homeworkchapter4supplycontracts-131109082324-phpapp02 - Home Work Chapter 4 Supply Contracts Student Name Shaheen Sardar Department Industrial and

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Home Work: Chapter 4 Supply Contracts Student Name: Shaheen Sardar Department: Industrial and Management Engineering, Hanyang University, South Korea. Home Work Chapter 4: Supply Contracts: Discussion Questions and Answers: Designing and managing the supply chain: Concepts, strategies, and cases. Book Reference: Simchi-Levi, D., Kaminsky, P., and Simchi-Levi, E., & (2008). Designing and managing the supply chain: Concepts, strategies, and cases (3 rd edition). United-States: McGraw-Hill. Problems Solutions: 1, 3, 4, 5, 8
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PROBLEM 1 Problem 1: When is a buy-back contract appropriate? When is a payback appropriate? What about an option contract? How are they related? Argue that buy-back and pay-back contracts are special types of options contracts? Answer: a) Buy-back contract is appropriate when the supplier wants to increase the order quantity placed by the buyer, and hence decreases the likelihood of out of stock. Buy back contract is appropriate in a sequential supply chain. This type of supply contract is generally implemented in order to reduce the risk of the buyer, so that he will order higher quantities from the suppliers. In the buy–back contract the supplier buys the unsold commodities from the buyer at a price that is greater than the salvage value so that the buyer involves himself in higher orders. This is generally implemented in the make-to- order type of contracts (Supply Chain) where the buyer forecasts the customer demand and orders the raw materials from the supplier and the supplier provides the exact quantities to the buyer. As it can be observed here the supplier is at risk as he needs to stock raw materials in accordance with to the buyer needs. In order to compensate the risk on the suppliers end, the supplier offers a price that is greater than the salvage value for the unsold goods from the buyer so that the risk is compensated (minimized) and the profit is optimized between the both parties and also the buyer will involve in higher amounts of orders. b) Pay-back contract is appropriate when wanting to give the manufacturer incentive to manufacture more since the risk with associated with unused capacity is decreased. In pay- back contract the buyer agrees to pay some price to the unit that the manufacturer (Supplier) produces. In this way the risk associated with the supplier is reduced, as his production capacity and utilization will be increased and he can rely on his production capacity. Whereas the risk associated with the buyer (Distributor) increases; but this reduces the inventory risks. The pay-back contract is generally implemented in a Make-to-Stock type of supply chain where the supplier stocks goods that he needs to supply to the distributor. The contract is made in such a way that all the parties involved are profited.
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