Quality in Supply Chain Design Supply Chain Contracts
Outline Introduction Global Optimization Contracts for Strategic Components Make-To-Order Supply Chain Contracts Buy-Back Contracts Revenue-Sharing Contracts Make-To-Stock Supply Chain Contracts Pay-Back Contracts Cost Sharing Contracts Contracts for Nonstrategic Components Long-Term Contracts Option Contracts Spot Purchase 4
2-Stage Sequential Supply Chain A buyer and a supplier. Buyer’s activities: generating a forecast determining how many units to order from the supplier placing an order to the supplier so as to optimize his own profit Purchase based on forecast of customer demand Supplier’s activities: reacting to the order placed by the buyer. Make-To-Order (MTO) policy 5
Swimsuit Example 2 Stages: a retailer who faces customer demand a manufacturer who produces and sells swimsuits to the retailer. Retailer Information: Summer season sale price of a swimsuit is $125 per unit. Wholesale price paid by retailer to manufacturer is $80 per unit. Salvage value after the summer season is $20 per unit Manufacturer information: Fixed production cost is $100,000 Variable production cost is $35 per unit 6
Sequential Supply Chain Retailer 7
What Is the Optimal Order Quantity? Retailer optimal policy is to order 12,000 units for an average profit of $470,700. If the retailer places this order, the manufacturer’s profit is 12,000(80 - 35) - 100,000 = $440,000 Expected supply chain profit : $470,700+ $440,000 =910,700 8
Global Optimization Strategy What is the best strategy for the entire supply chain? Treat both supplier and retailer as one entity Transfer of money between the parties is ignored 9
Global Optimization Profit using global optimization strategy: Swimsuit Example 10
Global Optimization: Swimsuit Example Relevant data Selling price, $125 Salvage value, $20 Variable production costs, $35 Fixed production cost, $10,000 Optimal production quantity = 16,000 units Expected supply chain profit = $1,014,500. 11
What is the difference? Global Optimization Expected supply chain profit = $1,014,500 Local Optimization Expected supply chain profit =910,700 Difference: $1,014,500-$910,700= $103,800 12
Why Risk Sharing In the sequential supply chain: Buyer assumes all of the risk of having more inventory than sales Buyer limits his order quantity because of the huge financial risk. Supplier takes no risk. Supplier would like the buyer to order as much as possible Since the buyer limits his order quantity, there is a significant increase in the likelihood of out of stock. If the supplier shares some of the risk with the buyer it may be profitable for buyer to order more reducing out of stock probability increasing profit for both the supplier and the buyer.
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- Fall '09
- Supply Chain Management, Option contract, supply chain contracts