Volume 5:4

Copies of these published papers may be downloaded from Informs Online

Title: "Capacity Management, Investment, and Hedging: Review and Recent Developments"

Author(s): Jan A. Van Mieghem

Abstract: This article surveys the literature on stochastic capacity investment and presents new work on hedging the risk of the investment porfolio by purposely unbalancing capacities. Capacity in this article relates to upper bounds on the production quantities of a firm resulting from limitations in its processing network. While many factors can limit production quantities, including inventory shortage, scheduling, flow time, and reliability, the discussion here will focus on the prime economic factors of production: capital and labor resources. Investment is the change of the stock of capital and labor and includes expansion and contraction. A general stochastic capacity investment model and its major properties are presented together with a discussion of important issues in the formulation of capacity problems. Recent directions in stochastic capacity investment are discussed: investment in multiple resources, investment by multiple agents, and investment that incorporates risk considerations. We focus on optimal investment and operational hedging in a portfolio of capacity types or "real assets" as opposed to financial assets. We present new results on the efficient risk-return frontier and the optimal risk-hedging capacity adjustment path. This suggests a measure for the value of operational hedging by purposely deviating from a balanced capacity  configuration (or from the risk-neutral optimal configuration as prescribed by a newsvendor network solution). An ongoing example illustrates the discussion.

Title: "Matching Demand and Supply to Maximize Profits From Remanufacturing"

Author(s): Daniel Guide, Ruud H. Teunter, Luk N. Van Wassenhove

Abstract:  The profitability of remanufacturing depends on the quantity and quality of product returns and on the demand for remanufactured products. The quantity and quality of product returns can be influenced by varying quality dependent acquisition prices, i.e., by using product acquisition management. Demand can be influenced by varying the selling price. We develop a simple framework for determining the optimal prices and the corresponding profitability. We motivate and illustrate our framework using an application from the cellular telephone industry.

The manuscript was submitted on October 11, 2001.  The average review cycle time was 73 days.

Corresponding author: Daniel Guide, Department of Supply Chain & Information Systems, Smeal College of Business Administration, The Pennsylvania State University, University Park, PA 16802-3005, e-mail : dguide@psu.edu

Title: "Capacity Investments in Supply Chains: Sharing-the-Gain rather than Sharing-the-Pain"

Author: Brian Tomlin

Abstract: In this paper we investigate price-only contracts in supply chain capacity procurement games.  For a two-party supply chain, comprising a manufacturer and a supplier that both invest in capacity, we prove the existence of a class of coordinating price-only contracts that arbitrarily allocate the supply chain profit. Moreover, if the supplier’s reservation profit is below a certain threshold, the manufacturer’s optimal contract is a quantity premium price-only schedule, that is the average wholesale price per unit increases in the order size. We prove that the manufacturer prefers simple piecewise-linear quantity premium contracts to linear contracts and show numerically that such contracts are highly efficient. We extend our results for piecewise-linear price schedules to N-supplier assembly systems. We also enrich the voluntary compliance regime of Cachon and Lariviere (2001). With this enrichment, we prove that share-the-pain contracts, such as firm commitment and options contracts, increase supplier capacity in the full information case, a result that contrasts with that of Cachon and Lariviere. Finally, we investigate when a manufacturer prefers single breakpoint quantity premiums to firm commitments.

The manuscript was submitted on November 14, 2001.  The average review cycle time was 29 days.

Corresponding author: Brian Tomlin, Kenan-Flagler Business School, University of North Carolina at Chapel Hill, Chapel Hill, NC 27599-3490,   e-mail: brian_tomlin@unc.edu

Title: "Interactive Multicriteria Optimization for Multiple-Response Product and Process Design" 

Author(s): Robert Plante, Murat Koksalan

Abstract: We consider product and process design problems (hereon collectively called process design problems), which address issues associated with the assessment of optimum levels for process inputs that influence multiple process performance measures. While this problem context encompasses many possible applications, we focus primarily on Multiple Response Design problems that have been widely studied in the quality improvement and quality management literature. For such problems, several optimization criteria have been proposed, including maximization of process yield, maximization of process capability, minimization of process costs, etc. In this research, we propose a method that accounts for many of these criteria via a procedure that interacts with and relies on the preferences of a Decision Maker (DM). The interactive procedure evolves from the convergence of three areas of research: notably, the research in Multiple Response Design, the research in Multi-Criteria Optimization, and recent developments in Global Optimization. The proposed interactive method is illustrated and comparatively assessed via two well-known problems in Multiple Response Design. Although the interactive procedure is developed for application in Multiple Response Design, it is not limited to this problem context. The concepts and methods developed in this research have applicability to problems that can be characterized by process inputs and process performance, such as supply chain management and multidisciplinary design optimization.

The manuscript was submitted on May 29, 2002.  The average review cycle time was 72 days.

Corresponding author: Robert Plante, Purdue University, Krannert School of Management, West Lafayette, IN, 47907, e-mail: bob@mgmt.purdue.edu

Title: "Price-Directed Replenishment of Subsets: Methodology and Its Application to Inventory Routing"

Author: Dan Adelman

Abstract: The idea of price-directed control is to use an operating policy that exploits optimal dual prices from a mathematical programming relaxation of the underlying control problem.  We apply it to the problem of replenishing inventory to subsets of products/locations, such as in the distribution of industrial gases, so as to minimize long-run time average replenishment costs.  Given a marginal value for each product/location, whenever there is a stockout the dispatcher compares the total value of each feasible replenishment with its cost, and chooses one that maximizes the surplus. We derive this operating policy using a linear functional approximation to the optimal value function of a semi-Markov decision process on continuous spaces. This approximation also leads to a math program whose optimal dual prices yield values and whose optimal objective value gives a lower bound on system performance. We use duality theory to show that optimal prices satisfy several structural properties and can be interpreted as estimates of lowest achievable marginal costs. On real world instances, the price-directed policy achieves superior, near optimal performance as compared with other approaches.

The manuscript was submitted on May 28, 2002.  The average review cycle time was 75 days.

Corresponding author: Dan Adelman, University of Chicago, Graduate School of Business, 1101 East 58th Street, Chicago, IL, 60637, e-mail: dan.adelman@gsb.uchicago.edu

Title: Erratum to Bounds in "Serial Production/Distribution Systems Under Service Constraints"

Authors: Tamer Boyaci, Guillermo Gallego, Kevin H. Shang, Jin-Sheng Song