Stochastic models on project-based supply chains and pricing of platform products [electronic resource]
Keywords: Management Science and Engineering

This dissertation is composed of two parts. In the first part we study project-based supply chains with changing product specifications, and in the second part we present a model that analyzes the pricing problem of platform products with service subscriptions. Project-based supply chains in high-tech industries such as aerospace and defense often involve uncertainties in product specifications, which can lead to project cost overruns and delays. According to a 2011 Government Accountability Office assessment of selected Department of Defense weapons programs, the total portfolio's acquisition costs rose \ 9 billion from 2008 to 2010, and projects with changes to specifications experienced roughly four times more growth in costs and three to four times greater delays compared to projects with unchanged requirements. We argue that mismanagement of the uncertainties in product specifications and schedule can cause misalignments between supply chain partners that ultimately result in added cost overruns and delays to the project. To study this problem, we consider a stylized project-based supply chain consisting of a buyer (such as the Department of Defense), a manufacturer (or contractor) hired by the buyer to manage the project, and a critical subassembly supplier (or subcontractor). We present two models: a procurement model and a development model. In the procurement model, the buyer orders a fixed number of units of an end product, but there is uncertainty in the number of units that will be needed earlier with the original specifications and the number of units that will be needed later with modified specifications. In the development model, the project consists of developing a single end product with a complex technology being created by the subassembly supplier. In these two settings, we analyze the incentive conflict between the manufacturer and the supplier when the buyer considers a possible change in the product's specifications. If the supplier begins development early -- or produces too many units early -- and changes are made to the specifications, then the project faces rework and/or holding costs. If the supplier postpones development -- or produces too few units early -- then the project is exposed to delays and penalty fees for late delivery. We apply many commonly used contracts to these settings (such as fixed-price, cost-sharing, and time-incentive contracts), and determine which ones are able to achieve coordination of the supply chain. We show that procurement projects can be coordinated by sharing the costs and risks in any way between the supplier and the manufacturer. However, development projects can only be coordinated by transferring all of the risk of the project to the supplier, since the supplier's actions are unobservable by the manufacturer. Nevertheless, these common contracts usually fail to achieve coordination under asymmetric information, where the manufacturer has private information on the order's forecast and the supplier has private information on the subassembly's costs of development or rework/holding. A more complex sequential revelation contract is presented that achieves truthful information sharing and supply chain coordination in the procurement model by aligning incentives through a menu of contracts contingent on the manufacturer's private information and on the supplier's private information as a function of her observable early production decision. However, we show that the sequential revelation contract does not achieve truthful information sharing in the development model, since the supplier not only has private information about her development costs, but also because her development efforts are unobservable by the manufacturer. In the second part of this dissertation we study the pricing decision of a firm that provides a subscription to a bundle consisting of a platform product and its associated service (e.g., an iPhone and a cellular phone plan, or a Kindle ebook reader with a magazine subscription). The firm's profit maximization problem is analyzed using a dynamic programming formulation and the customers' decisions are modeled using a reservation-price model. The pricing policy consists of two prices: the product price in the first period and the per-period subscription price. The firm incurs a setup cost for providing a product to each new customer and a service cost in each period that the customer chooses to continue his subscription. Under the assumption that the customer's valuation for the product is independent of the customer's valuation for the services associated with the product, we find that, for the single-period case, the optimal prices are independent of each other and of the number of customers subscribed to the bundle. For the multi-period case we show that the problem reduces to the single-period case with a simplified cost structure. Moreover, we demonstrate that these results extend to the stationary infinite-horizon case. We show that the optimal product price is increasing in the product cost, but decreasing in the profit margin generated by the subscription price. In contrast, the optimal subscription price depends on the service cost, but is independent of the product price and product cost.