Over the last three to four
decades, advances in technology and the networked economy have led to the
evolution of the business models in many project driven industries, from
the one-company-does-all approach to a more collaborative and decentralized
one on a global basis. While this has brought tremendous benefits in the
areas of market expansion, technological innovations and cost reduction, it
also led to significant challenges in the coordination and management of
the project (driven) supply chains. Indeed, with the outsourced work
accounting for 50% or more of the revenue for projects in these industries,
supply chain management has never been so important.
The problems studied in
this NSF-funded project share a common feature – project management and
supply chain management decisions are intertwined. In practice, they are
typically managed as projects without taking the supply chain perspective
into account. In academia, the connections and interactions between the
projects and their supply chains are yet fully recognized and understood.
We studied these problems by an interdisciplinary approach, which combines
mathematical modeling with empirical studies. Our objective is to develop
new insights and solutions beyond conventional wisdom, and reconcile the
discovery with practice to demonstrate its economic or social impact.
One-of-a-kind development projects with an extensive workload outsourced
(found in the aerospace and defense industries).
Trial Supply Management:
Clinical trial projects with a global network of testing sites and
investigative drug distribution (found in the pharmaceutical and biotech
projects subject to random material delays (found in the construction
1. Development Chain Coordination
stream of work is motivated by recent practice in the Aerospace and Defense
industies. Product development programs (e.g., the Dreamliner, Airbus 380,
China 919, F35 and Global Hawk) outsourced a signifcant amount of workload
in design and/or fabriaction to a global network of suppliers. While
outsourcing offers irresistible benefits in market expansion, utilization
of the best-in-class technologies, and cost/cycle-time reduction, it poses
a significant challenge for the project supply chains, which are increasingly
more complex, more risky and involve more organziations with diverse
strategic motivations. Indeed, many of these programs have experienced or
are experiencing significant delays and cost overrun. Naturally, people
asked, what caused those delays? How to avoid them the next time?
of our work:
1. We wrote a case study, “Build-to-Performance: The Boeing 787
thoroughly document the facts, events and data of the 787 development
program by collecting information from publically available sources such
as, the new medias, web commentaries, case studies and financial reports.
We conducted an empirical study, “Why 787 Slips Were Inevitable?”, to identify the real causes for a majority
of the 787 delays, and to reveal the rationale behind many irrational
behaviors that delayed this program.
constructed a game theoretical model, “Incentives and Alignment in Collaborative
analyze the firms‘ strategic motivation and economic incentives under the
risk sharing partnership, and to propose a new partnership, fair sharing,
that can align the firms‘ best interest with that of the program.
· Case Study: “Build-to-Performance
–The Boeing 787 Dreamliner”
Story: In September 2011, the first
Dreamliner was finally delivered to All Nippon Airways, Japan, the launching
customer of the Boeing 787 program, after 40 months of agonizing delays.
Boeing’s executives, in particular, the 3rd manager of the 787 program,
Scott Fancher (he replaced Pat Shanahan
who replaced Mike Bair), finally got a relief from the huge pressure
imposed by the share-holders, suppliers and customers. Looking back at the
delays and the damages to the company’s reputation and standing in the
market place, as well as the profitability of this program, Scott felt
lucky, as the situation could have been much worse.
the 787 development process, Scott can hardly believe how many delays there
were and how long they took, how many embarrassing mistakes were made, and
how much effort and expense that Boeing had to pay to bring the program back
on track. Although the pain is almost over, he cannot help but thinking how
such problems could have been avoided in the first place?
· Empirical Study – “Why 787
slips were inevitable?”
Abstract: Boeing 787, the Dreamliner, was the
fastest-selling plane ever in the commercial aviation industry. However,
its development was a nightmare – the first flight was delayed by 26
months, and the first delivery was delayed by 40 months with a cost overrun
of at least $11 billion. By a comprehensive empirical study of the actual
events and facts, we find strong evidence to suggest that a majority of the
delays were intentional. An economic analysis of incentives and gaming
behaviors in joint development projects discovers that the 787’s
risk-sharing partnership forced Boeing and its partners to share the
“wrong” risk. This led the firms into a Prisoner’s Dilemma, where delays
were in the best interests of these firms, although doing so drove them
into a disaster. We reconcile the economic analysis with the empirical evidence
to reveal the rationale behind many seemingly irrational behaviors that
delayed this program. Finally, we suggest a new “fair sharing” partnership
to share the “right” risk and greatly alleviate delays for development
programs of this kind.
Mathematical Modeling – Xu,
X., Y. Zhao (2014). “Incentives and
Alignment in Collaborative Projects.” Working Paper. Rutgers Business School. NJ
Abstract: Collaboration and partnership are the way of
life for many projects in diverse industries where the outcome depends on
the joint efforts of multiple firms. Although partnership (teamwork) and
externality are well studied in the economics literature, their explicit
expressions and implications in project management are not. Specifically,
it remains unclear as how collaboration may change firms' behaviors in
project execution and impact the overall project performance in time and
cost. Utilizing a novel model that integrates the economic theory of
teamwork with project management specifics, we study incentives and
strategic behaviors of firms under the popular loss-sharing partnership.
For a typical project network with both parallel and sequential tasks where
each firm faces a time-cost trade-off, we reveal an inherent conflict of
interests between individual firms and the project. Depending on the cost
and network structures, we discover explicit forms of externality in the
content of project operations, such as, the Prisoners' Dilemma in project
execution, the Supplier's Dilemma, and the Coauthors' Dilemma. These
dilemmas reveal how individual firms can be driven by selfish motives to
deliberately delay tasks against the best interest of the project and
exactly how collaboration can deteriorate project performance. As a remedy,
we suggest a new ``fair-sharing" partnership and prove its
effectiveness in handling the externalities in collaborative projects.
Trial Supply Management
Motivation: Clinical trial supply management offers a substantial
opportunity to cut costs and improve efficiency as the cost of clinical
supplies could account for 20 per cent or more of a company’s R&D
spending. The opportunity lies in the fact that companies typically manage
clinical trials as projects, and set up the trials without considering
supply chain issues. However, the project and supply decisions are tightly
coupled; for instance, globalisation improves significantly project metrics
(for example, patient recruitment), but imposes a huge challenge on supply
metrics (cost and drug availability). Thus, integrating clinical trial
project decisions (country and site selection, protocol design) with supply
decisions (inventory levels, logistics network) offers a significant
opportunity for companies to do more with less.
We wrote a
case study, “CTR
Clinical Research – Clinical Trial Supply Management”, to understand some of the key issues in
clinical trial supply chains.
conducted an empirical study, “Contract Development and Manufacturing Costs During Clinical
Development of A New Drug”, to estimate the financial impact of supplies on clinical trials by
collecting data from companies‘ SEC filings.
3. We present
various mathematical models to help firms streamline their clinical supply
operations, such as production planning and inventory management, and
integrate with their clinical project operations.
· Case Study: “CTR Clinical Research – Clinical Trial Supply
Story: James Collins is a project manager at SPRI Pharmaceuticals Inc.
supervising clinical trials. One of the current clinical trials under his
supervision is on the experimental medicine SPRINT-HC for treating
Hepatitis C. The clinical trial commenced on Oct. 1st 2009, and now it has
been six months into the study. A third party company CTR-PHONE,
a subsidiary of CTR Clinical Research, tracks and manages drug inventory
for this trial.
the beginning of this clinical trial, James has received a number of
complaints from the research sites, while some said that CTR-PHONE sent
shipments quantities that overwhelm their storage space, others said that
CTR-PHONE is not supplying enough medicine. Insufficient inventory at
research sites is of great concern to James as it risks slowing down
patient recruitment and invalidating the trial. However, too much inventory
at the sites risks leftover at the end of the trial and thus a waste of
precious materials. James notices that similar complaints are filed in
other clinical trials that he and his colleagues supervised. He wonders
what can be done to eliminate these problems encountered by CTR-PHONE.
Empirical Study – Fleischhacker, A.,
Y. Zhao (2013). “Contract Development and
Manufacturing Costs DuringClinical Development of A
Working Paper. Rutgers Business School.
Clinical trial supply is an area often ignored by pharmaceutical and
bio-tech companies partially due to a lack of understanding of its
financial impact. Through a study of several
firms’ expenditures on clinical supply and manufacturing activities, we
estimate the magnitude of R&D budgets devoted to these activities. In
these examples, roughly 30% - 40% of clinical trial spending is
attributable to supplying the investigational drugs and developing the
Analytical Modeling 1 – Fleischhacker,
A., A. Ninh, Y. Zhao (2012). “Positioning Inventory in Clinical Trial
Supply Chains.” To appear in Production and Operations Management.
Abstract: As a
result of slow patient recruitment and high patient costs in the United
States, clinical trials are increasingly going global. While recruitment
efforts benefit from a larger global footprint, the supply chain has to
work harder at getting the right drug supply, to the right place, at the
right time. Certain clinical trial supply chains, especially those
supplying biologics, have a combination of unique attributes that have yet
to be addressed by existing supply chain models. These attributes include a
fixed patient horizon, an inflexible supply process, a unique set of
service-level requirements, and an inability to transfer drug supplies
among testing sites. In this paper, we provide a new class of multi-echelon
inventory models to address these unique aspects. The resulting mathematical
program is a nonlinear integer programming problem with chance constraints.
Despite this complexity, we develop a solution method that transforms the
original formulation into a linear integer equivalent. By analyzing special
cases and numerically studying a hypothetical real-life example, we develop
novel insights into inventory positioning in clinical trial supply chains.
We also study the impact of site network on the supply chain cost and the
trade-off between inventory overage and the expected recruitment time.
· Analytical Modeling 2 – Fleischhacker,
A., Y. Zhao (2011). “The Dynamic
Economic Lot-size Model for Clinical Trial Supply Chains: Planning for
Demand Failure.” European Journal of Operational
Research 211: 496-506
paper examines the optimal production lot size decisions for clinical trial
supply chains. One unique aspect of clinical trial supply chains is the
risk of failure, meaning that the investigational drug is proven unsafe or
ineffective during human testing and the trial is halted. Upon failure, any
unused inventory is essentially wasted and needs to be destroyed. To avoid
waste, manufacturers could produce small lot sizes. However, high
production setup costs lead manufacturers to opt for large lot sizes and
few setups. To optimally balance this tradeoff of waste and destruction
versus production inefficiency, this paper generalizes the Wagner-Whitin model (W-W model) to incorporate the risk
of failure. We show that this stochastic model, referred to as the
failure-risk model, is equivalent to the deterministic W-W model if one
adjusts the cost parameters properly to reflect failure and destruction
costs. We find that increasing failure rates lead to reduced lot sizes and
that properly incorporating the risk of failure into clinical trial drug
production can lead to substantial cost savings as compared to the W-W
model without the properly adjusted parameters.
· Analytical Modeling 3 – Fleischhacker,
A., Y. Zhao (2013). “Balancing Learning and Economies of Scale for Adaptive
Clinical Trials.” Operations Research for Health Care 2: 42-51
Abstract: Prior to the start of an adaptive clinical trial,
demand for an investigational drug can be highly uncertain. Both
recommended dosages and forecasted patient recruitment can fluctuate in
response to early trial results. While initial demand forecasts can be very
wrong, the factors influencing future demand can be learned during the
trial. To take advantage of this learning, intra-trial production and/or
packaging can be leveraged, but this is done at the expense of scale
economies. In this paper, we study the balance between learning and
economies of scale for adaptive clinical trials. We characterize the
optimal production (or packaging) decisions and through analytical and
numerical studies, we develop insights on the impact of
fixed costs, learning rates in terms of forecasting future demand, inventory
overage costs, and inventory underage costs on the value of having
intra-trial flexibility and on decisions regarding quantity and timing of
Projects With Random Material Delays
Motivation: Today, construction projects frequently spend
a significant portion of their budgets (more than 50 per cent) on materials
sourced from an extended supply network. However, projects and their
material supply chains are often managed in separation despite the fact
that they are tightly coupled, for instance, lean supply practice often
leads to long and variable material lead-times which may ruin the project
schedule and result in expediting cost and/or delay penalties.
1. We wrote a
case study, “ICM Inc. –
Construction Resource Management”, to understand the current practice of material management in
conducted an empirical study, “Some Economic Facts on
Prefabricated housing”, to illustrate
the connections between project and supply chain operations in the real
established a class of mathematical models to study the connections and
quantify the impact of the integrating project and supply chain operations
in the construction industry.
· Case study: “ICM Inc. – Construction Resource Management”
story: Mihir is a new assistant
project manager at Intercontinental Construction Management Inc (ICM), a New Jersey based
engineering/construction company. As his first task, he assists in managing
and planning for the west point project which starts in
January. In February, he got a call from the structural steel
supplier that delivery to one of new buildings at the site will be delayed
by one week. This means one week delay of the new building if no action is
taken. Usually, ICM expedites some tasks to avoid project delay
at the cost of construction labor.
at past projects, Mihir noticed that
the same kind of structural steel is used in all ICM’s military projects.
Given about 25 weeks of total project duration, the lead time of structural
steel is relatively long (4-6 weeks) and varies quite significantly. Mihir wonders what else he can do to better match
material delivery with project schedule except passively expediting tasks
when a material delay occurs. Mihir also
realizes that this problem is connected to a more challenging issue: A few
major competitors are bidding against ICM on several construction projects.
The customer, US Military, has made it clear that the winner must provide
superior project schedule and competitive cost structure.
· Empirical study – “Some Economic
Facts on Prefabricated housing”
compare and contrast the current practice of the prefabricated housing
among three countries: the U.S., Japan and China, to illustrate the
advantages and challenges of this relatively new approach in the
construction industry. We also exemplify the operations management practice
through real-world practice for the prefabricated housing and point out the
· Analytical Modeling – Xu, X., Y. Zhao, C. Chen (2012). “Project-Driven Supply Chains: Integrating
Safety-Stock and Crashing Decisions for Recurrent Projects.” To
appear in Annals of Operations Research.
study a new class of problems -- recurrent projects with random material
delays, at the interface between project and supply chain management.
Recurrent projects are those similar in schedule and material requirements.
We present the model of project-driven supply chain (PDSC) to jointly
optimize the safety-stock decisions in material supply chains and the
crashing decisions in projects. We prove certain convexity properties which
allow us to characterize the optimal crashing policy. We study the interaction
between supply chain inventory decisions and project crashing decisions,
and demonstrate the impact of the PDSC model using examples inspired by