Tag: faculty research



If Americans fulfilled their java urges the same way they carefully shopped for groceries, they would visit five to seven various chain coffee shops regularly—for a blend of different categories.

In fact, it turns out that grocery categories such as dessert toppings, motor oil, candles and refrigerated ethnic foods were some of the leading products that lure customers to separate stores.

In the first test of detailed consumer-buying habits by categories at more than one chain store selling groceries, a team of business school researchers led by Washington University in St. Louis found that shoppers weren’t monogamist or bigamist but rather polygamist in their choice of outlets.

The vast majority—a whopping 83 percent—regularly visited between four and nine chain stores within a year’s time to purchase groceries. Of 1,321 households studied among this rich dataset, only 12 stayed loyal to just one store. More than half, at 51.1 percent, went to the average of five to seven different stores. Eighty-eight households, or six of every 100, went to 10 or more.

So much for store loyalty.

Shattering conventional wisdom on grocery loyalty

Using tracked data from a vendor utilizing a swipe card akin to a loyalty card, the researchers parsed more than $1 million worth of shopping transactions over 53 weeks involving 248 types of products sold at 14 retail chain stores in a large metropolitan market. The study, “Polygamous Store Loyalties: An Empirical Investigation,” was published last month in the Journal of Retailing.

“Store loyalty was pretty much a given in grocery retail,” said senior author Seethu Seetharaman, director of the Center of Customer Analytics and Big Data and the W. Patrick McGinnis Professor of Marketing at Olin Business School. “When people do their shopping, it’s the store close to where they live—location, location, location, like the real-estate mantra.

“Then there is a group of choosy consumers who stop at many stores, shopping for bargains or certain brands or products,” he said. “They’ve been called ‘cherry pickers.’” Often, those folks were associated with coupon shoppers.

“That made us do a deeper dive, and we found that people aren’t as store loyal as we thought,” Seetharaman said. “Clearly, people are polygamous. The majority of people are shopping at six grocery stores.”

Consumers tend to shop multiple stores for multiple reasons. In fact, the data showed little loyalty to a single store or handful of stores, but more so to types of products found in a store. Consumers shopped various stories for specific product categories: frozen treats at one grocer, meat and poultry at another, and so on. The researchers called this “intrinsic store-category attractiveness.”

Seetharaman was joined in this study by one of his former graduate students, Qin Zhang, assistant professor of business at Pacific Lutheran University, and one of Zhang’s former graduate students, Manish Gangwar, assistant professor of marketing at the Indian School of Business. They specified and estimated a statistical model of how consumers fractured their shopping basket and shared their wallet across stores.

Shoppers aren't as loyal to their grocery stores as conventional wisdom would have you believe, according to new research by Olin's Seethu Seetharaman.

Shoppers aren’t as loyal to their grocery stores as conventional wisdom would have you believe, according to new research by Olin’s Seethu Seetharaman.

‘Favorite’ stores account for 40 percent of the basket

The dataset comprised chains that were either traditional supermarkets (Albertsons, Bashas’, Food 4 Less, Food City, Fry’s Food Store, IGA, Safeway, Trader Joe’s and Wild Oats Market), supercenters (Kmart and Walmart) and warehouse clubs (Costco, Sam’s Club and Smart & Final). Further evidence of an ever-changing economy in which to purchase grocery, household and health and beauty products: Some of the studied chains have dwindled since the study and no longer service several of their previous states.

“It’s very diffuse,” Seetharaman said of consumers’ purchases from a larger-than-expected list of stores. “Only 40 percent of their basket is coming from their ‘favorite’ store.”

Some other findings from the research:

  • In the market surveyed in particular, Fry’s Food Stores emerged as the market favorite by a sizable margin, with Albertson’s, Safeway and Walmart next behind it.
  • In a large set of categories, a handful of stores competed intensely: Albertson’s, Bashas’, Safeway and Fry’s.
  • Warehouse clubs attract loyalty in categories different from the traditional supermarkets and supercenters.
  • Family size predicted store loyalty—the larger families tended toward Fry’s or a Walmart Supercenter.
  • Income was a somewhat surprising predictor, in that households with higher incomes were more likely to “budget shop” at a Costco, which could be explained by the fact that large houses with large basements are usually needed to store products bought in bulk.

Companies in the grocery, household item and healthy/beauty realm could learn from such a category-intensive study, Seetharaman said. “This gives you a good sense of what you are winning, and how you are winning. But there’s no silver bullet.”

“Will it be a surprise?” Seetharaman asked. “Yes, it will be a surprise,” he said. “The traditional wisdom is: Walmart is an aggressive, everyday-low-price price retailer and Target is the assortment retailer. So let’s say both mass merchandisers … each of them has a certain strategic positioning and therefore thought they attract a certain type of consumer.

“We are upending that wisdom a little bit here: No matter what kind of strategic positioning you have carved out, consumers have a mind of their own. They are choosing to do different things in different categories. And businesses should wise up to this. Even your core customer is buying categories at other shops.”




As the passive investing strategy has taken the market by storm, criticism of index funds and common ownership have increased: Are index funds evil (as asked by The Atlantic)? Are they bad for the economy?

Common ownership came under fire last year with a study finding that “airlines compete less vigorously on price because they are owned by the same handful of investors,” writes David Nicklaus.

However, in an interview with The St. Louis Post-Dispatch, Olin’s Todd Gormley, associate professor of finance, provides a defense for companies with higher index-fund ownership: They actually have better governance.

An active money manager who doesn’t like the way a company is run can simply sell the shares. The passive manager doesn’t have that choice. “In their view, the only way they can protect themselves is to make sure there are good governance structures in place,” Gormley said.

Besides, he said, long-term passive investors often back activist hedge funds that attempt to shake up a company. “We found a positive influence on governance,” Gormley said. “The presence of these index funds makes it easier for other investors, the activists, to get into a company and provide discipline over management.”

Gormley was recently quoted in the Princeton Alumni Weekly on the same subject, where he discusses the evidence of some positive effects of passive ownership.

Read the full article on The St. Louis Post-Dispatch and Princeton Alumni Weekly.




The value of empowering employees to make decisions is well known. So is the importance of holding workers accountable. And employers often go to great lengths to provide incentives for great performance among team members.

For the first time, however, research suggests that companies simply cannot achieve optimal performance without a balance of all three components: empowered decision making, accountability for performance, and incentives for strong work.

Using purchasing card data from 586 organizations, Olin Professor Mahendra Gupta and his coauthors analyzed the effect of a balanced deployment of these strategies. The findings showed companies that delegated decision-making, used a performance measurement system, and provided managers with incentives outperformed the companies with a different organizational structure.

Purchasing cards or “P-cards” allow corporate managers to make company purchases on a credit card that aggregates company purchases, allowing the firm to pay a single invoice for such company purchases. The P-card data gave researchers an entry point into the question by allowing them to examine the effects of delegating decision-making to a purchasing card administrator, as well as using a performance measurement system to track the administrator’s performance, and incentives to nudge the administrator’s behavior in the right direction.

“The study provides unique empirical evidence on the relevance of organizational architecture as a concept to explain organizational performance,” the authors wrote.

Gupta, former dean and Geraldine J. and Robert L. Virgil Professor of Accounting, said the findings show the three components are akin to a three-legged stool. If any leg is missing, the structure cannot stand.

Update: View a recording of Mahendra Gupta’s presentation below. Read a deeper summary of the research paper on Olin’s Research that Impacts Business page.


On August 25, Hurricane Harvey hit the Texas Gulf Coast with severe effects in the Houston metropolitan area, other parts of Texas, and Louisiana. When such disasters happen, we are all emotionally affected by the human tragedy, injuries and death (close to 50 deaths accounted for so far), devastation of properties that families had worked long and hard to build, and the desperation that follows as people try to pick up their lives.

Part of a supply chain manager’s job is to think about how such natural disasters will affect their company’s supply chain. In the tightly connected global supply chains of today, there is a high likelihood that there will be an impact, regardless of how far away the event occurred. Many recent disasters serve as examples of this global impact: Hurricane Katrina in New Orleans, the Japanese earthquake and tsunami north of Tokyo, or the flooding in Thailand. American and Western European car companies’ plant operations that sourced components from Japanese suppliers were halted within a week. And PC makers were disrupted due to the loss of 40% of worldwide capacity in hard disk drives in the Thai floods. Hurricane Harvey is another strong reminder of lessons learned in supply chain risks and their management, and how devastating and far reaching the effects of such events can be for supply chains.

It is perhaps a bit hyperbolic, but rightly so, to say that the whole world will feel the pinch of Harvey.

As a supply chain manager, your first level reaction is to consider which customers, products, facilities, employees and suppliers will be the most exposed to Hurricane Harvey. What is the overall revenue exposure, and how long will it take to recover? Houston is a metropolitan area with an economic output of half a trillion dollars, and companies in almost all industries have some type of location or sales outfit there. In most cases, the impact will be nothing more than a flooded basement, power outages, and restricted access to facilities due to other infrastructure failures, and some delayed shipments. Home Depot and Lowes reported close to 60 temporary store closures due to flooding, but given the increased demand of their products in infrastructure and home improvement projects, their recovery will most likely be swift.

The most important part, and the company’s first priority, is to check for employees that are located in affected areas, and quickly verify their wellbeing. Procter & Gamble’s Folgers plant in New Orleans was exposed to Hurricane Katrina, and one of the company’s biggest challenges after the event was tracing the fates of its employees and ensuring their safety. In the oil drilling, refining, and chemical manufacturing industries, some of the main production and distribution facilities are in the Houston area, so one needs to think about the first order effects on businesses from flooded, non-operable facilities. Some news outlets reported that 25% of the U.S. oil refining capacity was closed by the end of August, including the two largest refineries. This will imply serious disruptions to gasoline supply in the Southeast and the Midwest. Based on my own causal observations, gas prices in the St. Louis area were 20-30 cents higher this Labor Day weekend, with increases expected to last for a month. Depending on how fast the refineries recover, and the overall supply conditions of crude oil in the area, fears of fuel shortages might drive gas prices up, inevitably affecting the logistics costs of all businesses. Twenty percent of the offshore crude oil supply was shut down as flooding disrupted wells and caused pipeline operators to close their taps. But this might be welcome, as some of the crude oil demand is down at the same time due to the idled refineries. Crude oil prices slid down by almost 50 cents a few days after the hurricane. Natural gas production has been disrupted as well, with potential implications for heating and power generation fuel supply and prices.

hurricane-harvey

Hurricane Harvey

Infrastructure damages to ports, airports, and roads have immediate effects on all supply chains. The major airports in Houston were not affected much beyond some delayed flights (around 1,000 flights over a day or two) and unexpected delays in reopening. Even smaller airports were back in operation by the end of August. However, port traffic is more seriously affected. The ports of Houston and Corpus Christi are two of the largest in the U.S. (second and sixth, respectively), with both ports’ operations severely affected for more than a week. East of Houston, Port Arthur is completely underwater, and the closure of regional railways and highways led to FedEx, UPS, and USPS halting all deliveries to impacted areas. Major railroads (KC Southern, BNSF, Union Pacific, et al.) completely halted or reduced their level of operations around the coastal region and surrounding areas. Facilities receiving shipments from suppliers in the area should expect moderate to significant delays. Retailers and manufacturers far from Texas will be affected by the impact on transportation and rail networks, and should expect increased logistics costs to eat into their margins. In the trucking industry, which had capacity shortages prior to the event, the impact will be an additional shortage of 10%. As increased emergency shipment prices and demand shift some of the capacity to the Southeast, prices will rise nationwide. Capacity shortages and increased fuel costs might have a double-whammy effect on transportation logistics costs for all companies, particularly those in the grocery, food, and beverages industries.

As any supply chain manager understands all too well, it is not necessarily the original event (in this case, the hurricane), but the ripple effects of the event that cause the major supply chain disruptions.

In retrospect, the Japanese earthquake of March 2011 was the least of their worries. About half an hour after the shaking ended, a tsunami—two to three times higher than projected—inundated the shores nearest the quake’s epicenter. And 180 kilometers away from the quake’s epicenter, the nuclear power plant at Fukushima Daiichi flooded, incapacitating the backup diesel generators responsible for cooling three of the six nuclear reactors. Within 24 hours of the tsunami, these reactors exploded, spreading harmful radiation. Hurricane Harvey caused a similar scenario, albeit with substantially fewer consequences. As the hurricane blew in, employees of the Arkema chemical plant in Crosby, TX had to make sure that the plant’s volatile chemicals remained refrigerated. When the power went out and the floodwaters knocked out the plant’s generators, the only alternative was to move the chemicals to nine huge, refrigerated trucks, each with their own generator. However, when six feet of water swamped the trucks (described by an Arkema spokesman as “watching physics at work”), a series of explosions followed. Fortunately, the fire and blasts were not as dire as feared, but in the eyes of a safety investigator, it was “a wake-up call for an industry and their safety regulators who have not adequately taken action on lessons from Hurricane Katrina, as well as the Fukushima nuclear disaster in Japan.” A large number of the more than 1,300 chemical plants in Texas—many of them driven there by the access to gulf ports and shale gas operations—are vulnerable to flooding events.

If someone were trying to anticipate the ripple effects on supply chains resultant from the Harvey disaster, ethylene and its derivative products, polyethylene and PVC, will be the proverbial “usual suspects” to cause a bullwhip effect. Sixty percent of the U.S. ethylene capacity has been closed due to Harvey-related floods. Ethylene and its derivatives are used to produce plastics, antifreeze, house paint, vinyl products, and rubber; thus, shortages of it will affect multiple manufacturers and consumer markets. With the U.S. accounting for 20% of the global ethylene production, and with current utilization being very high, any small hiccup will drive supply-demand imbalances. It is too early to predict the magnitude of shortages, but petrochemical plants in the Gulf region are already advising customers of their inability to meet their commitments for polyethylene, polypropylene, and PVC. And the “bullwhip” game begins (!) with bigger firms hoarding capacity, smaller ones scrabbling to find any capacity at any price, suppliers rationing orders, inflated projections of demand, and rapidly escalating prices. The complexity of the ethylene manufacturing process, the longer restart times for closed operations, the lead times required to ensure safety of operation, and the current transportation bottlenecks make for an inflexible supply chain, incapable of adjusting to any small supply or demand shocks. Ethylene-dependent industries are in for a roller coaster ride in the next few months, and the rest of us might have to pay for it.

There are two main tools the supply chain manager possesses to effectively mitigate the damage of major disaster events and drive the quick recovery of supply chains. The first is redundancy, as in having extra resources, capacity, and people, and the second is operational flexibility, as in dynamically reallocating the resources based on updated information and the needs of the realized situation. Thus far, both of these tools have been deployed by federal agencies and companies in handling the Harvey disaster aftermath. Experts expect that the effects on gas prices will be less severe because gasoline inventories are higher than they were in the aftermath of Hurricane Ike in 2008. Also, the crude oil supply concerns can be alleviated through some release of oil from the Strategic Petroleum Reserves by the U.S. government. Going forward, it is better to plan ahead for some excess capacity and location diversification in our stretched energy infrastructure, as the heavy concentration along the Gulf Coast, together with very high utilization, makes it particularly vulnerable to natural disasters. Our ports have learned from the past, either through hurricanes or labor strikes, to be ready to effectively reroute shipments to meet logistics needs for customers. Global logistics companies have real-time information on the location and the container load of their ships and can drive dynamic rerouting as needed. Maersk is dynamically deciding whether to wait at the Houston port or reroute its container ships to other ports. Manufacturers fearing shortages of ethylene supplies are looking for substitute materials or alternative global suppliers. Hopefully, some of the downstream retailers have adequate inventories of needed products to handle a short period disruption in logistics services. Alternatively, price increases can also drive the demand away from low inventory products to other substitutes.

Wall Street is counting on the resilience of the supply chains. The stock markets have weathered the Harvey storms and have even gained in the aftermath. Effectively, the market is counting on companies to have learned lessons from the past and to have prepared their supply chains accordingly, either through careful planning, redundancy, or operational flexibility to manage the impacts of this disaster. The markets are comforted by the fact that any financial losses in the region will not propagate, as home insurance policies are not covering flooding and the major insurers will not be exposed to catastrophic losses. Other companies’ exposures on the service and delivery side are dealt with by supply contracts, which include “force majeure” clauses for events that result from natural and unavoidable catastrophes beyond the firms’ control. But I prefer the more optimistic explanation that markets trust the supply chain executives as consummate risk managers who have learned the lessons of the past. Hopefully they will be able to use the real-time information and data they have, and exercise a flexibility in their decision making to adjust operations for whatever outcomes result. Markets are betting that the companies using the best risk management techniques will find competitive opportunities against less-prepared rivals, and fully leverage the new opportunities created by the recovery efforts. Let us all be optimistic for the resilience of our supply chains and the fast recovery of the Gulf Region!

Panos Kouvelis is the Director of The Boeing Center for Supply Chain Innovation and Emerson Distinguished Professor in Operations and Manufacturing Management. He has consulted with and/or taught executive programs for Emerson, IBM, Dell Computers, Boeing, Hanes, Duke Hospital, Solutia, Express Scripts, Spartech, MEMC, Ingram Micro, Smurfit Stone, Reckitt & Colman, and Bunge on supply chain, operations strategy, inventory management, lean manufacturing, operations scheduling and manufacturing system design issues.



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The Boeing Center for Supply Chain Innovation presents…an interview with Professor Panos Kouvelis, Emerson Distinguished Professor of Operations and Manufacturing Management and Director of The Boeing Center for Supply Chain Innovation at Washington University in St. Louis, about the Global Supply Chain Benchmark Study, a collaborative research initiative of faculty at leading business schools including Olin. Below is an excerpt of the report; for the complete report, go here → http://bit.ly/GSCBS2016

BACKGROUND

“For the past 25 years manufacturing offshoring to low-cost locations like China has been the dominant strategy for many western manufacturing companies. This has led to a significant reduction of manufacturing jobs in developed economies. Recently, many manufacturers have reported they plan to bring back at least a part of their global production volume to developed countries. General Electric, for example, announced in 2012 they would relocate manufacturing and R&D of their household appliances business, which had previously been offshored to China and Mexico, to Louisville, KY in the USA.1 Similarly, Plantronics, a U.S. based manufacturer of headphones, shifted production volume back from China to Mexico.2 At the same time companies from perceived low-cost countries have reported investments in manufacturing capacity in developed economies. For instance, the Chinese company Lenovo recently brought back the production of personal computers to North America.

While there seems to be an emerging trend to reshore production, traditional offshoring to developing economies continues to be a viable phenomenon. For example, General Motors recently announced a USD 12bn investment in new plants in China.4 These examples offer just a glimpse of the magnitude of manufacturing location decisions companies are currently making in a wave of restructuring of their global supply chains.”

EXECUTIVE SUMMARY

“Despite the growing attention in the business press to reports of companies relocating manufacturing to western countries, there is very little empirical research on the scale of such decisions, their drivers and their impact. Hence, in this study we investigate current trends in production sourcing. Based on a survey of 74 leading manufacturing companies predominantly from North America, Europe and Japan we shed some light on (1) what production sourcing decisions are currently being made, (2) what drives these decisions and (3) what results do they lead to.

Our research suggests that there is a significant wave of restructuring of global supply chains in progress. Companies de- and increase production volume all over the globe as shown in the overview presented in Exhibit 1. However, we did not observe a dominant strategy for sourcing production volume. Companies make different decisions for a variety of reasons. While China continues to be the most attractive country for manufacturing, many companies reported following (also) other strategies. Moreover, we see that decision making has evolved from simple cost comparisons to more complex trade-offs between a magnitude of factors that are deemed important, i.e., across quality, market access and risk. Based on these and other reported drivers we see a shift of production not only to China but also to Eastern Europe and the ASEAN countries which are being used as nearshore sources of production for Western European and Chinese markets respectively.

For North America we see evidence for a return of manufacturing. It is not a strong trend but in our sample more companies report shifting production volume to North America rather than offshoring to other countries. This pattern is not consistent with the much cited reshoring trend predicted by many business and political commentators. The movement we observed is not driven by the reshoring of American firms but rather by European and Asian firms offshoring who account for 60% of the production volume increase in North America. While this is good news for manufacturing in North America, the indicators for the future of manufacturing in Western Europe appear to be less bright. Indeed, Western Europe is one of only two regions for which our sample reports a net decrease of production volume. Companies reported offshoring for a variety of reasons including shifting to either less costly locations or to places closer to market demand.

Despite the decline in production volume in certain regions, there is no evidence for a further decline in manufacturing jobs. In fact our sample reports that for China, Western and Eastern Europe their sourcing decisions hardly impacted employment. Moreover, it was only for North America and Japan that growth of manufacturing employment is observed.

We believe the analyses and insights presented in this research not only inform but also call for action. Executives should look at their supply chains critically by challenging their current footprint and production sourcing choices. We explicitly encourage benchmarking against the companies in our sample within their industry and across industries. Insights into market expectations and the forces driving the reported production sourcing and technology decisions should stimulate a discussion about future strategic actions.

For policy makers – especially in Western (European) countries – this research provides information concerning the perceived attractiveness of regions worldwide. Reading the report will provide policy makers with data about the trends in industry and the factors that have led companies to shift production into or away from particular regions and can thus inform the debate on how manufacturing policy can boost competitiveness, attract and retain manufacturing jobs.”

For the complete report, go here → http://bit.ly/GSCBS2016