2018-2019: Operations and Information Management

For more information please contact Prof. Bob Batt, bob.batt@wisc.edu.

Incentive Design for Operations-Marketing Multitasking

Prof. Chris Ryan, Associate Professor, Booth School of Business, University of Chicago

A firm hires an agent (e.g., store manager) to undertake both operational and marketing activities for a product. Marketing activities boost demand, but for demand to translate into sales, the agent must exert operational effort to ensure adequate inventory on hand. When demand exceeds available inventory, neither the firm nor the agent can observe unmet demand, a phenomenon known as demand censoring. The firm designs a compensation plan to induce the agent to put appropriate effort into both marketing and operations. We formulate this incentive design problem using moral hazard principal-agent framework with a multitasking agent subject to demand censoring. We develop a novel bang-bang control approach, with a general optimality structure applicable to a broad class of incentive design problems. Using this approach, we characterize the optimal compensation plan as consisting of a base salary and a bonus paid to the agent under one of the following two conditions: (a) all inventory above a predetermined threshold is sold, and (b) the sales quantity meets a downward-sloping inventory-dependent target. This structure implies non-monotonicity in the compensation plan: given the same sales outcome, the agent can be less likely to receive the bonus under a better inventory outcome. Furthermore, we find that inventory and demand outcomes can act as either complements or substitutes of each other in the compensation plan. Finally, we rule out the optimality of rudimentary compensation plans that generalize the logic of binary payment schemes from the single-tasking literature, revealing additional subtleties in the multi-tasking setting.

This is joint work with Tinglong Dai (Johns Hopkins University) and Rongzhu Ke (Hong Kong Baptist University).

Prof. Hillol Bala, Associate Professor, Kelley School of Business, Indiana University

Prof. Kostas Nikolopoulos, Professor, Bangor Business School, Bangor University

Prof. Edieal Pinker, Professor, Yale School of Management, Yale University

Prof. Ataly Atasu, Professor, Scheller College of Business, Georgia Tech

The circular economy (CE) movement has been gaining momentum as a promising solution to the environmental problems we are facing today. Promoted by non-profits such as the Ellen MacArthur Foundation and supported by major consulting companies (e.g., by McKinsey and Accenture), the CE is widely discussed in academic, industry and policy-making circles. A case in point is the recent CE pledge form multinationals (such as HP, Dell, Philips and Cisco) in the last World Economic Forum event in Davos.

The CE hinges on the idea that smart product and business model designs that close material and energy loops will help achieve not only environmental sustainability but also better economic outcomes. We test this influential premise in the context of modular product architectures and leasing, two prominent and frequently discussed elements of a circular economy implementation. The proponents of CE view these two strategies as complementary, reinforcing each other's beneficial effects especially on firm profits and the environment. A well-known case in point is Xerox, who has long leased products with modular product architectures as part of a successful business model, and claimed significant environmental benefits from its implementation. However, the joint execution of leasing and selling is not as prevalent in other industries or firms. Our interactions with a multinational asset-management company further suggest that many firms need guidance as to when and to what extent leasing modular products can be a profitable business strategy and beneficial for the environment.

To this end, observing that most product categories that fit into this discussion are durables, we formulate an analytical model that builds on the durable goods literature and extends it to analyze the impact of a modular product architecture under leasing. We find that leasing and modular product architectures are typically substitutes from a firm profit point of view. Leasing modular products is profitable only when (i) off-lease products are in much better condition than used products that have been sold; (ii) replacing product modules to offer blended products with used and new modules is economical for the firm; and (iii) product modules substantially differ with respect to their durability. We demonstrate the practicality of these results by a number of examples based on our interactions with the asset-management company. Regarding the environmental implications of leasing modular products, we find that they benefit the environment only in a relatively limited set of conditions, which are neither immediate nor intuitive.

The main take-away from this paper is that for all the talk on the potential of the circular economy, there is a lot to be done to test and verify its broad, sweeping claims, and much of this needs an academic perspective.

Prof. Jan Van Mieghem, Professor, Kellogg School of Management, Northwestern University

Prof. Beril Toktay, Professor, Scheller College of Business, Georgia Tech

Prof. Kumar Rajaram, Professor, Anderson School of Management, UCLA