This long-ago graduate of the University of Missouri-Columbia returns to the state to lead a talented team of professionals in promoting the university’s efforts via media relations. I arrived here after helping to share news and information about the University of Pittsburgh Medical Center (UPMC) and Carnegie Mellon University. Before that, I spent three decades with the Atlanta Journal-Constitution, Birmingham News and Pittsburgh Post-Gazette, though also dabbled as a contributor to numerous outlets — ranging from the former St. Louis-based institution The Sporting News to The New York Times.
Research and development is the key expertise of Anne Marie Knott, who developed the metric known as the Research Quotient (RQ), the only innovation metric that reliably predicts firm value.
With the new presidential administration announcing its economic-policy intention to invest $300 billion in research and development, there is a key voice offering the caution: Aim for the development end.
That is the counsel of Knott, the Robert and Barbara Frick Professor in the Olin Business School.
“President Biden has his work cut out for him in ensuring ‘a future made in all of America … where the United States wins … the jobs and industries of tomorrow.’
The most important thing he can do in the short-run is dedicate the $300 billion additional R&D to development (D) rather than research (R), she said.
“This level of investment could indeed bear fruit, but not if targeted at research,” Knott said.
(Research is diligent inquiry or examination to seek or revise facts, principles, theories, applications, etc. Development is about growth and directed change. Essentially, one is the creation of new ideas and the other is the application of them.)
“There has indeed been a dramatic decline in federal R&D support, but the decline is not in research. It is entirely in development.
“In fact, the decline in American R&D productivity tracks the decline in federal development almost perfectly. The decline in federal development is therefore the most likely culprit for the decline in R&D productivity. Thus, investing in research is solving the wrong innovation problem.”
Businesses beware: A price increase for carryout or delivery food means an increase in negative reviews—and a downturn in restaurant reputation, if not demand.
And it’s notable that in these COVID-19 pandemic times, an exponential amount of business is being conducted via carryout or delivery.
A pair of business researchers, from Washington University in St. Louis and Harvard University, studied the relationship between price and reputation by looking at online orders through Yelp’s Transaction Platform from its 2013 inception until January 2019, and then the resulting reviews. What they found: Ratings are price-adjusted rather than objective reviews of quality.
Their study showed an effect that is both statistically and economically significant: A price increase of just 1% leads to a decrease of 3%-5% in the average rating — a negative relationship between pricing decisions and reputation. “This effect becomes increasingly important when considering the average price change is about 3-9%,” they write. Their research is forthcoming in Management Science.
“Traditional intuition suggests a positive relation between prices and reputation, usually in the form of a price premium for reputable businesses,” said Oren Reshef, assistant professor of strategy at Olin. “Less attention, however, has been given to the direct impact of price increases on reputation for a focal firm. We find a negative relation when examining different price levels for the same business.”
The researchers used item-level data on all food orders placed via the Yelp Transactions Platform. There, they could detect changes in ratings in response to price changes. They keenly focused on narrow time bands around price changes—just days before and after restaurants updated their menu prices.
To provide further robustness to their findings, they analyzed instances where certain platforms are quicker than others to update the price. Thus, they focus on short time spans in which the same item is sold at different prices, one at the old price and one at the new price.
A new business creed
If nothing else, the study signals a new business creed: Be careful about raising prices, because, in addition to the direct negative effect on sales, down the line it will decrease reputation and, as a result, future business.
“Our results amplify the negative effect of price on sales: higher prices reduce demand today and demand in the long-run due to adverse effect on reputation,” Reshef said. “This is especially prominent in online markets, where consumers rarely know the prevailing prices and the time the review was given. This creates an additional incentive to maintain low prices and perhaps even set lower initial prices in order to establish good reputation.”
Their results hold more generally in the Yelp Star Rating, suggesting that ratings are a function of both quality and price — the cheapest restaurants achieve an average rating of 3.4 while the most expensive on average rate 3.6, less than a quarter standard deviation, despite the fact the latter group is four times as pricey. The researchers interpret this to mean that ratings are price adjusted — or at least adjusted for the expected quality at whatever price.
“The results inform us about the value of rating mechanism and how to interpret them,” Reshef said. “Online rating may not be capturing ‘objective’ quality, but rather the net value or surplus that the service or product generates. We believe that, in order to offer better platforms, managers should take this into account when designing reputation mechanism and recommendation systems on their platforms.”
The authors further attempt to disentangle other mechanisms that might impact consumers’ rating behavior. They discovered the effect is greater for first-time restaurant consumers — suggesting that diners initially respond to prices, which set their expectations for the quality of food they’ve never tasted or ordered before. This also shows that the results are not driven by repeat customers using lower ratings as a punishment for raised prices.
This price-reputation relationship translates to so many other consumer areas, what with the proliferation of Amazon, Airbnb, Taobao in Asia, grocery- and food-delivery services that grew during the pandemic, and more.
And, sorry, they cannot speak to price reductions—mainly because they were so seldom seen in the businesses they studied.
After years of both big-data and granular research about minimum-wage increases and homeownership/mortgages, Radhakrishnan Gopalan knows the pandemic-addled plight of the middle and under classes in America. Gopalan, professor of finance at Olin, also knows any economic plan must be multifaceted and multiyear. In short, this is going to take time. And effort.
“In my view, the Biden administration faces two short-run and three long-run challenges that it has to tackle to get the economy back on track,” he said.
“The two short-run challenges are the rampaging pandemic and the fact that many at the bottom of the pyramid are out of a job with little short-run prospect of getting one and are struggling to make day-to-day expenses,” Gopalan said. The pandemic is a public health issue, involving medical expertise, vaccines, masking, distancing and more. The economic challenge requires a directed stimulus program until COVID-19 is brought under control.
That leaves three long-run challenges, Gopalan said.
Don’t count on household consumption. “While there may be some short-run pent up demand, I fear the household sector will have too much debt and will find it difficult to contribute to demand in the long-run.”
Hospitality and transportation may never regain their lost employees. “This means retraining and repositioning the workers in these sectors.”
WFH changes everything. “The virus has resulted in many structural changes in the way we work and enjoy leisure, and this would involve refocusing our investment in infrastructure.”
How to tackle the challenges
“I believe the Biden administration will have a plan to tackle the fastest growing source of household debt: student debt. This may involve some debt forgiveness and more liberal eligibility for income-based repayment plans.”
“To both tackle the limited demand from the household and corporate sector, the administration will have an infrastructure bill that would involve green investment and investment in digital as opposed to physical infrastructure — taking into account the transformation in the economy brought about by the virus.”
“The administration may also have some targeted relief to the worst affected sectors of the corporate sector to help them recover and rebuild from the crisis. “
“There are some who argue that one way to increase household demand is to increase the minimum wage. I agree that there is some merit to this argument, so in the medium- to long-term I see the administration increasing the federal minimum wage.”
“To retrain and refocus workers from the sectors permanently damaged by the virus to the sectors helped by it, there will be investment in worker retraining.”
“Finally, health care is a constant source of concern for all Democratic administrations, and we may see further strengthening of Obamacare marketplaces and Medicaid.”
Forty of the world’s leading supply chain scholars were invited to the Olin Business School at Washington University in St. Louis, back before a virus’ early days gave rise to shortages of cleaners, toilet paper and such. This was May 2019, under the auspices of the 5thSupply Chain Finance and Risk Management Workshop in which The Boeing Center for Supply Chain Innovation served as host.
The assembled academics offered such relevant presentations, research and ideas — a full nine months before a pandemic derailed, if not stymied, global operations — that it produced a special edition in scholarship: how to pay for production and distribution today and manage global risks in a highly uncertain COVID-19 environment. Supply Chain Finance and Fin Tech Innovations was published Oct. 1 as the 14th volume of Foundations and Trends in Technology, Information and Operations Management.
The volume was co-edited by two Boeing Center/Olin faculty: Panos Kouvelis, the Emerson Distinguished Professor of Operations and Manufacturing Management and the center’s director, and Ling Dong, professor of operations and manufacturing management. Their third co-editor was former Olin colleague Danko Turcic of the University of California, Riverside.
“Innovative ways in managing working capital within global supply chains is of utmost importance in a turbulent environment,” said Kouvelis, who also sits on the journal’s editorial board. He also was part of a team that published a separate paper on these issues in the journal Production and Operations Management. “Especially small suppliers in global supply chains are currently stretched thin in their liquidity and ability to collect on their accounts receivables. Their debt exposure has drastically increased, and they rely on innovative financing schemes by their large corporate customers, such as reverse factoring schemes, or on fin tech innovations, such as the Ant Group fast loan services.”
Supply chain managers who want to stay in the forefront of such practices can benefit from the hot-off-the-press ideas in research shared in the workshop and appearing in the edited volume. “Our workshop benefits from the close interaction of the Boeing Center with its member companies, and we listen to the timely topics they want us to research. We bring state-of-the-art thinking back to them to advance their practices,” Kouvelis added.
The scholars came from the London Business School at the University of London, University of Chicago, Northwestern, Penn and Carnegie Mellon as well as top universities in Australia and China. They authored 10 different papers parsed into three supply chain themes: financing issues in supply chains, fin tech innovations for working capital and risk management, and advances in risk management of operational systems.
“Supply chain risk management is the other topic of timely importance in the current environment,” Dong said. “The last 20 years, and especially during the pandemic, made apparent to all that we are more frequently exposed to increased severity disruptive shocks. Building supply chain resilience is what all companies aspire in their initiatives right now.”
The question always remains: How to do it.
“There are some very interesting ideas and practical suggestions on better hedging operational and supply chain risks in the work summarized in the volume,” Kouvelis said.
Working capital needs
In another recent work, Kouvelis and Turcic addressed both of the challenges prominently mentioned above: supporting working capital needs and better hedging certain risks (exchange rate exposure, commodity price fluctuations, interest rates and so on). The two researchers teamed on an automotive industry study forthcoming in Production and Operations Management.
They looked into the effectiveness of two data-driven financial hedging policies, cost hedging and cash hedging, aimed at mitigating financial distress, with their data coming from car manufacturing environments. The paper is titled “Supporting Operations with Financial Hedging: Cash Hedging Versus Cost Hedging in an Automotive Industry,” and for this study, they used data from the Federal Reserve Bank of St. Louis, U.S. Bureau of Labor, U.S departments of Treasury and Energy, and International Monetary Fund data.
The widely used cost-hedging strategy calls for carmakers to hedge raw material and production input purchases. That means they need to trade in raw materials to avoid higher costs, such as amassing the four essential commodities: aluminum, steel, zinc and plastic. Kouvelis and Turcic argue that a better way is to focus on cash hedging under which the firm hedges its net cash flow. Although managers are concerned about fluctuations in commodity prices, their study points out that demand changes are the most significant factor to be hedged.
Their findings also meant that cost hedging is barely more effective than no hedging at all and less effective — plus more costly — than a cash-hedging strategy, which hedges cost and demand. Moreover, in the current pandemic-affected environment, with changing consumer behavior and spending approaches across many product categories, including cars, and with volatile commodity prices, manufacturers should use cash-hedging policies to enhance operating cash flows and protect against financial distress.
Photo: Empty grocery store shelves in Vancouver, British Columbia, in March 2020 reflect the global supply chain disruptions amid the COVID-19 pandemic. (Margarita Young/Shutterstock.com)
The global supply chain has experienced once-in-a-lifetime disruptions — at least four times in the past 12 years or so. The 2007-09 financial crisis was followed by Japan’s tsunami, earthquake and nuclear disaster of 2011, which was followed by the U.S.-China trade conflict that seemed to peak in 2018 and now the COVID-19 pandemic.
Resilience, once a hallmark that academics ascribed to the most successful supply chains, has become a “matter of survival,” writes an international team of researchers including an expert from Olin.
In a series of pandemic-era interviews with 14 senior executives from 12 companies representing a wide range of industries affected by the pandemic, the co-authors discovered that the businesses survived, if not thrived, due to “agile responses”—whether for the short term or long term, or both. These interviews allowed the researchers to derive an integrative framework similar to a how-to list, split into two basic categories: enablers and resilience strategies.
Enablers and resilience strategies
The resilience strategies are built upon policies that increase redundancy and operating flexibility: operation buffers (such as different inventories); footprint diversification (postponing or relocating production lines); supply options (flexible networks and financing); robust distribution (alternative warehousing, transport and routes); product standardization (sharing components or using off-the-shelf parts); and partner network (supplier relationships and sharing risks, costs and gains).
The enabler activities essentially are best practices and “prerequisites for implementing the strategy elements,” the researchers wrote: end-to-end visibility, end-to-end control, continuous IT infrastructure, and organizational readiness (previous or continuous risk management and planning).
“While all executives seemed well-versed into the supply chain resilience theory and concepts, they all discussed the implementation barriers they encountered as they tried to move their company’s supply chain to a needed resilient state,” said co-author Panos Kouvelis, director of the Boeing Center for Supply Chain Innovation and the Emerson Distinguished Professor of Operations and Manufacturing Management at Olin. “The executives were quick to point out supply chain resiliency as the attribute to guide the companies’ adjustment in the new (ab)normal world we will face the next two years.”
Kouvelis and his co-authors— rom Stanford University, Georgetown University, Santa Clara University, Kobe University, Germany’s Otto Beisheim School of Management and the University of Pennsylvania—followed four themes in their interviews: How has your company responded to the crisis? What are the elements of your resilience strategy? How did you arrive at that strategy? What lessons are key moving forward?
Cisco, Colgate-Palmolive, Nike, etc.
They interviewed executives with firms anywhere from a 2,000-employee food business in Asia earning $2.5 billion annually to a 150,000-employee consumer products company in Europe earning $52 billion annually. Among them were Cisco, Colgate-Palmolive, HP Enterprise, Infineon, Nike, Unilever, Emerson and Bayer Crop Science.
The co-authors learned that these companies basically designed a resilient supply chain via a two-stage process: selecting the “right” fit of strategies—and nobody implements all of the aforementioned—and then defining how to implement them. This could mean that, in the definition process, company management decides their first choice proves to be unfeasible or costly and instead opts for a Plan B. A company may also design different strategies for different products under their umbrella.
The researchers also found that strategy implementation, in these times of outsourcing and global disruptions, was enhanced by a collaborative, cooperative relationship among logistics businesses, suppliers and customers.
Interestingly, the researchers learned that executives are more willing to invest in resilience strategies if they had trouble regaining their market position after a disruption. For instance, it was mentioned amid the interviews—as examples of best practices—how Japanese automakers invested in increased buffers to reduce disruption risks after the 2011 earthquake, and Cisco reviewed its supply chain network to assess suppliers’ financial health after the 2007-09 crisis. The expenses were justified as a long-term and cost-effective “insurance policy.”
In fact, cross-company collaboration was seen as a necessary cost to the point where some companies financed suppliers and buyers, or at least provided technical support, to ensure a stronger supply chain.
The researchers offered a list of “prescriptive recommendations” such as centralizing the risk-management function, strengthening supplier relationships and innovative financing. However, they noted that the more resilient companies react early in such a crisis, and chains’ designs differ as much as their products, markets and countries. In other words, what works for toilet paper in Texas won’t work for cars in the Cayman Islands.
Kouvelis said he heard clear echoes of “never let a good crisis get wasted” throughout the executive interviews, and he paraphrased one of them: “You might even consider it a blessing in disguise … .” That particular company used the pandemic disruption to speed up digitalization of its supply chain and invest further in risk management.
In a separate paper written by Kouvelis and Morris A. Cohen, the Penn researcher from the resilience strategies study, and accepted for publication in the Production and Operations Management Society (POMS) journal, the co-authors rewrote the long-held Triple-A framework of successful global supply chains: agile, adaptable and aligned. They re-evaluated and reconfigured it, adding three R’s in addition: robust, resilient and realigned.
The reasons behind the redo are the global crises and the localized shocks that regularly have arrived the past decade-plus: Industrial supply chains have been found to experience a serious, one-month disruption every four years or so.
“The Triple-A framework of supply chain excellence served us well in the 1990s and early 2000s,” Kouvelis said of the rationale for, and the logic of, a new framework. “However, the last 15 years have seen frequent supply chain disruptions—and of alarming severity. Time to add the R’s in the supply chain excellence attributes model.
“Short-term agility has to be complemented with robustness for real-time responses across a wide range of scenarios. Adaptability to long-term technology and macroeconomic trends needs resilience to future shocks and the new (ab)normal world. Moreover, alignment of incentives of existing supply chain partners requires realignment to deal with evolving business models, changing consumer needs and preferences and a newly defined value system. The era of turbulence of the next 20 years needs a Triple-A-&-R portfolio of excellence capabilities in supply chains.”
POMS honored Kouvelis in its November 2020 issue, printing a career commendation called a Laudatio (subscription required). POMS also published as the lead article in that issue a study by Kouvelis and a Chinese University of Hong Kong professor on distribution channel compensation, initially posted online in June.