By Ben Haimowitz, Academy of Management

What happens when the romance of corporate leadership collides with the romance of stock analysis? With a massive literature devoted to leadership and American companies reportedly spending $14 billion a year to teach it, one might expect a CEO’s reputation for superior governance to prove dominant over even sharp-eyed analysis. Yet, some new research finds otherwise.

According to a study in the current issue of the Academy of Management Journal, “a downgrade by a star analyst causes tremendous valuation changes, which are not offset by the CEO’s reputation….CEO reputation buffers the stock market reaction to downgrades by regular analysts, but, when a downgrade is issued by a star analyst, the CEO’s reputation has almost no effect on the market reaction.”

In short, “star analysts’ reputation is more powerful when it comes to how the market reacts to downgrades, even when star analysts are downgrading firms run by star CEOs.”

Specifically, the researchers found the stock market’s reaction to a downgrade by a star analyst (someone ranked among the top one sixth or thereabouts of the breed) led to an average market-adjusted, two-day decline of a stock of 3.5 to 3.6 percent whether the CEO had won as many as five prestigious leadership awards over the previous five years or had been honored with one or two or none at all. In marked contrast, the impact of a downgrade by analysts outside that select circle varied considerably depending on the reputation of the CEO. While leading to an average market-adjusted decline of 1.93 percent for firms headed by five-time leadership honorees, it produced a 2.74 percent decline for those headed by non-honorees (presumably run-of-the-mill types), a drop of 42 percent more.

Comments Steven Boivie of Texas A&M University’s Mays Business School, who conducted the research with Scott D. Graffin of the University of Georgia and Richard J. Gentry of the University of Mississippi, “There has been much documentation of the advantages a firm enjoys when the CEO has a reputation for excellent leadership (an advantage our study confirms), but little research has been done on how this plays out in interactions with highly reputed others. We’ve all heard about the romance of leadership, a belief verging on mysticism about what great chief executives can lead companies to achieve. But, although we don’t hear quite as much about it, there’s also a romance of stock analysts, who, as Harvard’s Boris Groysberg informs us, have been variously described by seasoned investors as ‘Diogenes with a lamp’ or ‘a Renaissance man’ or a ‘course fixed on truth.’ Our findings suggest that the romance of analysis exceeds the romance of leadership, at least where the investment community is concerned.”

The researchers found a pattern among upgrades that was a somewhat reduced mirror image of the pattern for downgrades. Once again, rating changes by star analysts had the greatest impact on the market. And, once again, the market response to star-analyst changes was about the same no matter the number of awards garnered by CEOs, the average market-adjusted response to their upgrades being between 3.27 percent and 3.29 percent, whether the CEO was a non-honoree or a five-timer.

In contrast, the mean response to upgrades by non-star analysts ranged from 1.86 percent for firms with five-time-honoree CEOs to 2.29 percent for companies of non-honorees, a 23 percent greater boost for the latter group. Why do firms of pedestrian CEOs receive this significantly greater bump? As the professors explain, “Increased expectations for future performance will cause shareholders to react less positively to upgrades by analysts because their expectations that star CEOs will continue to deliver high levels of performance are already reflected in the firm’s value.”

The study draws on large databases of corporate, financial, and market information compiled over a 13-year period. CEO reputation is determined by the number of leadership awards bestowed on a chief in the five years previous to a given year by seven leading business magazines. Analyst stardom is gauged by selection to one of the all-American teams published annually by Institutional Investor magazine through worldwide surveys of money managers at large investment and hedge funds, a select group that constitutes about 17 percent of analysts. The study’s total of about 19,500 downgrades and 17,400 upgrades each consisted of a change of one point or more in recommendations that ranged from 1/strong buy to 5/strong sell.

As would be expected, the researchers controlled for many factors that can influence the effects of changed recommendations, including those related to analysis (such as extent of analysts’ experience or number of a firm’s upgrades or downgrades in the prior two weeks); those related to firms themselves (such as size, diversification, past profitability, and percent of institutional ownership); and those associated with company management (such as board size, CEO duality, and CEO tenure).

CEOs were recipients on average of 1.25 prestigious awards for leadership over five previous years, the study reveals. For the entire sample, each prior award reduced market reaction to a downgrade by an average of 3% and (because of higher market expectations for superior leadership) reduced reaction to an upgrade by 4%. In addition to finding that recommendation changes by star analysts amplified changes in market response compared to those resulting from changes by non-stars, the professors found that “firms being covered by star analysts received more upgrades and downgrades,” a finding that suggests that “star analysts may simply have more discretion in changing the recommendations they issue, and may also have a greater incentive in making changes in order to maintain their recommendation’s accuracy.”

It was also discovered that firms led by CEOs who had received one or more awards generally elicited more recommendation changes than others, which, the professors speculate, may be attributable to analysts’ seeking to “garner attention.” At the same time, “having a large number of CEO awards decreased the number of downgrades a firm received by star analysts.” The two findings lead the authors to observe that “firms led by star CEOs receive greater scrutiny in general…but CEO reputation may offset that scrutiny for star analysts.”

In conclusion, the authors wonder if, given that “star analysts move markets dramatically and are generally more likely to issue recommendation changes…it might be worthwhile [re]considering to what types of firms they are assigned. Markets may function more effectively if these influential analysts are distributed more evenly across all firm sizes and types.”

Adds Boivie: “Instead of having so much insight, and influence clustered around a relatively small number of the sexiest firms, maybe that talent can be of more service covering a more varied group. Instead of having three or four all-stars covering Google or Apple, maybe we could do as well with one or two.”

The paper, “Understanding the Direction, Magnitude, and Joint Effects of Reputation when Multiple Actors’ Reputations Collide” is in the February/March issue of the Academy of Management Journal. This peer-reviewed publication is published every other month by the academy, which, with more than 18,000 members in 123 countries, is the largest organization in the world devoted to management research and teaching. The Academy’s other publications are Academy of Management Review, Academy of Management Perspectives, Academy of Management Learning and Education, Academy of Management Annals and Academy of Management Discoveries.

Categories: Departments, Faculty, Mays Business, Research Notes, Texas A&M

Marketing Professor Leonard Berry’s research article “Managing the Clues in Cancer Care” was recently published by the Journal of Oncology Practice. The paper provides a framework recommended for cancer centers to implement in order to improve their services.

It was written in collaboration with Dr. Joseph O. Jacobson, chief quality officer of the Dana-Farber Cancer Institute and associate professor of medicine at Harvard Medical School, and Dr. Brad Stuart, chief executive officer of Advanced Care Innovation Strategies (ACIStrategies.com) in Forestville, Calif., and chief medical officer of Coalition to Transform Advanced Care (C-TAC.org)

The article outlines the importance of managing certain clues that act as stimuli to patients, eliciting either positive or negative emotions. These clues – identified as functional, mechanic and humanic – involve the perceived technical quality of the service, tangible aspects of the facility itself and the ability of the employees to interact effectively with the patients, respectively. Managing these clues well can make a frightening and emotional service experience much more positive in the eyes of the patient.

Berry is a University Distinguished Professor of  Marketing at Mays Business School and a Senior Fellow of the Institute for Healthcare Improvement in Cambridge, Mass. He has been an influential voice in the marketing and healthcare industries for many years. His research at Mayo Clinic and other high-performing healthcare facilities have translated into 10 books and extensive research on healthcare services. As a marketing professor at Mays Business School, Berry founded the Center for Retailing Studies and earned many awards, including Distinguished Achievement Awards in both teaching and research and the Lifetime Achievement Award at Mays.

For the full paper, go http://mays.tamu.edu/research/managing-the-clues-in-cancer-care/

 

Categories: Marketing, Mays Business, News, Research Notes, Texas A&M, Uncategorized

Drone project

 (Note: This is the first in a series of stories about research projects that have received I-Corps funding.)
A team of Texas A&M University engineers has been accepted into the NSF Innovation Corps (I-Corps) program, which is managed by the Center for New Ventures and Entrepreneurship (CNVE) of Mays Business School.

I-Corps™ is a set of activities and programs that prepares scientists and engineers to extend their focus beyond the laboratory and broadens the impact of select, NSF-funded, basic-research projects.

The latest Texas A&M team to receive the funding is from the Department of Mechanical Engineering in the Dwight Look College of Engineering. The team is made up of Andrea Strzelec, Ph.D. (principal investigator), Brian Musslewhite (entrepreneurial lead) and Dale Cope, Ph.D. (industry mentor). This team’s innovation to be tested is a miniaturized emissions sensor that is mounted on a drone that can be deployed to difficult and/or dangerous locations to analyze the existing environment. Strzelec has served as PI on a previous I-Corps team and recognizes the high value of this training and how it impacts her research.

The CNVE has played a key role in team formation, guidance and mentoring of the team.

I-Corps is a public-private partnership program that solicits three-member teams – composed of an academic researcher, a student entrepreneur and an industry mentor – to participate in an intensive seven-week program to determine commercialization opportunities for their innovations. Selected I-Corps teams are receive $50,000 in NSF grant funding to support their efforts in the combined on-site and online curriculum, which is based on the Lean LaunchPad Methodology for business model validation.

CNVE maintains a dedicated I-Corps program that is focused on discovering, recruiting and encouraging scientists and engineers to participate in this program which is designed to discover the true commercial capabilities of research innovations. Charles (Chuck) Hinton leads the CNVE’s efforts as part of the Southwest I-Corps Node (http://swicorps.org), one of seven national partnerships of universities funded by NSF to support I-Corps expansion. Texas A&M, UT-Austin, Rice University and Texas Tech University share responsibilities for promotion of this high-impact program and recruitment of I-Corps Team applicants.

At Texas A&M, 11 teams with grants totaling $550,000 have been assembled from the colleges of Agriculture & Life Sciences, Engineering and Science, as well as Texas A&M Engineering Experiment Station, Prairie View A&M, Texas A&M Health Science Center specializing in biochemistry, computer science, material science, mechanical engineering, chemical engineering, physics, biomedical engineering, electrical & computer engineering, biological and agricultural engineering, entomology, and environmental and occupational health.

About CNVE:  Through a combination of entrepreneurial-focused curricular and experiential opportunities, the CNVE seeks to enhance the livelihood of Texas A&M University and the greater community. Since its inception in 1999, the CNVE has served as the hub of entrepreneurship for Texas A&M University.3logos

Categories: Centers, Mays Business, Research Notes, Staff, Students, Texas A&M

Mays Business School Marketing Professor Leonard Berry co-wrote an article for Harvard Business Review on improving customer service in high-emotion customer experiences like cancer care. In “When the Customer is Stressed,” Berry and his colleagues identify reasons why certain services provoke high emotions. They also provide guidelines for ways organizations can design these services to better anticipate and respond to customers’ emotional needs.

The article is available online at https://hbr.org/2015/10/when-the-customer-is-stressed? and in the October 2015 print issue of the Harvard Business Review.

Berry conducted the research for the article with Scott W. Davis, a postdoctoral fellow at the Jones

Graduate School of Business at Rice University who studied at Mays; and Jody Wilmet, the vice president for oncology, diagnostics and hospital physicians at Bellin Health Systems in Green Bay, Wisc.

The team chose to focus on cancer care in part because Berry is conducting an ongoing study of how to improve the service journey that adult cancer patients and their families take from diagnosis through treatment, recovery and in some cases end-of-life care. So far, the research has involved interviews with more than 350 cancer patients, family members, oncologists, surgeons, oncology nurses, nonclinical staffers, and leaders of health care organizations, primarily at 10 highly reputed cancer centers in nine U.S. states.

Berry is a Senior Fellow with the Institute of Healthcare Improvement in Cambridge, Mass. He is Distinguished Professor of Marketing and holds the M.B. Zale Chair in Retailing and Marketing Leadership in the Mays Business School at Texas A&M University. He is the founder of Texas A&M’s Center for Retailing Studies and served as its director from 1982 through June 2000. He is a former national president of the American Marketing Association. He has written the books Management Lessons from Mayo Clinic, Discovering the Soul of Service, On Great Service, Marketing Services: Competing Through Quality and Delivering Quality Service.

Berry

Berry

Categories: Faculty, Mays Business, News, Research Notes, Texas A&M, Uncategorized

The Center for Retailing Studies at Mays Business School has partnered with Retail TouchPoints and CashStar to identify a new profile of empowered and engaged digital shoppers.

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Ram Janakiraman, a marketing professor and a Mays Research Fellow, was the lead researcher for the project. He analyzed survey data from Retail TouchPoints, the online publishing network for retail executives, to profile the influential “Brand Maven,” or enthusiastic brand advocate.

“It was good to get the reassurance that both digital and social media were the two big channels for consumers when it comes to engagement and interaction,” Janakiraman said. “I expected that people would prefer to use gift cards, but there was overwhelming evidence that digital technology is present throughout many transactions of retailers.”

The report, published by CashStar – a leader in prepaid commerce solutions such as branded gift cards – stands to influence the way retailers interact and view the impact of branded currency and behavior of usage. Its findings also explain how the relationship between a consumer and digital payment evolves, from the introductory point of giving or receiving a gift card to the transition into becoming a loyal customer.

According to Janakiraman, Brand Mavens are among us, with more than 53 percent representing the current shopping population and contributing approximately $1,800 of purchasing power annually through redeemable gift cards and loyalty credits.

Pleased with the collaboration efforts of Texas A&M University with CashStar and Retail TouchPoints, Kelli Hollinger, director of the Center for Retailing Studies, shared the impact of generating thought leadership. “By leveraging the unique analytical expertise of [our] faculty, the Center for Retailing Studies can help retailers identify their best customers or in this case, Brand Mavens, and quantify their financial value to a firm,” Hollinger said.

Last fall, the Center for Retailing Studies and Janakiraman partnered with Knights Apparel and Texas A&M University for the Back-to-College Roadshow promotional campaign, measuring the impact of social media engagement and evaluating sales of Aggie apparel at Costco Wholesale locations across the state.

According to Hollinger, partnerships like these can help “retailers better know where to invest their money to improve marketing efficiency and effectiveness.”

Janakiraman agrees.

“As researchers, we take a lot of pride working through case studies, marrying practice with academia,” he said. “But each time I work with the Center for Retailing Studies, I learn a lot.”

See the full report at CashStar.com.

ABOUT MAYS BUSINESS SCHOOL

Texas A&M University’s Mays Business School educates more than 5,900 undergraduate, master’s and doctoral students in accounting, business, finance, management, management information systems, marketing and supply chain management. Mays consistently ranks among the top public business schools in the country for its undergraduate and MBA programs, and for faculty research. The mission of Mays Business School is creating knowledge and developing ethical leaders for a global society.

Categories: Centers, Mays Business, Research Notes, Texas A&M

Michael A. HittMays Business School’s inaugural Lifetime Achievement Award for Research and Scholarship was awarded to Michael A. Hitt, a University Distinguished and Joe B. Foster ’56 Chair in Business Leadership.

During the recognition program for Hitt, Mays Dean Jerry Strawser said, “We are starting a new tradition in a place that’s full of traditions. We wanted to bring in pioneers and thought leaders in the field.”

Hitt entered the management field 40 years ago, and he spoke on the day of his award about the numerous changes in the field over time. “A lot of the work we do is important on even a broader scale,” he said, adding that the study of management is now global.

Data for research is much more available now than it used to be, but he said basic scientific research is still the basis of all reputable research.

Hitt said the important questions of academia are: What is the impact of your work? And how do you measure it? Strawser said Hitt’s research findings “direct the work of other scholars and the course of future study in the academic profession.” In addition, he said, Hitt “studies relevant issues that affect the business world and impact economic development.”

When Hitt’s impact on audiences – both within his field and outside of academia – is measured by any scale, it always ranks highly. An article in the Academy of Management Perspectives named him as one of the 10 most-cited authors in management over a 25-year period. The Times Higher Education in 2010 listed him among the top scholars in economics, finance and management, and he was first among management scholars (tied), with the largest number of highly cited articles.

Hitt targeted the younger audience members when he spoke to a group of colleagues and students at the award program, offering this checklist of advice:

  • Whatever you do, do it well.
  • Think long-term.
  • Do work for which you have a passion.
  • You’re going to have pressure to do it all well.
  • There are no short cuts.

About Mays Business School

Texas A&M University’s Mays Business School educates more than 5,000 undergraduate, master’s and doctoral students in accounting, finance, management, management information systems, marketing and supply chain management. Mays consistently ranks among the top public business schools in the country for its undergraduate and MBA programs, and for faculty research. The mission of Mays Business School is creating knowledge and developing ethical leaders for a global society.

Categories: Faculty, Research Notes, Texas A&M

Nathan Y. Sharp, Assistant Professor at Mays Business SchoolNathan Y. Sharp, Assistant Professor at Mays Business School

A new study of 365 sell-side financial analysts shows that private phone calls with managers remain an essential source of analysts’ earnings forecasts and stock recommendations — even in light of regulations limiting businesses’ selective disclosure of financial information.

More than half of the analysts surveyed by a team of accounting researchers said they make direct contact with executives of companies they cover five or more times per year. The direct contact with management is so important that one analyst said his company hired an FBI profiler to train analysts “to read management teams, to tell when they’re lying, to tell when they were uncomfortable with a question. That’s how serious this whole issue has become.”

“Our intent was to peer inside the “black box’ and provide new insights about the pressures and incentives analysts face. One key finding is that more than a decade after the passage of Regulation Fair Disclosure (FD), analysts report that private conversations with managers are among their most valuable sources of information,” said Nathan Y. Sharp, assistant professor at Texas A&M University’s Mays Business School, who conducted the study with professors at Temple University, The University of Georgia and The University of Texas at Austin.

The survey also finds that accurate earnings forecasts and profitable stock recommendations have relatively little direct impact on analysts’ compensation. These findings are derived from a study titled Inside the Black Box of Sell Side Financial Analysts, which presents results of a 23-question survey focused on analysts’ incentives, as well as 18 detailed follow-up interviews.

The study offers insights into an area that is understudied by researchers of the financial industry. While hundreds of articles have sought to predict financial analysts’ choices using models and statistics, few have peered into the “black box” of the organizational contexts and personal psychologies that drive analysts’ decision-making.

The study’s findings also serve as a potential commentary on the Securities and Exchange Commission’s Regulation Fair Disclosure (Reg FD), launched in 2000 to limit selective disclosure of market-moving information to analysts or other key stakeholders prior to the general public.

But respondents noted that companies’ public conference calls discussing quarterly earnings are often followed by one-on-one conversations between analysts and chief financial officers. According to one analyst: “We’re almost back to where we were pre-Reg FD, but not quite because that backroom chatter is shut down. It’s just now it’s not in the backroom; it’s everywhere.”

More insights from the survey include:

  • Approximately one quarter of analysts feel pressured by supervisors to lower their earnings forecasts, presumably because outperforming forecasts pleases investors.
  • Approximately one quarter of analysts feel pressured by supervisors to raise their recommendations, presumably because it is easier to get their clients to buy rather than to sell the stocks they recommend.
  • While only 35 percent of analysts said the profitability of their stock recommendations were a very important determinant of their compensation, 67 percent cited “standing in analyst rankings or broker votes” as central to their compensation.
  • Only half of analysts considered primary research “very useful” in forecasting earnings or recommending stocks.

The study was conducted by Nathan Y. Sharp, Assistant Professor at Texas A&M University’s Mays Business School; Lawrence D. Brown, Seymour Wolfbein Distinguished Professor of Accounting at Temple University’s Fox School of Business; Andrew C. Call, Assistant Professor at University of Georgia’s Terry College of Business; and Michael B. Clement, Professor at the University of Texas at Austin’s McCombs School of Business. The full text is available on Social Science Research Network at http://ssrn.com/abstract=2228373.

About Mays Business School

Texas A&M University’s Mays Business School educates more than 5,000 undergraduate, master’s and doctoral students in accounting, finance, management, management information systems, marketing and supply chain management. Mays consistently ranks among the top public business schools in the country for its undergraduate and MBA programs, and for faculty research. The mission of Mays Business School is creating knowledge and developing ethical leaders for a global society.

Categories: Faculty, Research Notes, Texas A&M

Rishika Rishika
Rishika Rishika

Ramkumar Janakiraman
Ramkumar Janakiraman

More fans on a company’s Facebook page can help generate more income, indicates a research study conducted by four professors, including two from Mays Business School at Texas A&M University.

The study shows social media participation helps strengthen the bond between the customer and the firm, generating 5.6 percent more revenue and about 5 percent more in-person visits than among non-participating customers.

The researchers were Rishika Rishika and Ramkumar Janakiraman, both marketing professors at Mays; Ashish Kumar from Aalto University; and Ram Bezawada from the University at Buffalo, N.Y.

This study has been published in a special issue of the journal Information Systems Research titled “Social Media and Business Transformation.”

Companies have long questioned the return on investment of resources needed to operate social media sites. Previously, there was no individual-level data connecting customers’ participation in a firm-hosted social media site and their actual purchase behaviors. This study gives business managers a better understanding of the return on their investment in social media. In particular, the study uses novel behavioral data and helps understand the link between social media participation and the number of customer purchases.

Building online communities, personalizing messages and encouraging contributions from online members enhances the customer experience. It also increases the frequency of customer shopping visits and promotes sales overall, the research indicated. The keys to success include maintaining a user-friendly site, sending regular updates about events, personalizing key messages to customers, and encouraging customer-firm interaction through these messages.

“Anyone can open a Facebook page and post, but good firms do something with that interaction – they capitalize on that engagement,” explains Janakiraman. Jason’s Deli, for instance, follows up on customer complaints posted on its social media sites, and large firms boast about the number of fans they have. “We argue social media is good for the business because it helps the customers. They have easy access to information, it pops up on their screens. And reviews come in from other fans in the community.”

By fostering an online relationship between the customer and the firm, customers can be segmented based on purchase history and their prior interactions with the firm. Market segmentation is essential, since not all customers respond to social media equally.

About Mays Business School

Texas A&M University’s Mays Business School educates more than 5,000 undergraduate, master’s and doctoral students in accounting, finance, management, management information systems, marketing and supply chain management. Mays consistently ranks among the top public business schools in the country for its undergraduate and MBA programs, and for faculty research. The mission of Mays Business School is creating knowledge and developing ethical leaders for a global society.

Categories: Research Notes, Texas A&M

Prior research finds that there is substantial variation in firms’ ability to avoid income taxes. One possible determinant of this tax avoidance variation is the influence of industry expertise of a firm’s external auditor.

In other words, the tax-specific expertise of the external auditing company a firm hires potentially makes a big difference in companies’ level of tax avoidance, and ultimately, net income.

Wang
Wang

Thomas Omer
Omer

McGuire
McGuire

Mays Business School faculty members and researchers Sean McGuire (an assistant professor in accounting), Thomas Omer (Ernst & Young Professor of Accounting) and Dechun Wang (assistant professor in accounting) set out to investigate the relationship between firms’ level of tax avoidance and the proficiencies of the external auditing companies those firms were hiring.

“We started this project because we were interested in the influence of the external audit firm on their clients’ tax avoidance activities,” says McGuire. “Many corporations hire their external audit firm to provide tax services in addition to their audit services. Accordingly, our goal was to investigate whether the tax expertise of audit firms that provide tax services to their client influences their clients’ level of tax avoidance.”

McGuire defines tax avoidance as “any strategy that reduces a firm’s tax liability, used by companies to generate cash savings and increase after tax earnings by reducing their tax expense.”

“Consistent with other academic research,” he explains, “we view tax avoidance as a continuum that ranges from clearly legal strategies, like investments in municipal bonds, to those of questionable legality, like tax shelters.”

The research relied on previous audit studies that define expertise in terms of industry and audit office fees. Two types of industry expertise were identified to measure the level of expertise in firms: overall expertise and tax expertise.

Both overall and tax expertise are designed to capture an audit firm’s tax expertise within a particular industry and city office. However, overall expertise includes audit expertise, rather than solely the firm’s level of tax proficiency.

To gather the information, McGuire says the researchers estimated companies’ tax-specific industry expertise based on an audit firm’s market share in a given industry and city. “We calculated market share using publicly available data from Audit Analytics,” McGuire shares.

The results of the research found that firms who hire industry experts exhibit higher levels of tax avoidance relative to firms that do not hire industry experts.

McGuire expounds upon the research results, saying, “I think the most interesting finding is that the clients of audit firms that have overall expertise, i.e. combined audit and tax expertise, exhibit high levels of tax avoidance. This finding suggests that the combined tax and financial reporting expertise of audit firms allows them to develop tax strategies that benefit their clients from both a tax and financial statement perspective.”

The research results provide a number of significant contributions to tax avoidance literature. Not only do the findings contribute to the stream of research investigating the variation in firms’ tax avoidance activities, but they also provide evidence on the association between the industry expertise of the firm’s external auditor and the firm’s tax activities.

According to McGuire, prior research documents substantial variation in firms’ level of tax avoidance. “Given that there are obvious benefits to avoiding income taxes (higher net income), it is important to understand why some firms are more successful than others in avoiding income taxes,” he says. “It is also interesting to examine whether the industry expertise developed by audit firms (in terms of tax-specific expertise and auditing expertise) influences the tax avoidance of their clients.”

Categories: Research Notes

Companies who produce items such as biochemicals, ready concrete, milk, eggs and even DVDs always arrive at an important question: What is the quickest, most effective way to distribute these short shelf life products?

Neil Geismar, an associate professor in the department of Information and Operations Management at Texas A&M University, along with fellow researchers Milind Dawande and Chelliah Sriskandarajah from the University of Texas at Dallas, explored the solutions to these companies’ issues with distribution of perishable products.

Neil Geismar
Geismar

The zero-inventory production and distribution problem (ZIPDP) is a common problem encountered in situations in which a product cannot be inventoried because of its short shelf life. Short shelf life is determined by either physical characteristics (such as perishable food items or chemicals) or by the limited duration of market interest (such as magazines, DVDs and electronic games).

Geismar’s research was initiated at the request of the Vice President of Operations at Blockbuster, Inc.’s, distribution center in McKinney, Texas. “He asked us for help to make his system run more efficiently,” Geismar explains. The facility supports 5,600 retail stores via 40 regional hubs, or “pool points.”

“Quick delivery of DVDs to the retail outlets is important because DVDs have an extremely short product life cycle, which can be attributed to the ephemeral nature of most entertainment products, to the release of new titles on DVD every week, and to the release date requirements imposed by the movie studios,” Geismar says.

ZIPDP’s challenge is to coordinate the production and transportation operations so that the total cost of operations is minimized while the product lifetime and the delivery capacity constraints are satisfied. Geismar puts it this way: “The product’s limited lifetime implies that no inventory can be held between production and delivery; hence, the two functions are tightly coupled.”

ZIPDP answers some of the following questions:
  • When and how much should be produced at the plant?
  • Should the production rate be increased?
  • How many delivery trucks should be hired?
  • When should the trucks leave the plant?

The researchers examined a popular method of distribution, the pool-point delivery model, which is also known as the “hub-and-spoke” delivery model. In pool-point distribution, the product or service is delivered to dispersed clusters of demand points by first delivering large quantities to pool points (hubs), which are centrally located in their respective clusters. The large quantities of products are then dispersed into small carriers for point-to-point connections (spokes).

This system is used by a wide variety of industries: airlines (large jets fly between hubs, small ones from hubs to other cities), freight distribution, light petroleum products, candy distribution, automobile distribution, and newspaper delivery. Each of these industries requires two steps of distribution—first to the “hubs,” then to the “spokes.”

Combining pool-point distribution and zero-inventory products is no simple feat. Geismar’s research discusses a few real-world examples of this type of distribution, including the production and distribution of ready concrete for the construction of venues for the 2004 Athens Summer Olympics. This example served as a case study for the researchers to investigate when considering the production and distribution of Blockbuster DVDs.

Geismar says the research primarily focused on two objectives relevant in the practice: Minimizing the sum of production and delivery time, and minimizing the total cost for producing and delivering products. The research also examined minimizing mean flow time, minimizing maximum lateness, and minimizing the number of late deliveries in the pool point distribution system.

The research details how these systems operate and provide “efficient algorithms to find optimal schedules for various objectives,” the research states.

The researchers’ paper was the first rigorous study of pool-point distribution in a zero-inventory system. Geismar notes that managers’ supply chain decisions are based on production times, delivery times, the cost to hire each truck, and the cost to increase the production rate, so the results of the study proved effective and beneficial to companies facing distribution issues similar to Blockbuster.

Geismar’s research sums it up this way: “By analyzing overall system cost, we provided managerial insights into how different costs for trucks and for production rates affect the optimum decisions on how many trucks to hire and on which production rate to use for various objectives.”

Categories: Research Notes