Effects of Sharing Upstream Information on Product Rollover

1. Effects of Sharing Upstream Information on Product Rollover Dr. Li, Zhaolin Erick Department of Management Sciences City University of Hong Kong April 1, 2014

2. Authors Gao, Long Li, Zhaolin Erick

3. Outline • Introduction • Managerial insights • On-going research

4. 1. Introduction • Product rollover • The process of introducing new and phasing out old products. • Billington, Lee and Tang (1998) • Lim and Tang (2006) • Many unsuccessful product rollovers happened before.

5. 1.1 Bring Back my Old Memory • Two contradicting stories • In 1997, the “secret rollout” strategy adopted by Changhong backfired. • The use of price protection contracts in Intel.

6. 1.2 Literature Review • Information sharing • Downstream information • Point of sales, inventory, etc. • Upstream information • Lead time, new product information, plant operations, etc.

7. 1.2 Literature Review (Cont’d) • Existing literature heavily tilts to downstream information • Chen (2003) for review • Little attention was given to upstream information • Chen and Yu (2005) • Jain and Moinzadeh (2005)

8. 1.2 Literature Review (Cont’d) • Supply chain contracting literature deals with • Buy-back (e.g., Pasternack 1985), • Option contracts (e.g., Wu and Kleindofer 2005), • Price protection (e.g., Taylor 2001), and • Revenue sharing (e.g., Iyer and Bergen 1997, Gan, Sethi, and Yan 2005)

9. 1.2 Literature Review (Cont’d) • Product rollover with inventory costs • Wilhelm and Xu (2002) • Souza, Bayus, and Wagner (2004) • Xu and Li (2007)

10. 1.2 Literature Review (Cont’d) • New product pre-announcement • Lilly and Walters (1997) • Kohli (1999)

11. 1.3 Research Questions • What supply chain contract can lead to a supply chain coordination (i.e., the decentralized decision is the same as the system's optimal solution)? • What is the impact of sharing the upstream information on supply chain performance? • Will all channel partners benefit from sharing the upstream information?

12. 1.4 The Model Customer M R charge wi charge ri Leftover incur hi Walk away if demand unmet Incur production cost ci The age of the product is represented by subscript j.

13. 1.5 What We Have Done • We first characterize the decentralized and centralized optimal policies under two scenarios: • (1) no information sharing, and • (2) with information sharing. • We then derive an optimal supply chain contract that coordinates the supply chain. • We analyze the chain performance of the coordinated and uncoordinated systems.

14. 2. Managerial Insights • To capitalize on information sharing, the supply chain needs to be coordinated in the first place. • If chain is coordinated, information sharing leads to win-win; otherwise, it may lead to a mixed outcome.

15. 2. Managerial Insights (Cont’d) • With decreasing price and short lifecycles, how can coordination be achieved? • By appropriately selecting • Wholesale price wi; • Price protection pi; • End-of-cycle return price bi.

16. Technical Trick • DP for the retailer is • DP for the coordinated chain is • If R(i,x) / T(i,x) is a constant, then the retailer’s optimal policy is the same as the system optimum.

17. 2. Managerial Insights (Cont’d) • How is the chain profit split? • Profit split ratio = Retailer Profit / Chain Profit • The profit split ratio needs to be age-independent.

18. 2. Managerial Insights (Cont’d) • When the chain is coordinated, the supplier has no incentive to mislead the retailer. • Cost savings due to information sharing increase when demand is more volatile.

19. 3. On-going Research • Plan to use laboratory experiments to verify the major propositions. • To investigate how various factors can affect supplier’s willingness to share information.

20. Thank You! • Paper is accepted by POMS and is available at http://fbstaff.cityu.edu.hk/zherli/Paper.htm