Optimal Ordering Decision and Incentives for Yield Improvement under Random Demand

Abstract

In this thesis, we focus on the applications of incentive mechanism design in operations and supply chain management (OSCM). Most significant--and interesting--topics arising in OSCM are concerned with the management of relationships among supply chain members under asymmetric information. Since the incentive mechanism design based on the principal-agent model deals with asymmetric information in a satisfactory way, it has become an important tool in investigating OSCM-related asymmetric information problems. We start with an introduction in Chapter 1. In this chapter, we briefly describe the theory of incentive mechanism design and its applications to OSCM, and the organization structure of this thesis. In Chapter 2, we study the optimal wage scheme and effort level in a contracting problem where both the principal and the agent are risk-averse. This chapter is a starting point for analyzing the buyer's optimal ordering decision and incentives for yield improvement in Chapters 3 and 4. Chapter 3 investigates the buyer's optimal ordering decision and incentives for yield improvement in the setting of random yield for the critical component and uncertain demand for the finished product. In Chapter 4, we assume the supplier's effort and yield become continuous and study a continuous optimization problem where the buyer decides the optimal order quantities and incentives for yield improvement under random demand. Our thesis ends with a conclusion and addresses the future research in Chapter 5.