How Multinationals Can Cope With Gray Market Imports

Author : Foad Iravan
Publisher :
ISBN 13 :
Total Pages : 142 pages
Book Rating : 4.:/5 (872 download)

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Download or read book Essays on Supply Chains Facing Competition from Gray Markets written by Foad Iravan and published by . This book was released on 2012 with total page 142 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation comprises of three chapters. The first chapter describes the development and implementation of a hierarchical framework for organizing the process for producing tax software at a leading tax software company in the United States. Every year, companies that produce commercial tax preparation software struggle with thousands of state and federal changes to tax laws and forms. Three competitors dominate the market with its short selling season, and release delays slash profits. Tax authorities issue updates August-December, and all changes must be processed and incorporated before year end. Systematic resource allocation and process management are crucial yet problematic due to the volume and complexity of changes, brief production timeframe, and feedback loops for bug resolution. A leading tax software provider asked us to formulate systematic approaches for managing process flow and staffing development stages with the goal of releasing the new version on time at minimum cost. To that end, we develop deterministic models in chapter 1 that partition tax forms into dedicated groups and determine staffing levels. Partitioning tax forms into groups simplifies workflow management and staffing decisions. To provide a range of resource configurations, we develop two modeling approaches. Numerical experiments show that our models capture the salient features of the process and that our heuristics perform well. Implementing our models reduced company overtime hours by 31% and total resource costs by 13%. The second and third chapters of the dissertation focus on supply chains that face competition from gray markets. Manufacturers in many industries have been challenged with the resale of their products in unauthorized distribution channels. Also known as parallel importation, gray markets are primarily driven by price differentials. When manufacturers release their products in different markets, they choose the price in each market based on consumer purchase power, sensitivity to price changes, and the overall economic conditions. This practice of price discrimination enables manufacturers to take advantage of differences between markets and maximize profit. However, price discrimination can potentially lead to the emergence of gray markets. Gray marketers buy products in the markets with lower prices and import them to markets with higher prices to sell below manufacturer price, thereby undermining the pricing structure of manufacturers and damaging brand value. The rapid growth and implications of gray markets have made it imperative for companies react to the diversion of their products to gray markets properly and take gray markets into consideration when making important strategic decisions. Chapter 2 analyzes the impact of parallel importation on a price-setting manufacturer that serves two markets with uncertain demand and characterizes the appropriate policy that the manufacturer should adopt against parallel importation. We show that adjusting prices is more effective in controlling gray market activity than reducing product availability, and that parallel importation forces the manufacturer to reduce the price gap while demand uncertainty forces the manufacturer to lower prices. We illustrate that ignoring demand uncertainty can take a significant toll on the manufacturer's profit. Furthermore, we explore the impact of market conditions (such as market base, price sensitivity, and demand uncertainty) and product characteristics (such as "fashion" vs. "commodity") on the manufacturer's policy. We also provide managerial insights about the value of strategic decision-making by comparing the optimal policy to the uniform pricing policy that has been adopted by some companies. Chapter 3 extends the Stackelberg game to analyze the role of providing service as a non-price mechanism in coping with parallel importation in a deterministic setting. We observe that the price and service competition leads to a Prisoner's Dilemma equilibrium: both players would be better off if the parallel importer does not offer service. We show that parallel importation forces the manufacturer to provide more service in both markets. Although the manufacturer achieves higher profits with providing service, the price gap may be higher or lower than when no service is provided. We find that a little service can go a long way; even if the contribution of service to total revenue in the absence of gray markets is not very large, the manufacturer can significantly increase total profits by providing service when facing gray market activities. Also, when consumers become indifferent between the manufacturer and the parallel importer, the manufacturer uses the service mechanism to differentiate herself from the parallel importer. However, when the parallel importer free rides on manufacturer service, the manufacturer provides lower service. We also consider the manufacturer's service policy towards customers who buy the product from the gray market, and show that the manufacturer may achieve higher profit by allowing more parallel imports and charging gray market customers a service fee.