October  2018, 14(4): 1397-1422. doi: 10.3934/jimo.2018013

Compensation plan, pricing and production decisions with inventory-dependent salvage value, and asymmetric risk-averse sales agent

1. 

School of Management, China University of Mining and Technology, Xuzhou, China

2. 

College of Information Science and Engineering, State Key Laboratory of Synthetical Automation for Process Industries, Northeastern University, Shenyang, China

3. 

Advanced Modeling and Applied Computing Laboratory, Department of Mathematics, The University of Hong Kong, Pokfulam Road, Hong Kong, China

* Corresponding author: Xinyu Wang

Received  December 2016 Revised  August 2017 Published  January 2018

In this paper, we investigate the joint decision on production and pricing, and the compensation strategy of a supply chain, where the manufacturer relies on a risk-averse sales agent to sell the products. The sales outcome is determined by the sales agent's selling effort and the product price. Most of the previous research about salesforce assumes that the risk attitude to an agent is known to each other and the salvage value is a constant. In this study, we have considered that the salvage value is a function of inventory, and both of the sales agent's selling effort and risk attitude are their private information on the general framework of dual information asymmetric. With the help of revelation principle and principal-agent theory, we have been able to derive the optimal compensation contracts, and joint decision on production and pricing for the manufacturer. Analyzing them and comparing to the symmetric scenario, we found that only the optimal production strategy and the manufacturer's profit depended on the variation rate of salvage value. When the manufacturer comes across asymmetric risk-averse sales agents its profit decreases, whereas the sales agent with private information obtains higher income but exerts less effort, which implies the value of information. The results also mean that the manufacturer should not only focus on offering a lower commission rate to the more risk-averse sales agent, but also on screening his risk information.

Citation: Kegui Chen, Xinyu Wang, Min Huang, Wai-Ki Ching. Compensation plan, pricing and production decisions with inventory-dependent salvage value, and asymmetric risk-averse sales agent. Journal of Industrial & Management Optimization, 2018, 14 (4) : 1397-1422. doi: 10.3934/jimo.2018013
References:
[1]

Y. Aviv and A. Pazgal, Optimal pricing of seasonal products in the presence of forward-looking consumers, Manufacturing & Service Operations Management, 10 (2008), 339-359.  doi: 10.1287/msom.1070.0183.  Google Scholar

[2]

A. BasuR. LalV. Srinivasan and R. Staelin, Salesforce-compensation plans: An agency theoretic perspective, Marketing Science, 4 (1985), 267-291.  doi: 10.1287/mksc.4.4.267.  Google Scholar

[3]

E. CaoY. MaC. Wan and M. Lai, Contracting with asymmetric cost information in a dual-channel supply chain, Operations Research Letters, 41 (2013), 410-414.  doi: 10.1016/j.orl.2013.04.013.  Google Scholar

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X. ChaoB. Yang and Y. Xu, Dynamic inventory and pricing policy in a capacitated stochastic inventory system with fixed ordering cost, Operations Research Letters, 40 (2010), 99-107.  doi: 10.1016/j.orl.2011.12.002.  Google Scholar

[5]

F. Chen, Salesforce incentives, market information and production/inventory planning, Management Science, 51 (2005), 60-75.  doi: 10.1287/mnsc.1040.0217.  Google Scholar

[6]

Y. J. ChenS. Shum and W. Q. Xiao, Should an OEM retain component procurement when the CM produces competing products, Production and Operations Management, 21 (2012), 907-922.  doi: 10.1111/j.1937-5956.2012.01325.x.  Google Scholar

[7]

A. T. Coughlan, Salesforce compensation: A review of MS/OR advances, Eliashberg, J., G. L. Lilien (eds.), Handbook in Operations Research and Management Science, 5 (1993), 611-651.   Google Scholar

[8]

Y. Dai and X. L. Chao, Salesforce contract design and inventory planning with asymmetric risk-averse sales agents, Operations Research Letters, 41 (2013), 86-91.  doi: 10.1016/j.orl.2012.11.010.  Google Scholar

[9]

Y. Dai and X. L. Chao, Price delegation and salesforce contract design with asymmetric risk aversion coefficient of sales agents, International Journal of Production Economics, 172 (2016), 31-42.   Google Scholar

[10]

J. Gonik, The salesmen's bonuses to their forecasts, Harvard Business Review, 56 (1978), 116-123.   Google Scholar

[11]

S. HuangC. Yang and X. Zhang, Pricing and production decisions in dual channel supply chains with demand disruptions, Computers & Industrial Engineering, 62 (2012), 70-83.  doi: 10.1016/j.cie.2011.08.017.  Google Scholar

[12]

E. Katok and V. Pavlov, Fairness in supply chain contracts: A laboratory study, Journal of Operations Management, 31 (2013), 129-137.  doi: 10.1016/j.jom.2013.01.001.  Google Scholar

[13]

M. Kaya and O. Ozer, Quality risk in outsourcing: Noncontractible product quality and private quality cost information, Naval Research Logistics, 56 (2009), 669-685.  doi: 10.1002/nav.20372.  Google Scholar

[14]

L. C. Kung and Y. J. Chen, Monitoring the market or the salesperson? The value of information in a multilayer supply chain, Naval Research Logistics, 58 (2011), 743-762.  doi: 10.1002/nav.20480.  Google Scholar

[15]

C. Y. Lee and R. Yang, Compensation plan for competing salespersons under asymmetric information, European Journal of Operational Research, 227 (2013), 570-580.  doi: 10.1016/j.ejor.2013.01.007.  Google Scholar

[16]

C. Y. Lee and R. Yang, Supply chain contracting with competing suppliers under asymmetric information, IIE Transactions, 45 (2013), 25-52.   Google Scholar

[17]

B. LiuR. Zhang and M. D. Xiao, Joint decision on production and pricing for online dual channel supply chain system, Applied Mathematical Modelling, 34 (2010), 4208-4218.  doi: 10.1016/j.apm.2010.04.018.  Google Scholar

[18]

S. OhK. Sourirajan and M. Ettl, Joint pricing and production decisions in an assemble-to-order system, Manufacturing & Service Operations Management, 16 (2014), 529-543.  doi: 10.1287/msom.2014.0492.  Google Scholar

[19]

O. Ozer and G. Raz, Supply chain sourcing under asymmetric information, Production and Operations Management, 20 (2011), 92-115.   Google Scholar

[20]

V. Pavlov and E. Katok, Fairness and Coordination Failures in Supply Chain Contracts Working paper, Smeal College of Business, Pennsylvania State University, Pennsylvania, 2009. doi: 10.2139/ssrn.2623821.  Google Scholar

[21]

Y. QinJ. Wang and C. Wei, Joint pricing and inventory control for fresh produce and foods with quality and physical quantity deteriorating simultaneously, International Journal of Production Economics, 152 (2014), 42-48.  doi: 10.1016/j.ijpe.2014.01.005.  Google Scholar

[22]

S. Saghafian and X. Chao, The impact of operational decisions on the design of salesforce incentives, Naval Research Logistics, 61 (2014), 320-340.  doi: 10.1002/nav.21585.  Google Scholar

[23]

T. Steenburgh and M. Ahearne, Motivating salespeople: what really works, Harvard Business Review, 90 (2012), 70-75.   Google Scholar

[24]

H. XuN. ShiS. Ma and K. K. Lai, Contracting with an urgent supplier under cost information asymmetry, European Journal of Operational Research, 206 (2010), 374-383.  doi: 10.1016/j.ejor.2010.03.012.  Google Scholar

[25]

P. ZhangY. XiongZ. Xiong and W. Yan, Designing contracts for a closed-loop supply chain under information asymmetry, Operations Research Letters, 42 (2014), 150-155.  doi: 10.1016/j.orl.2014.01.004.  Google Scholar

[26]

A. A. ZoltnersP. Sinha and S. E. Lorimer, Sales force effectiveness: A framework for researchers and practitioners, Journal of Personal Selling & Sales Management, 28 (2008), 115-131.  doi: 10.2753/PSS0885-3134280201.  Google Scholar

show all references

References:
[1]

Y. Aviv and A. Pazgal, Optimal pricing of seasonal products in the presence of forward-looking consumers, Manufacturing & Service Operations Management, 10 (2008), 339-359.  doi: 10.1287/msom.1070.0183.  Google Scholar

[2]

A. BasuR. LalV. Srinivasan and R. Staelin, Salesforce-compensation plans: An agency theoretic perspective, Marketing Science, 4 (1985), 267-291.  doi: 10.1287/mksc.4.4.267.  Google Scholar

[3]

E. CaoY. MaC. Wan and M. Lai, Contracting with asymmetric cost information in a dual-channel supply chain, Operations Research Letters, 41 (2013), 410-414.  doi: 10.1016/j.orl.2013.04.013.  Google Scholar

[4]

X. ChaoB. Yang and Y. Xu, Dynamic inventory and pricing policy in a capacitated stochastic inventory system with fixed ordering cost, Operations Research Letters, 40 (2010), 99-107.  doi: 10.1016/j.orl.2011.12.002.  Google Scholar

[5]

F. Chen, Salesforce incentives, market information and production/inventory planning, Management Science, 51 (2005), 60-75.  doi: 10.1287/mnsc.1040.0217.  Google Scholar

[6]

Y. J. ChenS. Shum and W. Q. Xiao, Should an OEM retain component procurement when the CM produces competing products, Production and Operations Management, 21 (2012), 907-922.  doi: 10.1111/j.1937-5956.2012.01325.x.  Google Scholar

[7]

A. T. Coughlan, Salesforce compensation: A review of MS/OR advances, Eliashberg, J., G. L. Lilien (eds.), Handbook in Operations Research and Management Science, 5 (1993), 611-651.   Google Scholar

[8]

Y. Dai and X. L. Chao, Salesforce contract design and inventory planning with asymmetric risk-averse sales agents, Operations Research Letters, 41 (2013), 86-91.  doi: 10.1016/j.orl.2012.11.010.  Google Scholar

[9]

Y. Dai and X. L. Chao, Price delegation and salesforce contract design with asymmetric risk aversion coefficient of sales agents, International Journal of Production Economics, 172 (2016), 31-42.   Google Scholar

[10]

J. Gonik, The salesmen's bonuses to their forecasts, Harvard Business Review, 56 (1978), 116-123.   Google Scholar

[11]

S. HuangC. Yang and X. Zhang, Pricing and production decisions in dual channel supply chains with demand disruptions, Computers & Industrial Engineering, 62 (2012), 70-83.  doi: 10.1016/j.cie.2011.08.017.  Google Scholar

[12]

E. Katok and V. Pavlov, Fairness in supply chain contracts: A laboratory study, Journal of Operations Management, 31 (2013), 129-137.  doi: 10.1016/j.jom.2013.01.001.  Google Scholar

[13]

M. Kaya and O. Ozer, Quality risk in outsourcing: Noncontractible product quality and private quality cost information, Naval Research Logistics, 56 (2009), 669-685.  doi: 10.1002/nav.20372.  Google Scholar

[14]

L. C. Kung and Y. J. Chen, Monitoring the market or the salesperson? The value of information in a multilayer supply chain, Naval Research Logistics, 58 (2011), 743-762.  doi: 10.1002/nav.20480.  Google Scholar

[15]

C. Y. Lee and R. Yang, Compensation plan for competing salespersons under asymmetric information, European Journal of Operational Research, 227 (2013), 570-580.  doi: 10.1016/j.ejor.2013.01.007.  Google Scholar

[16]

C. Y. Lee and R. Yang, Supply chain contracting with competing suppliers under asymmetric information, IIE Transactions, 45 (2013), 25-52.   Google Scholar

[17]

B. LiuR. Zhang and M. D. Xiao, Joint decision on production and pricing for online dual channel supply chain system, Applied Mathematical Modelling, 34 (2010), 4208-4218.  doi: 10.1016/j.apm.2010.04.018.  Google Scholar

[18]

S. OhK. Sourirajan and M. Ettl, Joint pricing and production decisions in an assemble-to-order system, Manufacturing & Service Operations Management, 16 (2014), 529-543.  doi: 10.1287/msom.2014.0492.  Google Scholar

[19]

O. Ozer and G. Raz, Supply chain sourcing under asymmetric information, Production and Operations Management, 20 (2011), 92-115.   Google Scholar

[20]

V. Pavlov and E. Katok, Fairness and Coordination Failures in Supply Chain Contracts Working paper, Smeal College of Business, Pennsylvania State University, Pennsylvania, 2009. doi: 10.2139/ssrn.2623821.  Google Scholar

[21]

Y. QinJ. Wang and C. Wei, Joint pricing and inventory control for fresh produce and foods with quality and physical quantity deteriorating simultaneously, International Journal of Production Economics, 152 (2014), 42-48.  doi: 10.1016/j.ijpe.2014.01.005.  Google Scholar

[22]

S. Saghafian and X. Chao, The impact of operational decisions on the design of salesforce incentives, Naval Research Logistics, 61 (2014), 320-340.  doi: 10.1002/nav.21585.  Google Scholar

[23]

T. Steenburgh and M. Ahearne, Motivating salespeople: what really works, Harvard Business Review, 90 (2012), 70-75.   Google Scholar

[24]

H. XuN. ShiS. Ma and K. K. Lai, Contracting with an urgent supplier under cost information asymmetry, European Journal of Operational Research, 206 (2010), 374-383.  doi: 10.1016/j.ejor.2010.03.012.  Google Scholar

[25]

P. ZhangY. XiongZ. Xiong and W. Yan, Designing contracts for a closed-loop supply chain under information asymmetry, Operations Research Letters, 42 (2014), 150-155.  doi: 10.1016/j.orl.2014.01.004.  Google Scholar

[26]

A. A. ZoltnersP. Sinha and S. E. Lorimer, Sales force effectiveness: A framework for researchers and practitioners, Journal of Personal Selling & Sales Management, 28 (2008), 115-131.  doi: 10.2753/PSS0885-3134280201.  Google Scholar

Figure 1.  The impact of the sales agent's risk attitude on his optimal effort
Figure 2.  The impact of the sales agent's risk attitude on the commission rate
Figure 3.  The impact of the sales agent's risk attitude on the price
Figure 4.  The impact of the sales agent's risk attitude and the variation rate of salvage value on the production quantity
Figure 5.  The impact of the sales agent's risk attitude and the variation rate of salvage value on the manufacturer's expected profits
Figure 6.  The impact of the sales agent's risk attitude on her expected profits
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