Knowledge that Transforms

The journal is pleased to publish the abstracts of the six finalists of the 2016 Manufacturing and Service Operations Management Society’s student paper competition. The 2016 prize committee was chaired by Sameer Hasija (INSEAD), Nicos Savva (London Business School), and Tolga Tezcan (London Business School). The other committee members were: Philipp Afeche, Vishal Agrawal, Aydin Alptekinoglu, Dimitrios Antritsos, Nilay Argon, Mazhar Arikan, Alessandro Arlotto, Arash Asadpour, Atalay Atasu, Nitin Bakshi, Gah-Yi Ban, Opher Baron, Robert Batt, Elena Belavina, Omar Besbes, Kostas Bimpikis, Robert Bray, Carri Chan, Xin Chen, Ying-Ju Chen, Soo-Haeng Cho, So Yeon Chun, Florin Ciocan, Sarang Deo, Lingxiu Dong, Santiago Gallino, Srinagesh Gavirneni, Manu Goyal, Shuangchi He, Jonathan Helm, Ming Hu, Dan Iancu, Foad Iravani, Srikanth Jagabathula, Nitish Jain, Yash Kanoria, Fikri Karaesmen, Diwas KC, Saravanan Kesavan, Bora Keskin, Sang Kim, Song-Hee Kim, Pascale Krama, Mirko Kremer, Harish Krishnan, Mumin Kurtulus, Guoming Lai, Cuihong Li, Jun Li, Lauren Lu, James Luedtke, Victor Martinez de Albinez, Mili Mehrotra, Alex Mills, Toni Moreno, Nektarios Oraiopoulos, Anton Ovchinnikov, Yiangos Papanastasiou, Chris Parker, Rodney Parker, Ali Parlakturk, Alfonso Pedraza Martinez, Ramandeep Randhawa, Paat Rusmevichientong, Chris Ryan, Soroush Saghafian, Ozge Sahin, Burhaneddin Sandikci, Nicola Secomandi, Stephen Shechter, Pengyi Shi, Amitabh Sinha, Milind Sohoni, Brad Staats, Alireza Tahbaz-Salehi, Nicos Trichakis, Owen Wu, Wenqiang Xiao, Nan Yang, Fuqiang Zhang, Jiawei Zhang, Yao Zhao, Karen Zheng, Yong-Pin Zhou, and Leon Zhu.

The continued success of Manufacturing & Service Operations Management (M&SOM) depends on the volunteer work of many professionals who take their precious time to provide careful and constructive reviews of the manuscripts submitted to the journal in a timely manner. On behalf of M&SOM, Editor-in-Chief Christopher Tang would like to express his deepest gratitude to all those who served as reviewers for the journal in 2016. Among all reviewers, some individuals have distinguished themselves by reviewing several manuscripts and with each manuscript by writing a fair, critical, and constructive review in a timely fashion. In recognition of their outstanding service provided to support the journal’s scholarly mission, M&SOM grants the 2016 Meritorious Service Award to….

This paper models a cash conversion system in a subsidiary of a parent company where there is an active internal capital market, but otherwise the subsidiary has no access to additional external funds. The cash conversion system consists of a treasury, a single-product make-to-stock inventory, and a receivables pool. It implements a perpetual flow cycle, where funds convert to product and back to funds. The system is stationary, and revenues and costs flow directly to the parent company. The parent company aims to maximize equilibrium (long-run) financial metrics in terms of net profit rate and rate of return. To this end, we model this system as a discrete-state continuous-time Markov process and compute its equilibrium state distribution using analytic and numerical methods. These are then used to derive statistics of the equilibrium cash conversion cycle and define equilibrium financial rate metrics and cumulative counterparts that incorporate the time value of money. We further optimize the financial and operational designs of the system and, specifically, the internal capital allocation and inventory base stock level. Finally, noting the potential for friction in the parent–subsidiary relationship, we study numerically the impact of moral hazard and internal capital market inefficiency on optimal designs. The online appendix is available at https://doi.org/10.1287/msom.2017.0625 .

I have enjoyed the opportunities to identify new problems, implement my ideas and algorithms in practice, work closely with start-ups and mature organizations, and build a software company that created the market for enterprise inventory optimization, while also developing novel solution methods that have adapted and enhanced esoteric mathematics. This invited essay is a playful reflection of creative joy in operations management (OM)—obtained by intertwining theoretical developments with industrial implementations forging a path that consciously forks from received wisdom and conventional methods—while looking ahead to continued delights.

The revolution in information technology has provided the research community in operations management (OM) with new areas to explore and many new avenues to develop. In recognition of this, many editors of OM journals strive to publish new ideas. These two forces generate strong motivation, but many young OM scholars find it difficult to find new OM research ideas. To address this challenge, I describe three simple thought processes (or approaches) that I have learned and used to identify new research topics over the last 35 years. These approaches are as follows: (1) observe and learn to develop “problem-based” research, (2) ask “whys” to develop “phenomenon-based” research, and (3) sketch graphs to develop “insight-based” research. Clearly, these simple approaches are neither complete nor optimal; however, I share these personal thought processes with the hope of contributing to discussions as to how the next generation of OM researchers can build upon and expand the remarkable impact that our field has had and will continue to have.

The timing of forest stands harvesting is an important operational decision in forestry. Major goals of private nonindustrial forest owners are to achieve a steady flow of profits while reaching an overall satisfactory and reliable profit level. These goals are pursued under uncertainties in the growth of trees in different regions and in the prices of wood products. We propose an optimization framework that uses financial risk concepts to capture the above goals and uncertainties, and apply it to a real forestry problem in Finland. Our results demonstrate that the obtained harvesting schedules outperform those obtained without the explicit consideration of the stability and reliability requirements in harvest profits. More generally, our results indicate that the forest owner can improve the profit stability by (i) harvesting a greater number of forest stands early and (ii) harvesting in the first periods of the planning horizon stands that are predominantly composed of slow-growing forests. This research responds to the call for scenario-based approaches that represent well, and in a solvable way, multiple uncertainties in large forestry problems. This study fills in a gap in stochastic programming and can be a cornerstone for subsequent improvements in the solution of combinatorial chance-constrained problems with multirow random technology matrix. The online appendix is available at https://doi.org/10.1287/msom.2017.0626 .

We analyze how performance metrics that contain equivalent information affect actual decisions. We consider two such performance metrics from supply chain management, days of supply and inventory turn rate, where one is the inverse of the other. We argue that individuals’ assessment of performance is also affected by the metric as opposed to solely based on the inventory value that actually matters. We perform three laboratory studies and analyze how decisions are affected by the metric used to indicate inventory performance. The first study considers alternative inventory optimizations, out of which one must be selected. The second study analyzes a decision maker who must decide on the effort to invest in optimizing inventory of a specific product. The third study corresponds to the economic order quantity model. Our behavioral models suggest that decisions are affected by the metric that is used to indicate performance, and we find support for the predictions in laboratory experiments with human subjects: Under the inventory turn rate metric, individuals overvalue inventory reductions. Compared to decisions under the days of supply metric, they choose worse inventory optimization options, invest more effort optimizing inventory of specific products, and choose higher ordering cost. The e-companion is available at https://doi.org/10.1287/msom.2017.0620 .

The presence of strategic customers may force an already financially distressed firm into a death spiral: sensing the firm’s financial difficulty, customers may wait strategically for deep discounts in liquidation sales. In turn, such waiting lowers the firm’s profitability and increases the firm’s bankruptcy risk. Using a two-period model to capture these dynamics, this paper identifies customers' strategic waiting behavior as a source of a firm’s cost of financial distress. We also find that customers' anticipation of bankruptcy can be self-fulfilling: when customers anticipate a high bankruptcy probability, they prefer to delay their purchases, making the firm more likely to go bankrupt than when customers anticipate a low probability of bankruptcy. Such behavior has important operational and financial implications. First, the firm acts more conservatively when facing either more severe financial distress or a large share of strategic customers. As its financial situation deteriorates, the firm lowers inventory alone when financial distress is mild or only a small share of customers are strategic and lowers both inventory and price in the presence of severe financial distress and a large fraction of strategic customers. Under optimal price and inventory decisions, strategic waiting accounts for a large part of the firm’s total cost of financial distress, although a larger proportion of strategic customers may result in a lower probability of bankruptcy. In addition to inventory reduction and (immediate) price discount, we find that a deferred discount, in the form of rebates and/or store credits for future purchases, can act as an effective mechanism to mitigate strategic waiting. As a contingent price reduction, deferred discounts align the interests of customers and the firm and are most effective when the fraction of strategic customers is high and the firm’s financial distress is at a medium level.

We consider the problem of managing production in a production-inventory system where a firm is subject to an allowance (a limit) on either the amount of input it can use or the amount of output it can produce over a specified compliance period (in addition to being subject to a constraint on the production capacity). Examples of such settings are numerous and include those where limits are placed on the use of scarce natural resources as input or on the amount of waste or harmful pollution generated by production as output. We study the structure of the optimal production policy for such systems and show that it is determined by dynamic thresholds that depend only on the sum of the on-hand inventory level and the remaining allowance. We provide an effective approximate solution approach that can compute these thresholds efficiently while retaining their essential properties. We examine the differences between how an allowance constraint and a constraint on production capacity affect production decisions and show that they exhibit opposite effects over time. We also examine, in the context of an extended version of the problem where both the allowance amount and the production capacity are endogenous, optimal investments in allowance and production capacity and the impact of both on firm profit. We also consider the optimal demand fulfillment policy in settings where the firm can decide whether to back-order or to reject demand that cannot be satisfied from on-hand inventory. The online appendix is available at https://doi.org/10.1287/msom.2016.0603 .