Service Chain Coordination Using Salvage Manipulation

ABSTRACTThis paper introduces a new coordinating mechanism for a two-echelon service chain with a single service retailer and multiple suppliers. The retailer sells a bundled product with perishable demand to the end customer. Prior to the selling season, suppliers must make components available to the retailer, and the retailer must acquire capacity. The bundled components consist of service capacity at the retailer and products from the suppliers. We demonstrate our salvage manipulation mechanism using an example of a travel agency that provides vacation packages using components provided by suppliers in a service chain. Our mechanism is simple to calculate and does not require the use of burdensome revenue-sharing contracts.JEL: C61, D21, L11, L81KEYWORDS: Service Chain, Coordination, Newsvendor, Exogenous Pricing(ProQuest: ... denotes formulae omitted.)INTRODUCTIONRetailers in the service industry may sell a combination of tangible and intangible items. For example, in a restaurant, the intangible capacities of the server and the chef are combined with the tangible components of a steak and a glass of wine. In a service chain, when all these elements need to exist in concert to provide a complete customer experience, the quantities of each need to be coordinated. If the package or bundle to be provided by the retailer consists of an item that has a short life cycle, this problem can be modeled as a single-period newsvendor problem. Tangible items may be sold at a reduced price after the selling season ends (or may require a disposal fee). However, if the components are intangible/perishable (e.g., unused seats on an airplane), then salvage value may be zero. Each firm in the service chain will want to balance its own costs of having too much capacity or goods on hand with the amount of lost profit due to having too little capacity or goods on hand. If the retailer and all component suppliers were owned by a single firm, that firm would choose the stocking quantity (capacity and components) to maximize the expected profit of the entire service chain. However, with different owners, each company is likely to optimize locally, potentially resulting in a lower expected profit for the entire service chain.The rest of this paper is organized as follows. In the next section, we review the literature on coordinating manufacturing supply chains and service chains. After that, we discuss the model and the notation for the service chain examined in this paper. Then, we analyze centralized versus decentralized service chain operation and discuss the use of salvage manipulation to coordinate the decentralized service chain. Finally, we discuss the results and present conclusions.LITERATURE REVIEWDue to the presence of many stakeholders, each with its own localized objectives, service chains are difficult to manage. Fugate, Sahin, and Mentzer (2006) noted that often in business, each participant attempts to optimize locally without considering the entire service chain. A centralized decision maker could optimize the profits for the service chain, but many participants would be unwilling to give up control. As a result, many of these service chains operate in a decentralized manner, which results in a significant loss in overall efficiency, even with full information available to all participants. To overcome this inefficiency, it is necessary to identify mechanisms that give the participants control over their local entities and, simultaneously, enable them to make decisions that achieve the centralized efficiency. As noted in Lau, Lau, and Wang (2007), a manufacturer/retailer channel has difficulties in fully realizing the profit potential of the market.Spengler (1950) referred to this inefficiency as double marginalization. To eliminate double marginalization, Pasternack (1985) proposed a coordination mechanism that provides partial credit to the retailer for unsold goods. …