This chapter investigates preference revelation in a standard economicmodel. There is a commodity that can be consumed jointly and simultaneously by the entire community – a fireworks display, for instance. To produce this public good, resources have to be diverted from the production of commodities for private consumption. In ourmodel, as in the real world, efficiency requires a positive amount of some public good to be produced. But there is a point beyond which an increase in the supply of the public good leads to an inefficient outcome. Clearly, identification of an efficient outcome depends on individuals revealing their preferences. In this context truthful revelation of individual preference is problematic because one can consume the public good without contributing to the financing of it.

More generally, agent A's action generates a positive spillover if some other agent B directly benefits as a result of that action. For example, if A removes weeds from his own property, then neighbor B's grass will have fewer weeds because one source of seed has been eliminated. In this case, most of the benefit of A's effort is reaped by A, so we say that the spillover is incomplete. However, if C produces a fireworks display then everyone else in town will have just as good a view of it as C and hence the spillover is complete. When the agent creating the spillover benefit is not compensated for the positive effect on the welfare of others, we refer to it as an externality. Important examples include the containment of a virulent disease by a health organization, the retardation of global warming or ozone depletion by international treaty, and publication of information concerning public safety.

Our aim is to provide the individual decision maker with incentive to consider the benefit that others derive from his or her actions. The decision maker can be a single individual or household, or a region within a country, or even a country itself. When one country takes costly measures to reduce its output of carbon dioxide any resulting retardation of global warming is a benefit that is captured by every country.

This chapter and the next four investigate hidden characteristic problems, from voting to used-car markets to kidney exchanges. In some cases market forces have fostered contracts and other devices that induce agents to reveal their hidden characteristics. This does not mean that the equilibrium outcome is efficient in each case, however. There are incentive schemes that do induce truthful revelation of the hidden information while at the same time bringing the system close to efficiency – the Vickrey auction of Chapter 6 for instance.

Markets can be very creative in circumventing hidden information problems – for instance, warranties on consumer durables. The producer of a shoddy appliance cannot afford to offer a substantial warranty: the point of producing a low-quality item is to get more profit by keeping costs down, but if appliances are being returned for replacement or repair then costs will be high, not low. A producer who deliberately sets out to profit by misleading consumers about the quality of the product will not be able to offer the same kind of warranty as the producer of a high-quality product. The latter is credibly signaling high quality to the consumer by offering a substantial warranty. Reputable manufacturers often make good on a warranty even after it has expired, as long as the appliance is returned a month or less after the expiration date.

Although not always delivering an efficient outcome, the market system often goes a long way toward eliciting the hidden information. The next section begins with a standard example of the hidden characteristic phenomenon.

Networks can be tiny – your circle of very close friends, for instance. They can be vast, as in the case of the individuals and institutions connected to you and to each other through the world wide web. The internet has not only given us an extraordinary increase in the number of sources from which we can obtain information. It has also increased the value of that information, in part because of the great increase in the number of sources of information available to the compilers of any web site that you visit. (Of course, the web has also greatly increased the number of sources of misinformation.) Until the arrival of the internet, an increase in the number of sources of information brought with it a substantial increase in the cost of widespread comparison shopping: one had to sacrifice a significant amount of time to visit rival retailers. By contrast, the web has vastly reduced the cost of acquiring information from any one source, and thus has made it possible to comparison shop extensively at almost no cost. (Transactions involving rare books have increased more than a hundred-fold since the advent of the internet, because search costs have virtually dropped to zero. In the previous century collectors of rare books had to wait for the arrival of annual catalogues. These catalogues were costly and infrequently updated because of the cost and the time commitment required of their compilers.)

The internet may be the network that comes to mind first, but it is probably not the most important one. That is obviously the case in parts of the third world where there is no access to the web. Instead, networks that rely on information transmission by word-of-mouth are used to locate sources of safe drinking water, to provide access to birth control information, and for AIDS prevention campaigns, to name but a few crucial examples.

Learning is perhaps one of the most widely used, but also the most misunderstood, words. In this chapter, we first define learning in a more concrete way and elaborate on the meaning of learning perspective. Learning is one of the fundamental concepts in management. But, it is also an elusive one – it is difficult to clearly define the concept. In this book, we approach the issues of supply chain management from a learning perspective. As such, we have already used the term several times, assuming that there would be no confusion, although the concept has not been formally defined. But now we can no longer delay defining the concept, since we need a finer understanding in order to deal with issues specifically related to the learning processes in SCM. In this chapter, we delve into learning and its dynamics in operations management, in particular, SCM. We define and elaborate more on the learning propensity model (LPM). We also examine how the learning process influences the performance of a supply chain system.

Key Learning Points

What is value? Value is the defining concept that drives the whole subject of supply chain management (SCM). Let's start with defining and discussing the meaning of value and value creation, since these are the key concepts which underlie our study on supply chain management in this book – Supply Chain Management: A Learning Perspective. When we believe a product or service has value for us, it means we are satisfied or happy with the product or service. That is, the product or service gives us great utility, which we as consumers cherish and are willing to pay for. Since each of us can be quite different in terms of feeling satisfied or happy, however, value is subjective and difficult to measure accurately without taking into account unique circumstances each of us is facing. Therefore, ultimately value should be defined and espoused by each customer or consumer who is using or consuming the product or service.

Key Learning Points

In this chapter, we show what a supply chain is, what supply chain management (SCM) is all about, and why it is important to grasp the fundamentals of SCMin creating real value for the customers. We try to understand these issues from a learning perspective, i.e., a dynamic and systemic viewpoint. First, we draw a supply chain and define key decision dimensions and considerations associated with it. By doing so, we can better appreciate the dynamic interrelationship between key factors in SCM, and develop our own capability of designing a well-balanced SCMstrategy. Since we view the SCMissues from the learning perspective, it is necessary for us to refer to qualitative concepts like organizational capability, learning dynamics (e.g., single-loop versus double-loop learning), and how these capability factors interact with each other to develop an effective SCMstrategy. Note that we already defined “operations management” in Chapter 1: “Operations management is about how to manage the three fundamental building blocks (i.e., resources, processes, and capabilities) effectively to optimize value creation. Traditional operations management has focused on a single company's boundary. That is, traditional operations management approaches the value creation from a single company's perspective.” Although most of the theories and principles in operations management are also valid for supply chain management, SCMis fundamentally different fromtraditional operations management in that it approaches the operations issues from the value chain perspective, i.e., coordination among supply chain or value chain partners sharing the same supply chain or value chain should be at the center of any SCM.

Key Learning Points