This chapter examines allocation problems for which the desired “commodities”, such as dormitory rooms, are only available in discrete units and each “consumer” wants one unit and only one unit. Moreover, allocating a desired object to the highest bidder is unacceptable, as it would be in the case of an offer of admission to a good university. The objective is to match each student with a room (or a university), or available kidneys with the patients on a transplant waiting list, and so forth.

Suppose that an economics department has a given number of students (i.e., majors) and professors, and the objective is to assign each student a professoradvisor. In this case both sides of the match have preferences: students like some professors better than others, and the professors can rank the students. There are problems for which only one side of the match has preferences: students have preferences for dormitory rooms, but the rooms don't have preferences for students.

We can also classify matching problems according to whether we can have outcomes at which an agent is paired with more than one agent of the opposite type, as in the case of college admissions. Each student is placed with only one college, but each college admits many students. Both types have preferences: each student can rank the colleges, and the colleges have preferences for students – if only for students with high test scores.

The first allocation problem that we study is a marriage model, for which there are two types of agents: there is a set ofWtypes and a set ofMtypes. Each member of each type has a preference ordering for the members of the other type, and each agent is matched with at most one member of the other type. The problem of matching students and advisors can be a marriage model. A student will have at most only one advisor, and if there is a department rule limiting a professor to at most one advisee then we have a marriage model. Our objective is not to classify allocation problems, however, but to solve them by designing satisfactory allocation procedures.

Supply Chain Management: A Learning Perspective is the third edition of my book on supply chain management originally published by John Wiley & Sons in 2005. Supply chain management is about creating value through coordination. In this book, I explore essential issues of supply chain management from the learning perspective – a philosophical prism through which I analyze and understand value and the value creation process.

As we will see, Confucius taught three ways for a human being to obtain wisdom. The first was through reflection, the noblest way. The second was through imitation, the easiest way. Finally, one could get wisdom through one's own experience, the bitterest way! Drawing an analogy with Confucian teaching, I suggest we can learn in three different ways – analyzing, benchmarking, and experiencing. What is the fundamental commonality underlying all these three methodologies? That is the causal relationship, i.e., cause-and-effect analysis. For instance, we analyze, benchmark, and experience to understand the cause-and-effect relationship between variables, e.g., key factors in managerial decision-making. Unless the manager understands the complex causal relationship among managerial variables or factors, she is not able to make a decision that can solve real-world managerial problems.

In fact, the cause-and-effect analysis is the fundamental base for a systemic perspective, which is the underlying principle of managerial learning. As such, it is the quintessential perspective for this book – Supply Chain Management: A Learning Perspective.

Is there a perfect solution to a managerial problem? Possibly except for some of the most basic problems, we cannot find a definitive solution to a real-world managerial problem. Then, what is the role of a professor in a business school? It should be a kind of coaching. A coach for a chef! Cooking is probably for the most creative people. Suppose there are two chefs, who use the same ingredients and also the same cooking processes. Then, will the two dishes prepared by the two chefs be exactly the same? The answer is an unambiguous “no.” Even if the two chefs use the same resources and processes, their foods will be very different. In fact, the chef is a creative director, who finalizes the food. It is the chef's creative capability that determines the food's ultimate taste. What the chef does for her food can never be predetermined completely, since she has to constantly adapt her cooking to the emerging unknowns in the kitchen environment.

This chapter takes an economy-wide perspective and seeks a mechanism that elicits private information about individual preferences and firm production recipes to deliver an efficient allocation of private goods and services. We assume away all other hidden information problems. In particular, every consumer is assumed to know the quality of every firm's output, every employer knows the abilities of every prospective employee, every lender knows the probability of default of every creditor, and so on. Every manager can be relied on to maximize profit. In fact there is no shirking by anyone.

The economy faces an impressive challenge – to induce truthful revelation of the remaining hidden information, specifically preferences and production functions. In fact, three of the five sections even assume away this hidden information problem, highlighting instead the transmission of information. Recall that an outcome is efficient if there is no other arrangement of production and consumption activities that makes one person better off without lowering the utility of anyone else. Identification of an efficient outcome would seem to require an enormous amount of information about all of the private characteristics. Therefore, even with most of the hidden information problems assumed away, identification of an efficient outcome by the market system is a remarkable accomplishment. Social cost pricing is the key.

In a private ownership market economy the consumer maximizes utility subject to a budget constraint, and this results in a chosen consumption plan at which the marginal rate of substitution (MRS) for each pair of commodities equals the price ratio for those goods. Therefore, the price ratio transmits information about one consumer's MRS to every other consumer and every firm. The budget constraint gives consumers the incentive to employ that information in their utility maximization calculations, as Section 11.1.4 demonstrates. Profit maximization by a firm in a competitive environment results in the equilibrium price of a commodity that is also equal to the marginal cost of producing that good. Therefore, prices transmit marginal information about consumer preferences and firm production recipes.

In spite of the fact that prices transmit only marginal information, we demonstrate in Sections 11.2 and 11.3 that this allows an efficient outcome to be identified in a wide range of circumstances.

The final element of the structural dimension for designing an effective supply chain is the transportation or logistics, i.e., how to physically deliver the best materials (including raw materials, parts, semi-finished products, and finished products) to the appropriate customers, both internal and external. There are several factors to consider. The most important factor is quality, i.e., how to procure the finest materials that ensure high quality of the final product. This issue essentially involves identifying and selecting the best suppliers, i.e., from whom to procure such materials. Then the company should transport or deliver the materials to where they are required or can be utilized most effectively. Transportation costs and delivery timing are some of the critical factors the company should take into account when designing its logistic and procurement strategy. All of these issues inevitably make it crucial for the company to cultivate a strategic supplier relationship. In this chapter, we focus on the strategic aspects of logistics and procurement and how they interact with other essential elements of optimal supply chain management.

Key Learning Points

If we want to know the state of our health, we go to a hospital and have a medical checkup. The hospital conducts many tests to examine our body. Among those numerous tests for the medical check-up, which one do you think is the most important, if you have to choose only one? The most likely answer is a blood test. To see whether our body is healthy, we need to test our blood: the blood test result reveals many things about our body. In fact, our blood performs several vital functions that are extremely essential to our body and eventually our life itself. One of them is to transport oxygen to every part of our body, including the most quintessential, our brain: we cannot be alive without oxygen, i.e., without blood. Inventory is to a company as blood is to a body! That is, inventory is much like blood. Should we want to check the condition of a company's health, we first need to look at the inventory the company has. Both too much and too little imply something wrong at the company. In this chapter, we delve into inventory not only as a key element of the structural dimension, but also as a strategic lever for the company.

Key Learning Points

We define sustainability from a value chain perspective, which we term “value system sustainability.” Value system sustainability emphasizes a firm's effort to make decisions so as to be sustainable not just from the firm's own perspective, but from the perspectives of the entire value chain participants, including internal stakeholders like managers and employees and external stakeholders like suppliers, vendors, distributors, customers, communities, governments, and non-governmental organizations, and even those in other countries, i.e., in the global market. In a sense, it looks into the sustainability issue in a holistic manner, and therefore is sublimated to a highly comprehensive level. Sustainable action or behavior means that value is created in such a way that the output is more valuable than the input so that the surplus, i.e., output minus input, can be preserved for future value creation. Here, the concept of value is not just monetary, but encompasses various tangible and intangible elements. We develop a framework to define and assess a firm's corporate sustainability, i.e., value system sustainability. It consists of three dimensions. First, there are three areas of sustainability, i.e., economic, social, and natural (environmental). Second, there are stakeholders for whom the firm should pursue sustainability, i.e., the firm's effort for sustainability must be assessed not only by the firm's own internal perspective, but also by that of the external stakeholders. Finally, the level of sustainability should be measured. Our model uses seven levels determined by strategic and operational priorities: ignorant, passive, reactive, receptive, constructive, proactive, and, finally, transcendental.

Key Learning Points

My greatest debt is to Emily Martell, an undergraduate at William and Mary. She was my research assistant for the last eight months of work on the book. Her love of learning, her ability to write good prose, and her extraordinary intellect redounded to my great benefit and to the benefit of anyone who reads this book. Emily contributed to a few of the topics – the Enron debacle among them – and read the new network chapter and some others, each with great care. She responded to requests for help with alacrity and skill. Both her research and her critique of the manuscript were exemplary. She not only identified glitches, she drew my attention to passages that were not sufficiently clear. (“Glitch” is an understatement. She saved me from a horrible blunder in Chapter 4.) Emily even corrected my prose. I am deeply grateful for her help, and blessed to have had her as a colleague. Any defects that remain can be put down to the fact that I did not give her enough time to read the entire manuscript.

I am also thankful for the input of Steven Williams of the Department of Economics, University of Illinois, Lauren Merrill of the Boston Consulting Group, and my longtime colleague Jerry Kelly.

Over the last eight years I have benefitted from the excellent research assistance of Jennifer Boardman, Anthony Guth, Sarah Turner, and Gefoffrey Zinden. They were students in William and Mary's Masters in Public Policy program and my research assistants during their time here. The fruits of their labor can be found in the gray boxes containing the snippets that complement the formal analysis.

A number of William and Mary undergraduates have contributed to the third edition by suggesting improvements to its predecessor. I'm happy to be able to publicly thank Fasil Alemante, Daniel Byler, Bryan Callaway, Jimmy Cao, Sarah Gault, You-Suk Kim, Shane Mangin, Ruoyan Sun, Richard Uhrig, and especially Theresa Long. I'malso grateful to Simon Fung who, as a student at the University of London, drew my attention to an error in the second edition.

I salute my Cambridge University Press editors, Karen Maloney and Stephen Acerra, and editorial assistant Kristina Deusch. Their encouragement and guidance are much appreciated.

This book is the revision of Supply Chain Management, originally published by Wiley in 2005. Since its first edition, I have successfully used it for MBA courses in operations strategy and supply chain management at KAIST. Over the years, however, I have been able to identify innovative new ideas as well as cases in supply chain management and tried to incorporate them into the book as emerging theories or best practices. As a result, it seemed necessary to make a full revision to the original book. At the same time, I also believed most of the core concepts and theories in the first edition would be still very much relevant and useful for effective supply chain management. Against this backdrop, I decided to write a revision, which could integrate the new ideas and cases with the existing ones, rather than to replace the existing with the new. This philosophy resulted in the second edition, which includes seven in-depth chapters in addition to the original chapters. Complementing the first edition in great detail, these in-depth chapters elaborate on innovative approaches and ideas as well as sustainable competitive capabilities for supply chain management from the learning perspective. I hope that as an integrated and independent volume, the book now can play an essential role in enabling the students to learn and experience effective supply chain management.

This chapter examines decision making by a community (or any group) in a simple model: the community must choose from a finite set of mutually exclusive alternatives. (The next chapter endows the model with much more structure by specifying individual utility functions and a production function – and resource constraints. The utility functions will have classical economic properties.)

We look at situations in which a groupmust make a decision that will be binding on all of its members. For example, a class has to determine a time for a review session, a town has to decide whether to build a new school, a nation has to elect a legislature. The resulting choice will have no other implications for personal consumption – in this chapter. Suppose for instance that X, Y, Z, etc. denote alternative ways of spending a fixed amount of government revenue, with the same individual tax burdens in each case. In this setting we can't rule out any ranking of the available options as a possible preference scheme for a member of the group. This makes it very difficult to induce truthful revelation of the hidden characteristic, which in this chapter and the next is the individual's true preference scheme. We want the individuals to reveal enough information about their preferences to enable the system to select the outcome that best reflects those individual preferences.

Clearly, one could write an entire book on the criteria for determining the alternative that “best” reflects individual preferences. Indeed, hundreds of volumes have been written on that theme. In this chapter we set that issue aside and simply determine which selection rules elicit truthful information about individual preferences. Aselection rule is essentially amapping from individual preferences into a social choice, and it must be defined for each possible specification of individual preferences.

VOTING RULES

Although this section examines voting procedures, you are encouraged to think of the candidates standing for election not as individuals seeking careers in government but as alternative packages of public projects. Candidate (or alternative) X may, for example, be a proposal to reduce expenditure on space exploration by a specific amount and to use the proceeds to fund research on the production of energy by nuclear fusion.

Technology consists of knowledge, procedures, and devices, both conceptual and physical, and is also a mechanism used for problem solving. Innovation is often defined as new combination. Therefore, technological innovation is new combination of knowledge, procedures, devices, and problem-solving mechanisms. It has been touted as the biggest force driving economic development and prosperity. Technological innovation has also enabled the company to achieve highly sophisticated coordination with its supply chain partners. Since coordination is at the center of supply chain management, it is true to say that most of the recent development in SCM can be attributed to technological innovation, especially internet-based technology. As such, in this chapter, we review important technological innovations that have been closely related with improvements in operations and supply chain management. Our fundamental premise is that technology cannot be understood independent of organization, i.e., technology and organization must interact with each other and evolve together in order to accomplish an optimal result from technological innovation. It should be valid for supply chain management as well. We elaborate the premise from the learning perspective covered in Chapter 2.

Key Learning Points