L23_SupplyChain - Lecture 23 Part II Supply Chain Coorditor Slide 1 Le a rning O b je c tive s Slide 2 Slide 3 IncentiveConflicts Badeconomistjoke

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Slide 1 Lecture 23 – Part II Supply Chain Coorditor
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Slide 2 Le a rning  O b je c tive s Understand incentive conflicts in supply chain Understand techniques of supply chain coordination
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Slide 3 Coordination through Contracting
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Slide 4 Incentive Conflicts  Bad economist joke Q: What is worse than one monopolist? A: Two monopolists   in a vertical channel. Suboptimal supply chain performance occurs because of  double  marginalization    each firm makes decisions based on its own margin,  NOT the supply chain s margin.  Supply chain performance can be significantly improved Consumer can be much better off (increased satisfaction) . if decision making is centralized
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Slide 5 Blockbuster in 1998 Demand for a movie newly released video cassette typically starts high  and decreases rapidly Peak demand last about 10 weeks Blockbuster purchases a copy from a studio for  $65  and rent for  $3 Hence, retailer must rent the tape at least  22  times before earning  profit (breakeven) Retailers cannot justify purchasing enough to cover the peak demand In 1998, 20% of surveyed customers reported that they could not rent  the movie they wanted 
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Slide 6 Blockbuster in 1998 Starting in 1998 Blockbuster entered a  revenue sharing agreement  with  the major studios Studio charges  $8  per copy Blockbuster pays  30-45%  of its rental income Even if Blockbuster keeps only half of the rental income, the breakeven  point is  6  rental per copy The impact of revenue sharing on Blockbuster was dramatic Rentals increased by 75% in test markets Market share increased from 25% to 31% (The 2nd largest retailer,  Hollywood Entertainment Corp has 5% market share)
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Slide 7 A Sunglass Supply Chain   Centralized Zamatia produces sunglasses for c = $50. Umbra Visage (UV) retails them for  p=$125 and liquidates them for v=$25. Supply chain s best decision (If Zamatia owns UV) Overage cost: Co =  50    25 = 25 Underage cost: Cu = 125    50  = 75 Critical ratio: 75/(25+75) =  75%
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Slide 8 A Sunglass Supply Chain  Centralized  Supply chain has a ratio 75% and orders Q=300 Demand  (D) Pr(D) Sales =Min(D,300) Sales X  Pr(D) 100 25% 100 25 200 25% 200 50 300 25% 300 75 400 25% 300 75 Expected demand = 250 Expected sales = 225 Expected lost sales = 25 Expected leftover inventory = 75 
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This note was uploaded on 10/16/2011 for the course OM 335 taught by Professor Jonnalagedda during the Fall '08 term at University of Texas at Austin.

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L23_SupplyChain - Lecture 23 Part II Supply Chain Coorditor Slide 1 Le a rning O b je c tive s Slide 2 Slide 3 IncentiveConflicts Badeconomistjoke

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