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IIM Indore

We examine the implications of vertical augmentation – delegation and strategic decentralization – by involving an intermediary in a supply network of competing firms with limited supply capacity offering multiple product brands. We identify (i) the conditions for the competing firms to characterize their single- versus multi-product incentives, and (ii) the conditions for network sustainability. We develop a game-theoretic model to analyze equilibrium outcomes for competing firms in a decentralized network where the firms respond to horizontal and vertical competition in a multi-product setting. In examining the role of an intermediary in the network, we provide insights into the network setting from the perspectives of (i) consumer valuation for the firms’ products, (ii) size disparity between the network firms, (iii) the intermediary’s efforts in marketing and brand-building, and (iv) the network firms’ mandate for the intermediary. We show that vertical augmentation can be a viable alternative to manage the competing firms’ multi-product incentives, provided a suitable mandate is given to the intermediary. We highlight the importance of the marketing agent in managing the network firms’ multi-product incentives favorably when the firms’ supply capacities are quite disparate, and the consumer valuation for the shared product of the network is relatively high. Our work explores an alternate business model that is relevant for empowering small and micro-entrepreneurs in developing countries.

Operation Management and Quantitative Techniques

European Journal of Operational Research

Multi-product supply networks: Implications of intermediaries

Problem definition: Stockists are the entity in the supply chain who deliver to the millions of small shops that account for over 90% of retail sales in India. The stockist purchases product from the manufacturer, develops retailer interest in carrying the product, solves the logistics problem of delivery to retailers, and manages retail credit and money collection. In return, the stockist is provided assistance by the manufacturer and paid an associated margin that is a percent of the product’s retail price. We observed relatively low distribution margins offered to the stockists in India that was a surprise given infrastructure and financing challenges. We noted that the low margins are enabled by the efficiency in product delivery and demand stimulation induced by the stockist. In this paper, we focus on the analysis of screening contracts offered by manufacturers to stockists. Methodology: We use a principal–agent model structure and model the routing cost, inventory cost, and demand impact of the stockist’s capability. We then use a substitutes or complements relationship between manufacturer assistance and stockist impact to understand the optimal contract structure—i.e., level of assistance and associated retail margin. We describe the economics associated with the stockist, provide data regarding the margins and assistance provided by the manufacturer, and use the model to understand their use in developing an effective supply chain. Results: Our model uses three parameters to show that a manufacture can adjust the level of spatial retailer intensity and thus the impact of the stockist in generating demand, the fraction of high-performing stockists associated with the manufacturer and the nature of the relationship between assistance provided and its impact on the stockist’s performance (i.e., complements or substitutes relationship), to attain superior performance. Academic/practical relevance: We parameterize data from Indian firms in the consumer goods industry to understand the observed assistance provided by the manufacturer to the stockist, and associated margins. We then use our model to understand actions taken by a manufacturer in the Indian market. Managerial implications: Our analysis provides a framework for manufacturers to design screening contracts for stockists who play a vital role in managing the fragmented retail markets in developing countries.

World University root node

Manufacturing and Service Operations Management

Contract Design for the Stockist in Indian Distribution Networks

Nonprofit health care organizations in low- and middle-income countries often pursue a cross-subsidization business model wherein services are offered to poor patients for free through surpluses generated by serving some patients at market prices. This approach allows such organizations to fulfill their mission-oriented and revenue-generation goals. Conventional wisdom holds that mission activities need financial subsidies from revenue-generating activities. The authors examine this dependence in the context of Aravind Eye Hospitals, which delivers eye care services in India. They measure whether the marketing activities (outreach camps) of Aravind that are targeted only to poor patients produce the spillover benefit of attracting paying patients to its hospitals. Using nine years of patient-level historical data, the authors find that camps increase the flow of paying patients. These effects are comparable to the camps acting as advertising for Aravind. Using model estimates, the authors compute the incremental revenue accruing to Aravind from a camp and find that it exceeds the incremental cost of a camp. The findings challenge conventional beliefs about the subsidies required by mission activities.

Fulltext

Journal of Marketing Research

Spillover Effects of Mission Activities on Revenues in Nonprofit Health Care: The Case of Aravind Eye Hospitals, India

An innovative business model for delivery of health services in low and middle income countries is based on cross-subsidizing across patients. Services are offered to poor patients for free, while other patients pay competitive market prices. Driven by their social mission, organizations often focus their marketing efforts only on poor patients via outreach and education. We analyze the outreach activities (camps) of Aravind Eye Hospital in India to learn whether these efforts produce additional spillover benefits of attracting paying patients to its hospitals. In particular, we estimate spatial and temporal (both short- and long-term) effects of camps on different types of paying patients. Based on nine years of historical data on the spatial origin of patient traffic and outreach camp locations, we find that camps have net positive effects on the number of paying patients. These effects are consistent with the camps acting as advertising for Aravind. We also find that the effects of camps are stronger for patients who pay a subsidized price than for those who pay full price, camps influence patients in a small geographic radius of six miles, and the effects persist for up to ten weeks after the camp. Camps also have long term positive effects beyond ten weeks on the number of new patients who pay full price. Further, effects become stronger with distance from the base hospital, a finding also consistent with camps acting as advertising. Our findings reinforce the viability of the cross-subsidization model since they identify a mechanism that creates synergy between the social mission and income generating sides of the organization.

WORKING PAPER

Spillover Benefits of Marketing Exclusively to Free Patients at Aravind Eye Hospital

We develop a noncooperative game theoretic model to examine network performance and stability related implications of allocation mechanisms that endogenously balance equity vis-à-vis equality, and hence, the degree of collusion among the network firms in a decentralized setting. We obtain the structural results and bounds for our model parameters in this regard by focusing on two important factors: (i) synergy between the firms, and (ii) the number of network firms. Our contribution to the existing literature is threefold in showing that: (i) perfect equality among the network firms can be suboptimal, (ii) explicit cooperation among the firms is not always necessary for the efficient network performance, and (iii) the network firms do not completely collude, and yet, network stability can be enhanced. By particularly modeling a two-tier network, we exhibit our results in a decentralized setting and highlight the role of a coordinating agent in enhancing competitiveness of the network firms. We demonstrate that inefficiencies and instability of decentralization can be eliminated by incorporating an additional degree of freedom in the network formation game. Our model and the structural results are applicable to networks such as producers’ cooperatives, cartels, exclusive production facilities, industrial clusters, joint production and research facilities, etc., wherein the conflicts of equity–equality and degree of collusion are predominant. Copyright Springer Science+Business Media New York 2016

Annals of Operations Research

Impact of equity and equality on stability and collusion in a decentralized network

We develop a (noncooperative) game theoretic model for a decentralized setting wherein fringe farmers compete with a two-tier cooperative network involving network farmers and a coordinator. We examine the roles of the coordinator and profit sharing in allocating costs/benefits of externalities in enhancing network efficiency and stability. Our main finding is that using profit sharing based mechanism the coordinator can overcome inherent inefficiency and instability of decentralization and noncooperative behavior of the network farmers. The roles of the coordinator and profit sharing are particularly important when it is economical for both network and fringe farmers to supply the product.

Transportation Research Part E: Logistics and Transportation Review

Cooperatives for fruits and vegetables in emerging countries: Rationalization and impact of decentralization

In this paper, we consider a generic product line design and positioning problem in the context of variety creation using a core product and add-on services. While the functional output of the core product is identical across the products, product variety is created using add-on services that do not alter the functionality of the core product. The motivation for our study comes from emerging for-profit private healthcare service providers in India. We consider two specific scenarios – simultaneous and sequential design – and focus on obtaining insights into the implications of the core product on design and positioning of add-on services. We show that for the core product cost below a threshold the firm does not cover the entire market. For the cost beyond another threshold, it does not introduce any product. The product quality increases in both the core product cost and the consumer valuation of the product relative to the cost of quality; however, the quality based distinction decreases (increases) in the cost parameters (product valuation). In the two-product sequential product design scenario, we show that both products are active only under certain situations. We derive conditions under which the second product has quality higher (lower) than that of the first product. When the firm initially enters the market with a product that corresponds to single product design scenario, we show that the firm introduces a lower quality product and increases profit by increasing the market share. By comparing our results in the two scenarios, we show that the gap between positive (and similarly negative) implications of the two scenarios decreases as the core product cost increases with respect to the cost of quality. In a duopoly setting, we also illustrate how the design and positioning of an incumbent׳s product impacts a new entrant׳s product. Our model and results may be seen as building blocks for obtaining managerial insights.

International Journal of Production Economics

Product line design and positioning using add-on services

In this paper, we develop a non-cooperative game theoretic model for our problem context in which the competing producers adopt one of the two alternate production and marketing technologies — efficient and inefficient. We examine stability related implications of the producers' decisions regarding the choices of (i) technologies, (ii) coalition formation, (iii) coalition form, (iv) intensity of collusion. The coalitions can adopt either complete collusion or partial collusion by determining intensity of collusion using endogenously determined sharing rules. The motivation for our study comes from the Costa Rican coffee industry and interesting findings presented in the existing literature focusing on a variety of competing-coalitions settings. Our results can be categorized as: (i) Nash equilibrium of the endogenously determined sharing rules, (ii) the equilibrium coalition forms, and (iii) stability of coalitions. They highlight the dynamics between the number of coalition producers and the cost of inefficiency. We show that the equilibrium sharing rules may have interior solutions and they are not necessarily (a)symmetric. We also show that both coalitions forming complete collusion of the respective producers in not always a Nash equilibrium, and the equilibrium coalition forms need not be (a)symmetric. Our main contribution to existing literature rests in determining the situations in which (i) competing players form coalitions, and (ii) they adopt the coalition form of either complete or partial collusion. Moreover, we provide an alternate explanation to why competing producers horizontally merge in the presence of a competing coalition adopting partial collusion in spite of the merger paradox. We also show that none of the two types of producers considered in this paper have any incentives in not making the information on their coalition form public. Moreover, we establish that situations yielding stable coalitions always exist. Our results demonstrate that the cost advantage to the efficient producers decreases in the number of producers adopting the efficient technology, and the coalition stability related conditions need not imply better profitability for one type of producer vis-à-vis the other. Our model essentially provides a platform for future research in a variety of competing-coalitions settings adopting endogenously determined sharing rules.

International Game Theory Review

Complete versus partial collusion in competing coalitions

In this chapter, we formulate and solve a math-programming model for Milk and Milk Products Cooperative (MMPC) – a cooperative organization with its shareholders as milk producing member farmers in India. The joint procurement, production and marketing problem of this supply-driven cooperative is characterized by highly perishable raw material, i.e., milk, exhibiting unmatched peaks of supply and demand seasons in a year. The product portfolio of MMPC consists of both high and low return products, and not all products can be inventoried for long periods without refrigeration. Moreover, MMPC adopts a pricing and inventorying strategy keeping in view the expectations of both its suppliers and consumers. In this regard, it is essential for the cooperative to develop annual plans well before the supply season peaks.

International Series in Operations Research & Management Science

Procurement, production and marketing at supply-driven milk and milk products cooperative

The train design problem (also called "block-to-train assignment problem") is a difficult combinatorial optimization problem encountered daily in the freight railroad industry. In 2011, the Railway Applications Society (RAS) of the professional society INFORMS had set up a competition problem of this based on a simplified real-life instance, which is the basis for this chapter. In this chapter we discuss this problem, and develop an algorithm for it based on the minimum cost spanning tree approach, and the solution of the RAS 2011 contest problem using it.

Freight Transport by Rail

Stability is essential for long term sustainability of supply chain networks. The literature on supply chain coordination focuses on enhancing network efficiency, and stability issues are largely unexplored. In this paper, we consider a two-tier supply chain network with a marketing agent coordinating activities among the network players using a price and profit sharing based coordination mechanism. Our <a href="https://www.sciencedirect.com/topics/economics-econometrics-and-finance/noncooperative-game">non-cooperative game</a> theoretic model shows that a unique subgame perfect <a href="https://www.sciencedirect.com/topics/engineering/nash-equilibrium">Nash equilibrium</a> exists that facilitates development of structural results characterizing network stability from the perspectives of costs, number of players and parameters of the coordination mechanism. In particular, we obtain ranges for cost, number of players and the profit sharing parameter over which the network is internally and/or externally stable. Our results suggest that cooperation among the network players is not always necessary; network efficiency can be achieved in some situations with the coordination mechanism adopted here.

Stability issues in supply chain networks: Implications for coordination mechanisms

A typical single period revenue sharing contract specifies a priori a fixed fraction for the supply chain revenue to be shared among the supply chain players. Over the years, supply chains, especially in the movie industry, have adopted multi-period revenue sharing contracts that specify one fraction for each contract period. These revenue sharing contracts are of revenue-independent type such that the revenue sharing fractions are independent of the quantum of revenue generated. Motivated by the recent events in Bollywood – one of the popular arms of the Indian movie industry – in this paper we develop and analyze a game theoretic model for revenue-dependent revenue sharing contracts wherein the actual proportion in which the supply chain revenue is shared among the players depends on the quantum of revenue generated. Our aim is to understand why revenue-dependent revenue sharing contracts are (or not) preferred over revenue-independent contracts. We also examine if supply chains can be coordinated over multiple periods using both types of revenue sharing contracts. We build a two-period model characterizing supply chains in the movie industry and highlight the implications of the multi-period contractual setting for the supply chain coordinating revenue sharing contracts. We show that supply chains can be perfectly coordinated using both types of revenue sharing contracts; however, there exist situations in which revenue-dependent contracts outperform revenue-independent contracts. Using revenue-dependent revenue sharing contracts supply chains can be coordinated while providing positive surplus to the supply chain players that is otherwise not possible under certain situations in revenue-independent contracts. We also demonstrate how revenue-dependent contracts enhance supply chain coordination and highlight their significance when the drop in the revenue potential from one period to another is moderate.

Omega

Supply chain coordination using revenue-dependent revenue sharing contracts

Indore Management Journal

Madras Management Association: Managing Diversity, Growth and Excellence

Anthropogenic emissions likely pose serious threat to the stability of our environment; immediate actions are required to change the way the earth’s resources are consumed. Among the many approaches to mitigation of environmental deterioration being considered, the processes for designing, sourcing, producing and distributing products in global markets play a central role. Considerable research effort is being devoted to understanding how organisational initiatives and government policies can be structured to facilitate incorporation of sustainability into design and management of entire supply chain. In this paper, we review the current state of academic research in sustainable supply chain management, and provide a discussion of future direction and research opportunities in this field. We develop an integrative framework summarising the existing literature under four broad categories: (i) strategic considerations; (ii) decisions at functional interfaces; (iii) regulation and government policies; and (iv) integrative models and decision support tools. We aim to provide managers and industry practitioners with a nuanced understanding of issues and trade-offs involved in making decisions related to sustainable supply chain management. We conclude the paper by discussing environmental initiatives in India and the relevance of sustainability discussions in the context of the Indian economy.

IIMB Management Review

Sustainable supply chain management: Review and research opportunities

International Journal of Game Theory

Y. Narahari, D. Garg, R. Narayanam and H. Prakash: Game theoretic problems in network economics and mechanism design solutions

In this paper, we consider a two level supply chain with a manufacturer supplying the product to a retailer. The retailer faces nonstationary demand that follows an ARIMA (0,1,1) process. In the absence of information sharing, the retailer only conveys his order quantity to the manufacturer, and with information sharing, he also conveys the demand level in each period. The model based on nonstationary demand process is sign cant; given the empirical dings that the demand processes observed in industries such as FMCG, grocery, apparel, and auto components are auto correlated and nonstationary. In our model, we consider a periodic review system for both retailer and manufacturer and derive the expressions for the optimal order up to level for the players. We also obtain the expressions for the cost functions of the two players and conduct a numerical study to evaluate the value of information sharing. We find that both the retailer's ordering process and the manufacturer's demand process are independent of the inertia of the external demand process, and they depend only on the delivery lead time of the retailer from the manufacturer. We observe that both variance of the manufacturer's demand process and his cost decrease due to information sharing. However, the savings in the manufacturer's cost with information sharing decrease as the external demand process becomes less stable or more transitory, and they increase as the demand uncertainty increases. Lastly, we note that the cost reduction is more by reducing the manufacturer's rather than the retailer's lead time.