Faculty and Research

"Revenue Management in Airline Alliances"

Abstract: Major airlines are selling increasing numbers of interline itineraries, in which flights operated by two or more airlines are combined and sold together. This creates a difficult coordination problem: each member of the alliance makes revenue management decisions to maximize its own revenue, and the resulting behavior may produce sub-optimal revenue for the alliance as a whole. Airline industry researchers and consultants have proposed a variety of static and dynamic mechanisms to control revenue management decisions across alliances (a dynamic mechanism adjusts its parameters as the number of available seats in the network changes). In this talk, we examine Markov-game models of two-partner alliances that can be used to analyze the effects of these mechanisms on each partner's behavior. We begin with models that assume complete information: within each time period, each airline knows its partner's inventory level, and both have identical forecasts of future arrival probabilities and revenue distributions over the entire alliance network. For these games, we show that no Markovian transfer pricing mechanism can coordinate an arbitrary alliance. We then derive equilibrium acceptance policies and generate insights about partner behavior under various coordination schemes. We then consider alliances that operate with incomplete information. We consider an extreme case: that transfer prices are the only information that each airline has about the state of its partner's network. Specifically, its partner's forecasts (revenue and arrival processes) and inventory levels are not shared. Therefore, each partner's decisions are based solely on the transfer prices, their own forecasts for their own networks, and their own inventory levels. We explore the airlines' equilibrium policies under this game and compare the overall performance of the alliance to both the centralized control (first-best) alliance and an alliance that shares complete information.

"Global Dual Sourcing: Mexico or China?" Paper > papers under review> #4

Abstract: When designing a sourcing strategy in practice, a key task is to determine the average order rates placed to each source because that affects cost and supplier management. We consider a firm that has access to a responsive near-shore source (e.g., Mexico) and a low-cost offshore source (e.g., China). The firm must determine an inventory sourcing policy to satisfy random demand over time. Unfortunately, the optimal policy is too complex to allow a direct answer to our key question. Therefore, we analyze a tailored base-surge (TBS) sourcing policy that is simple, used in practice, and captures the classic tradeoff between cost and responsiveness. The TBS policy combines push and pull control by replenishing at a constant rate from the offshore source and producing at the near shore plant only when inventory is below a target. The constant base allocation allows the offshore facility to focus on cost efficiency while the nearshore's quick response capability is utilized only dynamically to guarantee high service. The research goals are to i) determine the allocation of random demand into base and surge capacity, ii) estimate corresponding working capital requirements, and iii) identify and value the key drivers of dual sourcing.

"Implementing and Evaluating Distribution Systems: Experience with Zara and Beyond"

Abstract: Working in collaboration with Spain-based retailer Zara, we address the problem of distributing, over time, a limited amount of inventory across all the stores in a fast-fashion retail network. Challenges specific to that environment include very short product life-cycles, and store policies removing articles from display whenever one of their key sizes stocks out. We first formulate and analyze a stochastic model predicting the sales of an article in a single store during a replenishment period as a function of demand forecasts, the inventory of each size initially available and the store inventory management policy just stated. We then formulate a mixed-integer program embedding a piece-wise linear approximation of the first model applied to every store in the network, allowing us to compute store shipment quantities maximizing overall predicted sales. We report the implementation of this model by Zara, and the ensuing controlled pilot experiment performed to assess its impact relative to the prior procedure used to determine store shipment quantities. This experiment suggests that the new allocation process increases sales by 3 to 4%, which is equivalent to $275M in additional revenues for 2007, reduces transshipments, and increases the proportion of time that Zara's products spend on display within their life-cycle. Zara is currently using this process for all of its products worldwide. If time permits I will also discuss a related ongoing collaboration with the World Bank and Zambia's Ministry of Health to improve the distribution of essential medical drugs in Zambia. (joint work with F. Caro, UCLA; P. Yadav, Zaragoza Logistics Center; Z. Leung, MIT) Paper (attached): "Inventory Management of a Fast-Fashion Retail Network" (with F. Caro), to appear in Operations Research, 2009.

"The Co-Evolution of Organizational Structures and Software Structures in Open Source and Closed Source Projects"

Abstract:This study draws on the product development literature to hypothesize how organizational structures and product design structures co-evolve in open and closed source software projects. We further hypothesize how these structures affect project performance. Findings suggest that organizational structures and software structures become mutually interdependent but also reveal significant differences in the patterns of relationships in Open Source and Closed Source projects. In Open Source, the software structure reflects the organizational structure of its development team whereas in Closed Source the software structure also impacts the organizational structure of the team. Further, the organizational structure impacts productivity in Closed Source projects, while the software structure impacts productivity in Open Source projects. Intriguingly, over time the organizational structure in Closed Source projects evolves to resemble that of Open Source. Our results have important implications for the management and coordination of product development projects.

Keywords: Software Design Structure, Organizational Structure, Social Network, Open Source, Closed Source, Software Evolution; Product Development; Product Design; Organizational Design.

"Are Reservations Recommended?"

Abstract: We examine the role of reservations in capacity-constrained services with a focus on restaurants. Although customers value reservations, restaurants typically neither charge for them nor impose penalties for failing to honor them. However, reservations impose costs on firms offering them. We highlight ways in which reservations can increase a firm's sales by altering customer behavior. First, when demand is uncertain, reservations induce more customers to patronize the restaurant on slow nights. The firm must then trade off higher sales in a soft market with sales lost to no shows on busy nights. Competition makes reservations more attractive as long as enough customers will consider dining at either restaurant. When there are many firms in the market, it is rarely an equilibrium for none to offer reservations. Second, we show that reservations can increase sales by shifting demand from a popular peak period to a less desirable off-peak time. This is accomplished by informing diners when all peak reservations have been given out. In this setting, competition may make offering reservations less attractive, and a market with many firms may have no one offering reservations.

"Managing Customer Goodwill Using Approximate Dynamic Programming"

Abstract: We study the problem faced by a supplier deciding how to dynamically allocate limited capacity among a portfolio of customers who remember the fill rates provided to them in the past when making ordering decisions. Customers differ from one another in their contribution margins, in their sensitivity to the past, and in their demand volatility. We seek to understand the impacts of these factors on the supplier's allocation policy. We approach the problem using approximate dynamic programming, by incorporating a dynamic model of customers' behavioral responses. The model trades-off customer characteristics to rationalize how much goodwill the firm should target for each customer.

"The Influence of Prior Industry Affiliation on Framing in Nascent Industries: The Evolution of Digital Cameras" (with Mary Benner)

"Management practices across firms and countries"

Abstract: This will present and update the Bloom and Van Reenen (2007, QJE) paper comparing management practices in firms around the world published with a much larger dataset. The older paper is here and an updated paper will be circulated shortly.