Case in Point: Managing Inventory to Maximize Profit

2017-10-03 09_46_52-SAGE Knowledge - SAGE Business CasesDo young professionals want robot vacuum cleaners more than they want waffle makers? Catering to young professionals who have little time to cook meals or clean their homes, The Young Professional Dream Company, Inc. sells an array of electronic appliances. As a start-up e-commerce company with a limited budget, it must be careful to stock the most in-demand products for their customers. But how do they determine the right products to order from their suppliers, and how much?

These questions are explored in the case study, The Young Professional Dream Company’s Stochastic Inventory Management Problem, by Wenbo Cai and Layek Abdel-Malek of the New Jersey Institute of Technology. Published in SAGE Business Cases, the case examines how the start-up manages its inventory by using data to forcast demand, identifying ordering policies, and evaluating how its contracts with suppliers will impact its profit.


Interested in learning more, we interviewed the authors for our Case In Point Series. Read the full interview below.

1. Your case is about a young company’s efforts to procure inventory while sticking to a limited budget. What are some common challenges that arise when start-upsembark on this kind of detailed operations management planning?

Usually start-up companies have known historical data regarding their suppliers’ performance, lead times, and quality. However, they do not know about the demands of their customers and their nature. The problem is then compounded by budget limitation and how to allocate it among the competing products. As a result, when a start-up company embarks on operations management planning, it usually faces many blind spots. Applying operations management techniques could be quite helpful to alleviate some of these challenges.

2. How difficult or risky is it to keep in mind a product’s demand uncertainty when evaluating suppliers and Order Quantity Commitments?

Unlike the common Economic Order Quantity models where the costs of the ordering policy are less sensitive to the order quantities, when the demand is uncertain, the amount ordered affects drastically the profitability of the company. The variance in the demand of a product will have a significant impact on the order quantity even in cases where the average is the same.

3. What are some strategies small start-ups (particularly those with limited money to invest) can apply when negotiating pricing with suppliers?

Start-up companies should negotiate as much flexibility as possible in their contracts which allow for updating their orders during the season, the return of left-overs, low extra charge for expedite deliveries, low minimum order quantities, and ability to pass over one or more of the products on the list.

4. You developed an exercise for this case in which readers are given a hypothetical budget to spend on stock, shipping costs, and more. What’s the benefit of providing decision-making exercises in case studies?

The case we developed goes beyond the single-period stochastic inventory model, which is  often used as a demonstrative strategy in operations management. However, this strategy may need to be modified when companies have a limited budget or other restrictions. We want to highlight some of these issues companies may face in this case study and provide an opportunity for students to discover the rich literature in operations management that discusses these issues in-depth. Moreover, the case study is intended for students to act as decision makers by weighing quantitatively the benefits and costs of flexible contract terms.

5. In your opinion, how does teaching with case studies expose students to the kind of operational dilemmas they might face in their careers?

We think case studies, in general, promote the development of analytical skills by asking students to act as decision makers. Unlike the traditional problems where the real-world challenges have been extracted and synthesized into useful information and the students only need to figure out what methodology to apply, there are no definitive answers of which methodology is the most suitable or guarantees the best performance in case studies. Students have to figure that out by exercising critical thinking, researching, and discussing with group members.

6. Can you share any tips for new instructors using this case in their course?

I believe that it is beneficial to analyze this case in the following steps.

  • Understand the risk of demand uncertainty without the consideration of contract terms. For example: the impact of unsold inventory on the retailer’s profit is relatively easy to compute, but how are companies, both brick-and-mortar retailers and e-commerce companies, handling unsold items in practice?
  • Explore the joint impact of the minimum ordering quantity and penalty. Though the minimum ordering quantity and penalty are given in the case, performing sensitivity analysis will give students insights on the joint impact of the two factors.
  • Investigate the benefit of the expedited-delivery option. In addition to question four in the case (What are the criteria under which you should exercise the expedited-delivery option?), the instructors may want to ask questions pertaining to the supplier’s side. For example: Why would a supplier want to offer flexible contract terms? How expensive is it to provide these options? Is there a win-win situation for both the supplier and the retailer in terms of their expected profitability? Please see the following paper for answers: Cai, W., Abdel-Malek, L., Hoseini, B., & Dehkordi, S. R. (2015). Impact of flexible contracts on the performance of both retailer and supplier.International Journal of Production Economics170, 429-444.

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The Impact of Training on Innovation

[We’re pleased to welcome author Benoit Dostie of HEC Montréal. Benoit recently published an article in the ILR Review entitled The Impact of Training on Innovation. Below, Benoit discusses the inspiration for this research, along with the applied methodology:]

The positive impact of firm-sponsored training on workers’ wages and productivity is well documented. At the same time, many studies are highlighting innovation as an important component of firms’ performance.

This paper ILR_72ppiRGB_powerpoint.jpglinks these two ideas and investigates whether firms who invest more in training their workers reap reward through better innovation performance. Bauernschuster, Falck, and Heblich (2009) argue that continuous training guarantees access to leading-edge knowledge and thus increase a firm’s propensity to innovate. In fact, lack of skill within the enterprise is one of the two most frequently reported obstacles to innovation amongst Canadian firms (Statistics Canada (2012)).

To do so, we use longitudinal Canadian linked employer-employee data from 1999-2006 and look at two types of human capital investments, the number of employees who received classroom and on-the-job training; and four measures of innovation: improved and new processes, improved and ne
w products.

Our results show that more training leads to more product and process innovation, with on-the-job training playing a role that is as important as classroom training. These results are important because many policies used by governments throughout the world to encourage firms to invest more in training put more weight toward more formal or structured forms of training like classroom training.

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Read the November 2016 Issue of Journal of Management!

3340359442_b93f0f9aa9_o-1The November 2016 issue of Journal of Management is now available online, and can be accessed for the next 30 days! The November issue covers a variety of topics, including articles on organizational transparency, shared leadership-team performance relations, and the effects of autonomy on team performance.

Authors Anthony J. Nyberg, Jenna R. Pieper, and Charlie O. Trevor contributed the article “Pay-for-Performance’s Effect on Future Employee Performance: Integrating Psychological and Economic Principles Toward a Contingency Perspective,” which suggests that bonus pay may have a stronger effect on future performance than merit pay, among other findings about pay-for-performance. The abstract for the paper:

Although pay-for-performance’s potential effect on employee performance is a compelling issue, understanding this dynamic has been constrained by narrow approaches to pay-for-performance conceptualization, measurement, and surrounding conditions. In response, we take a more nuanced perspective by integrating fundamental principles of economics and psychology to identify and incorporate employee characteristics, job characteristics, pay system Current Issue Covercharacteristics, and pay system experience into a contingency model of the pay-for-performance–future performance relationship. We test the role that these four key contextual factors play in pay-for-performance effectiveness using 11,939 employees over a 5-year period. We find that merit and bonus pay, as well as their multiyear trends, are positively associated with future employee performance. Furthermore, our findings indicate that, contrary to what traditional economic perspectives would predict, bonus pay may have a stronger effect on future performance than merit pay. Our results also support a contingency approach to pay-for-performance’s impact on future employee performance, as we find that merit pay and bonus pay can substitute for each other and that the strength of pay-for-performance’s effect is a function of employee tenure, the pay-for-performance trend over time, and job type (presumably due to differences in the measurability of employee performance across jobs).

Another article from the issue, entitled “Social Media for Selection? Validity and Adverse Impact Potential of a Facebook-Based Assessment” from authors Chad H. Van Iddekinge, Stephen E. Lanivich, Philip L. Roth, and Elliott Junco delves into the hazards that arise when recruiters use social media platforms like Facebook to screen job applicants. The abstract for the paper:

Recent reports suggest that an increasing number of organizations are using information from social media platforms such as to screen job applicants. Unfortunately, empirical research concerning the potential implications of this practice is extremely limited. We address the use of social media for selection by examining how recruiter ratings of Facebook profiles fare with respect to two important criteria on which selection procedures are evaluated: criterion-related validity and subgroup differences (which can lead to adverse impact). We captured Facebook profiles of college students who were applying for full-time jobs, and recruiters from various organizations reviewed the profiles and provided evaluations. We then followed up with applicants in their new jobs. Recruiter ratings of applicants’ Facebook information were unrelated to supervisor ratings of job performance (rs = −.13 to –.04), turnover intentions (rs = −.05 to .00), and actual turnover (rs = −.01 to .01). In addition, Facebook ratings did not contribute to the prediction of these criteria beyond more traditional predictors, including cognitive ability, self-efficacy, and personality. Furthermore, there was evidence of subgroup difference in Facebook ratings that tended to favor female and White applicants. The overall results suggest that organizations should be very cautious about using social media information such as Facebook to assess job applicants.

You can read these articles and more from the November 2016 issue of Journal of Management, which is free for the next 30 days, by clicking here to view the issue’s table of contents! Want to stay current on all of the latest research published by Journal of Management? Click here to sign up for e-alerts to receive notifications for new issues and Online First articles!

*City image attributed to Mark Goebel (CC)

Creative Problem Solving Training: What Works?

4769744435_1985998a32_z (3)[We’re pleased to welcome David Vernon of Cantebury Christ Church University. David recently published an article in Human Resource Development Review entitled “An Evidence-Based Review of Creative Problem Solving Tools: A Practitioner’s Resource” with co-authors Ian Hocking and Tresoi C. Tyler.]

  • What inspired you to be interested in this topic?

My colleague, Dr Ian Hocking, and I were interested in the nature of creative problem solving and how, if at all, this could be facilitated or improved by using a structured thinking tool. With the help of Tresoi Tyler we began a systematic search of the literature to explore and identify the various tools that have been used to enhance some aspect of creative problem solving. We then focused our search to examine precisely which tools have some/any evidence to support their use. In essence, we wanted to know which tools have been shown to work.

  • Were there findings that were surprising to you?

Yes. I think the aspect of our work that surprised us all was the mismatch between the Current Issue Covernumber, availability and use of creative problem solving tools and their empirical basis. This gave rise to what we referred to as ‘the plethora and the paucity’ – which simply meant that the plethora of available tools was matched only by the paucity of research showing that they had any real benefit.

  • How do you see this study influencing future research and/or practice?

In terms of practice we hope this will have two effects. First, our review will provide practitioners with a clear understanding of which tools have been shown to benefit a particular stage of creative problem solving. In this sense, we hope that it will serve as a useful resource. Second, we hope that this encourages practitioners to ask what we consider to be an essential question when faced with using any creative problem solving tool: ‘What is the evidence that this works?’

In terms of future research, again there are two directions we think our work can have some impact. First, we have provided in the review an outline of which tools seem to work at the various stages within creative problem solving. However, this work needs to be continued to ascertain the broader benefits of using such tools. For instance, such tools can be explored using a variety of different problem types and levels of training, as well as looking at long-term benefits and transfer effects. Second, many tools have little or no empirical support. This doesn’t mean they don’t work, of course. It may reflect the fact that no one has looked. Moving forward, we would hope that our review stimulates researchers to examine the possible benefits these tools.

The abstract for the paper:

Creative problem solving (CPS) requires solutions to be useful and original. Typically, its operations span problem finding, idea generation, and critical evaluation. The benefits of training CPS have been extolled in education, industry, and government with evidence showing it can enhance performance. However, although such training schemes work, less is known about the specific tools used. Knowing whether a particular tool works or not would provide practitioners with a valuable resource, leading to more effective training schemes, and a better understanding of the processes involved. A comprehensive review was undertaken examining the empirical support of tools used within CPS. Despite the surprising lack of research focusing on the use and success of specific tools, some evidence exists to support the effectiveness of a small set. Such findings present practitioners with a potential resource that could be used in a stand-alone setting or possibly be combined to create more effective training programs.

You can read “An Evidence-Based Review of Creative Problem Solving Tools: A Practitioner’s Resource” from Human Resource Development Review free for the next two weeks by clicking here. Want to stay current on all of the latest research from Human Resource Development ReviewClick here to sign up for e-alerts!

*Image attributed to Reilly Butler (CC)

Read the August 2016 Issue of Journal of Management Education!

4537055943_82352d7853_zThe August 2016 issue of Journal of Management Education is now available online and can be accessed free for the next 30 days. The August issue features a provocative article from authors J. Michael Cavanaugh, Catherine C. Giapponi, and Timothy D. Golden, entitled “Digital Technology and Student Cognitive Development: The Neuroscience of the University Classroom,” which delves into how digital technology is changing the way students learn on a neurological level, and how management educators should reevaluate their approach to teaching as a result. In particular, the article highlights the negative impact digital technology has on students “deep thinking” capabilities. The authors argue that management education should help students develop multiple literacies across contexts, teaching students reading, comprehension, and complex thinking that may be lost if teachers focus wholly on technology and digital media. The abstract for the article:

Current Issue Cover

Digital technology has proven a beguiling, some even venture addictive, presence in the lives of our 21st century (millennial) students. And while screen technology may offer select cognitive benefits, there is mounting evidence in the cognitive neuroscience literature that digital technology is restructuring the way our students read and think, and not necessarily for the better. Rather, emerging research regarding intensive use of digital devices suggests something more closely resembling a Faustian quandary: Certain cognitive skills are gained while other “deep thinking” capabilities atrophy as a result of alterations in the neural circuitry of millennial brains. This has potentially profound implications for management teaching and practice. In response, some advocate that we “meet students where we find them.” We too acknowledge the need to address student needs, but with the proviso that the academy’s trademark commitment to penetrating, analytical thinking not be compromised given the unprecedented array of existential challenges awaiting this generation of students. These and rising faculty suspicions of a new “digital divide” cropping up in the management classroom represents a timely opportunity for management educators to reflect not only on how today’s students read and learn, but equally, on what and how we teach.

The issue also features a rejoinder from author Caroline Williams-Pierce, who offers an interesting counterargument to Cavanaugh, Giapponi, and Golden’s article, arguing that given their autonomy, students can engage in deep interest-driven learning through digital media.

You can read the August 2016 issue of Journal of Management Education free for the next 30 days by clicking here. Want to stay current on all of the latest research from Journal of Management EducationClick here to sign up for e-alerts!

*Ipad image attributed to Gustav Holmström (CC)

Read the New Issue of Administrative Science Quarterly!

Current Issue CoverThe June 2016 issue of Administrative Science Quarterly is now available online and can be accessed free for the next 30 days. The June issue includes articles covering a range of topics, including an article that explores why cultural omnivores get creative jobs, and an article on task segregation as a mechanism for within-job gender inequality. William Starbuck’s piece, “60th Anniversary Essay: How Journals Could Improve Research Practices in Social Science” opens the new issue by exploring how improvements can be made to editorial policies to make research practices in the social sciences more accurate and reliable. The abstract for the paper:

This essay proposes ways to improve editorial evaluations of manuscripts and to make published research more reliable and trustworthy. It points to troublesome properties of current editorial practices and suggests that editorial evaluations could become more reliable by making more allowance for reviewers’ human limitations. The essay also identifies some troublesome properties of prevalent methodology, such as statistical significance tests, HARKing, and p-Hacking, and proposes editorial policies to mitigate these detrimental behaviors.

Click here to access the table of contents for the June 2016 issue of Administrative Science Quarterly. Want to know about all the latest from Administrative Science Quarterly? Click here to sign up for e-alerts!

The Impact of Employee Experience on Productivity and Firm Innovation: A Study of Italy’s Slowdown

parma emiliaromagna italy europe piazza in the city of parma

[We’re pleased to welcome Francesco Daveri and Maria Laura Parisi. Francesco and Maria recently published an article in ILR Review entitled “Experience, Innovation, and Productivity: Empirical Evidence from Italy’s Slowdown.”]

Italy has been on a declining growth path well before the current crisis. We see this as the unfortunate combination of policy and managerial habits. On the policy side, a string of partial labor market reforms at the end of the 1990s  made inexperienced–hence less productive–workers enter the labor market. On the managerial side, a long-run feature of Italy’s corporate world is its seniority-based system of managerial selection. Evidence shows that senior conservative managers took advantage of cheap unskilled workers as a way to cut costs. This trend, however, also made a dent on the innovation and productivity performance of Italian companies.

The abstract for the paper:

The authors investigate whether the level of employee experience is good or bad for innovation and productivity. Using a sample of Italian manufacturing firms during the early 2000s, the authors find different results for managers’ versus workers’ experience. The ILR_72ppiRGB_powerpointeffect of managerial experience—proxied by age—on firm performance appears to depend on the type of firm; in innovative firms, having older managers and board members has a negative effect on innovation and productivity, while in non-innovative firms, the costs and benefits of having older managers appear to cancel each other out. For workers, the effect of having a high share of inexperienced (temporary) workers is unambiguously associated with low innovation and low productivity. These results also hold when endogenous regime switching is taken into consideration.

You can read “Experience, Innovation, and Productivity: Empirical Evidence from Italy’s Slowdown” from ILR Review free for the next two weeks by clicking here. Want to know about the latest research from ILR Review? Click here to sign up for e-alerts!

*Parma image credited to Mark Goebel (CC)

Francesco Daveri is Professor of Economic Policy at Università Cattolica del Sacro Cuore, Piacenza.

Maria Laura Parisi is Associate Professor of Economics at the University of Brescia.