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