Supply Chain Design: Capacity, Flexibility and Wholesale Price Strategies

This is the forth contribution to my series on doctoral dissertations on Supply Chain Risk Management. An immense effort and dedication is spent on these works only to find the results hidden in the libraries. So the goal is raise interest in the research of my peers.

Author / Topic

This dissertation was written by Brian Tomlin in 1999 as his doctoral thesis at the Massachusetts Institute of Technology, Cambridge, USA. It can be downloaded here at his homepage at his current employer (Tuck School of Business at Dartmouth). The title is:

Supply Chain Design: Capacity, Flexibility and Wholesale Price Strategies

Summary

Tomlin cumulates three distinct topics and analyzes them in depth in his dissertation. His core question is always the supply chain design, with demand uncertainty as the dominant risk.

• Wholesale Pricing Strategies
  Using a game theoretic model with two actors (supplier and manufacturer) he explores the best strategies for setting the wholesale price. The objective is to maximize the supply chain profit (think of it as a return on investment in the supply chain). He shows, that no matter if quantity-discount or quantity-premium pricing schedules are used, non-linear pricing schedules outperform linear pricing schedules.
• Process Flexibility Strategies
  He then tackles flexibility strategies in a multi-product, multi-stage supply chain environment. He first identifies two inefficiencies which only occur in a multi-stage environment, namely stage-spanning bottlenecks and floating bottlenecks. He develops a mathematical supply chain optimization model and based on the results he concludes, that “in supply chains with a large number of products or stages, additional flexibility is advisable, especially for stages in which the capacity is not much greater than the expected demand.”
• Capacity Decision
  With this chapter on capacity decision making in multi-product, multi-stage supply chains he walks on new grounds, since up to then only single-stage models have been analyzed. He uses two criterion for his analysis: service level and expected shortfall. The results of his analysis show that under optimal capacity allocation: for every stage must hold true: for a small increase in a stage’s capacity, the decrease in shortfall divided by the capacity cost should be the same for all stages.

Conclusion

I have to admit that I do not really like the segregated design of the thesis itself, analyzing one topic in depth usually should be sufficient for one dissertation. On the other hand the work by Tomlin on the three topics would probably also have sufficed for two or three separate dissertations as well.

Compared to other dissertations I read it was refreshing to see, that he did not spend (too) much time on making an in depth literature review beforehand but focussed very much on his own works.