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.

[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.

[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.

[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.

[5]

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

[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.

[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.

[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.

[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.

[10]

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

[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.

[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.

[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.

[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.

[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.

[16]

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

[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.

[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.

[19]

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

[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.

[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.

[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.

[23]

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

[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.

[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.

[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.

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.

[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.

[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.

[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.

[5]

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

[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.

[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.

[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.

[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.

[10]

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

[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.

[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.

[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.

[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.

[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.

[16]

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

[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.

[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.

[19]

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

[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.

[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.

[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.

[23]

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

[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.

[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.

[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.

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
[1]

Kegui Chen, Xinyu Wang, Min Huang, Wai-Ki Ching. Salesforce contract design, joint pricing and production planning with asymmetric overconfidence sales agent. Journal of Industrial & Management Optimization, 2017, 13 (2) : 873-899. doi: 10.3934/jimo.2016051

[2]

Shichen Zhang, Jianxiong Zhang, Jiang Shen, Wansheng Tang. A joint dynamic pricing and production model with asymmetric reference price effect. Journal of Industrial & Management Optimization, 2018, 13 (5) : 1-22. doi: 10.3934/jimo.2018064

[3]

Vincent Choudri, Mathiyazhgan Venkatachalam, Sethuraman Panayappan. Production inventory model with deteriorating items, two rates of production cost and taking account of time value of money. Journal of Industrial & Management Optimization, 2016, 12 (3) : 1153-1172. doi: 10.3934/jimo.2016.12.1153

[4]

Apostolis Pavlou. Asymmetric information in a bilateral monopoly. Journal of Dynamics & Games, 2016, 3 (2) : 169-189. doi: 10.3934/jdg.2016009

[5]

Ruopeng Wang, Jinting Wang, Chang Sun. Optimal pricing and inventory management for a loss averse firm when facing strategic customers. Journal of Industrial & Management Optimization, 2018, 14 (4) : 1521-1544. doi: 10.3934/jimo.2018019

[6]

Xiaochen Sun, Fei Hu, Yancong Zhou, Cheng-Chew Lim. Optimal acquisition, inventory and production decisions for a closed-loop manufacturing system with legislation constraint. Journal of Industrial & Management Optimization, 2015, 11 (4) : 1355-1373. doi: 10.3934/jimo.2015.11.1355

[7]

K. F. Cedric Yiu, S. Y. Wang, K. L. Mak. Optimal portfolios under a value-at-risk constraint with applications to inventory control in supply chains. Journal of Industrial & Management Optimization, 2008, 4 (1) : 81-94. doi: 10.3934/jimo.2008.4.81

[8]

Qing-you Yan, Juan-bo Li, Ju-liang Zhang. Licensing schemes in Stackelberg model under asymmetric information of product costs. Journal of Industrial & Management Optimization, 2007, 3 (4) : 763-774. doi: 10.3934/jimo.2007.3.763

[9]

Marcello Delitala, Tommaso Lorenzi. A mathematical model for value estimation with public information and herding. Kinetic & Related Models, 2014, 7 (1) : 29-44. doi: 10.3934/krm.2014.7.29

[10]

Sanjoy Kumar Paul, Ruhul Sarker, Daryl Essam. Managing risk and disruption in production-inventory and supply chain systems: A review. Journal of Industrial & Management Optimization, 2016, 12 (3) : 1009-1029. doi: 10.3934/jimo.2016.12.1009

[11]

Ata Allah Taleizadeh, Hadi Samimi, Biswajit Sarkar, Babak Mohammadi. Stochastic machine breakdown and discrete delivery in an imperfect inventory-production system. Journal of Industrial & Management Optimization, 2017, 13 (3) : 1511-1535. doi: 10.3934/jimo.2017005

[12]

Lou Caccetta, Elham Mardaneh. Joint pricing and production planning for fixed priced multiple products with backorders. Journal of Industrial & Management Optimization, 2010, 6 (1) : 123-147. doi: 10.3934/jimo.2010.6.123

[13]

Feliz Minhós, A. I. Santos. Higher order two-point boundary value problems with asymmetric growth. Discrete & Continuous Dynamical Systems - S, 2008, 1 (1) : 127-137. doi: 10.3934/dcdss.2008.1.127

[14]

Biswajit Sarkar, Bimal Kumar Sett, Sumon Sarkar. Optimal production run time and inspection errors in an imperfect production system with warranty. Journal of Industrial & Management Optimization, 2018, 14 (1) : 267-282. doi: 10.3934/jimo.2017046

[15]

Belma Yelbay, Ş. İlker Birbil, Kerem Bülbül. The set covering problem revisited: An empirical study of the value of dual information. Journal of Industrial & Management Optimization, 2015, 11 (2) : 575-594. doi: 10.3934/jimo.2015.11.575

[16]

Simone Göttlich, Patrick Schindler. Optimal inflow control of production systems with finite buffers. Discrete & Continuous Dynamical Systems - B, 2015, 20 (1) : 107-127. doi: 10.3934/dcdsb.2015.20.107

[17]

Chen Fan, Yongmei Liu, Xuehua Yang, Xiaohong Chen, Junhua Hu. Online and offline cooperation under buy-online, pick-up-in-store: Pricing and inventory decisions. Journal of Industrial & Management Optimization, 2018, 13 (5) : 1-18. doi: 10.3934/jimo.2018104

[18]

Ali Naimi Sadigh, S. Kamal Chaharsooghi, Majid Sheikhmohammady. A game theoretic approach to coordination of pricing, advertising, and inventory decisions in a competitive supply chain. Journal of Industrial & Management Optimization, 2016, 12 (1) : 337-355. doi: 10.3934/jimo.2016.12.337

[19]

Yanju Zhou, Zhen Shen, Renren Ying, Xuanhua Xu. A loss-averse two-product ordering model with information updating in two-echelon inventory system. Journal of Industrial & Management Optimization, 2018, 14 (2) : 687-705. doi: 10.3934/jimo.2017069

[20]

Chui-Yu Chiu, Ming-Feng Yang, Chung-Jung Tang, Yi Lin. Integrated imperfect production inventory model under permissible delay in payments depending on the order quantity. Journal of Industrial & Management Optimization, 2013, 9 (4) : 945-965. doi: 10.3934/jimo.2013.9.945

2017 Impact Factor: 0.994

Article outline

Figures and Tables

[Back to Top]