Supply Chain Coordination through Contracts
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Questions and Answers

What is the primary purpose of a supply chain contract?

  • To increase the administration costs associated with supply chain operations.
  • To eliminate the risks involved in production.
  • To ensure that supply chain entities take localized optimization decisions. (correct)
  • To provide a fixed price for all goods in the supply chain.

In the context of a wholesale price contract, which party typically bears the risk of demand uncertainty?

  • Manufacturer only
  • Both parties equally
  • Retailer only (correct)
  • Neither party bears any risk

What happens if a contract is not designed well in a supply chain?

  • It may lead to aligned objectives among all parties.
  • It can create conflicts in objectives hurting overall supply chain performance. (correct)
  • It will ensure optimal performance across the supply chain.
  • It guarantees a fixed price for all parties involved.

What is a characteristic of a wholesale price contract?

<p>It features a fixed wholesale price to the retailer. (A)</p> Signup and view all the answers

What is the role of incentives in a supply chain contract?

<p>They help align the incentives of different supply chain organizations. (D)</p> Signup and view all the answers

What happens to the supply chain profit as the wholesale price increases from $20 to $90?

<p>It initially increases and then decreases. (D)</p> Signup and view all the answers

At what wholesale price does the retailer profit peak according to the data?

<p>$80 (B)</p> Signup and view all the answers

What is a primary characteristic of a buyback contract?

<p>Unsold units can be returned to the supplier. (A)</p> Signup and view all the answers

Which of the following wholesale prices results in the lowest manufacturer profit?

<p>$90 (B)</p> Signup and view all the answers

Which profit tends to decrease as the wholesale price increases?

<p>Manufacturer Profit (D)</p> Signup and view all the answers

At what wholesale price is the supply chain profit equal to $7500?

<p>$50 (A)</p> Signup and view all the answers

Which characteristic is NOT associated with the buyback contract?

<p>Complete revenue sharing between seller and buyer. (D)</p> Signup and view all the answers

As the wholesale price reaches $90, which of the following is true?

<p>All profit types decrease. (C)</p> Signup and view all the answers

What is the primary advantage of the consignment model for retailers?

<p>Retailers incur no losses if actual demand is lower than estimated. (D)</p> Signup and view all the answers

In the context of the consignment model, who bears the risk of demand uncertainty?

<p>Manufacturer (C)</p> Signup and view all the answers

Why might a retailer prefer to use a consignment model when dealing with unbranded products?

<p>Retailers face lower risks without committing to purchases. (C)</p> Signup and view all the answers

What is a characteristic of discounts offered by suppliers in the context of contracts?

<p>They are based on demand thresholds above a specified level. (B)</p> Signup and view all the answers

Which of the following platforms is an example of the creator economy?

<p>TikTok and YouTube (D)</p> Signup and view all the answers

What is a potential disadvantage for retailers in a consignment model?

<p>They face opportunity costs related to space and inventory. (A)</p> Signup and view all the answers

What is the role of large platforms in the creator economy?

<p>To aggregate user-generated content and monetize it through advertisements. (C)</p> Signup and view all the answers

What is a common characteristic shared by most contracts in the creator economy?

<p>They enable risk sharing which promotes coordination. (D)</p> Signup and view all the answers

What does the parameter 'f' represent in the context of supply chain performance?

<p>The flexibility of the supplier (A)</p> Signup and view all the answers

In a decentralized supply chain, how does a decrease in 'w' affect the total quantity produced?

<p>It decreases the total quantity (A)</p> Signup and view all the answers

Which contract type provides complete risk protection for a retailer up to a certain limit?

<p>Flexible Contract (B)</p> Signup and view all the answers

What is the implication of a high value of 'SC share' in a decentralized supply chain?

<p>High supply chain efficiency (D)</p> Signup and view all the answers

If the 'profit' for the retailer decreases as 'w' increases, which statement is likely correct?

<p>Retailer's cost increases with increased 'w' (C)</p> Signup and view all the answers

Based on the information provided, what happens to the 'Manufacturer SC profit' as the efficiency increases?

<p>It increases (B)</p> Signup and view all the answers

What trend occurs with 'Total' supply chain profit as the 'f' parameter approaches zero?

<p>Total profit decreases (B)</p> Signup and view all the answers

In the scenario where 'w' is fixed, which of the following occurs as 'f' decreases?

<p>Retailer profitability decreases (C)</p> Signup and view all the answers

What formula is used to calculate the cost of understocking?

<p>p × f - w (D)</p> Signup and view all the answers

What is represented by the Critical Ratio (CSL)?

<p>The ratio of cost of understocking to the sum of costs of under and overstocking (A)</p> Signup and view all the answers

What is the expected sales calculation based on given data?

<p>Mean Demand - Expected Stockout (A)</p> Signup and view all the answers

How is expected retailer profit calculated?

<p>(Expected Sales × Price × f) - (Order × Wholesale Price) (C)</p> Signup and view all the answers

What is the calculated expected stockout when Lz = 0.399 and σ = 30?

<p>11.97 (B)</p> Signup and view all the answers

What does a higher value of 'f' indicate in the context of supply chain performance?

<p>Increased expected retailer profit (C)</p> Signup and view all the answers

What is the correct expression for calculating supply chain profit?

<p>Expected retailer profit + Manufacturer profit (D)</p> Signup and view all the answers

When analyzing supply chain efficiency, what does a profit share of 0.62 indicate?

<p>Balanced profit distribution between manufacturer and retailer (A)</p> Signup and view all the answers

Which of the following products is most likely to benefit from a buyback contract due to limited shelf life?

<p>Pharmaceuticals (B)</p> Signup and view all the answers

What is represented by 'b' in the buyback contract?

<p>Buyback value (B)</p> Signup and view all the answers

Given the parameters, if the mean demand (μ) is 100 and the standard deviation (σ) is 30, the retailer is likely to stock how many units (Q) at a buyback value of 20?

<p>90 units (C)</p> Signup and view all the answers

What effect does an increase in the buyback value 'b' typically have on the retailer's profit?

<p>It tends to increase the retailer's profit. (B)</p> Signup and view all the answers

Which of the following mathematical symbols represents the wholesale price in the buyback contract?

<p>w (D)</p> Signup and view all the answers

In the buyback contract table, what is the relationship between supply chain profit (PSC) and manufacturer profit (Pm) as the buyback price increases?

<p>Manufacturer profit tends to decrease while supply chain profit increases. (B)</p> Signup and view all the answers

What is a likely outcome when the salvage value is set to 0 in a buyback contract?

<p>Increased likelihood of losses for the retailer. (A)</p> Signup and view all the answers

How does the standard deviation (σ) affect the decision-making in a buyback contract?

<p>Higher standard deviation indicates greater uncertainty in demand. (C)</p> Signup and view all the answers

Flashcards

Supply Chain Contract

A contract between a manufacturer and a retailer which legally binds them to a specific agreement. This agreement goes beyond standard terms and conditions by defining how risks are shared and the specific payoffs for each party.

Contract Purpose

The contract aims to align the incentives of the manufacturer and retailer, allowing them to make independent but coordinated decisions that optimize the overall supply chain performance.

Wholesale Price Contract

A contractual agreement where the manufacturer sets a fixed wholesale price for the retailer. This is the simplest type with the lowest administration costs, but the retailer carries the burden of demand uncertainty.

Wholesale Price Contract: Variables

The retailer decides how much to order (Q) based on the wholesale price (W). The manufacturer's profit (Pm) depends on the production cost (c) and the quantity sold. The retailer's profit (Pr) depends on the selling price (p), quantity sold, and the wholesale price. The total supply chain profit (PSC) is the sum of both manufacturer and retailer profit.

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Supply Chain Efficiency

The performance of the contract is measured by supply chain efficiency (SC). It reflects how effectively the supply chain generates profit compared to the maximum possible profit.

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Buyback Contract

A type of contract where the supplier sells each unit to the retailer at a fixed wholesale price, and the retailer can return unsold units to the supplier for a refund.

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Risk Sharing in Buyback Contracts

The risk of demand uncertainty is shared between the supplier and the retailer.

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Industries Using Buyback Contracts

Industries like book publishing and apparel retailing often use buyback contracts.

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Supplier Incentive in Buyback Contracts

The supplier is responsible for absorbing the risk of unsold units, they are incentivized to sell more.

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Retailer Incentive in Buyback Contracts

The retailer has a greater incentive to order more units, as they can return unsold units.

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Retailer Risk Mitigation

The retailer avoids the risk of being stuck with unsold inventory.

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Supplier Cost in Buyback Contracts

The supplier may face high return costs, especially if there are many unsold units.

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Contract Negotiation Challenges

The contract may be difficult to agree on, especially if there is no clear understanding of demand.

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Buyback Value (b)

The price at which the manufacturer buys back unsold units from the retailer. This is a key variable in the Buyback Contract.

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Mean Demand (μ)

The average demand for the product in a given time period. This is important for calculating optimal order quantities.

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Standard Deviation of Demand (σ)

The standard deviation of demand, which measures the variability of demand around the mean. This helps assess risk and uncertainty.

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Optimal Order Quantity (Q)

The optimal order quantity for the retailer, determined to balance the costs of ordering too much and too little. In this case, the retailer must consider the buyback price.

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Retailer's Expected Profit (Pr)

The expected profit for the retailer under the Buyback Contract, balancing the profit from sold units and the buyback value for unsold units.

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Manufacturer's Expected Profit (Pm)

The expected profit for the manufacturer under the Buyback Contract, considering the wholesale price, manufacturing cost, and the buyback payments.

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Supply Chain Expected Profit (PSC)

The expected total profit for the supply chain under the Buyback Contract, which considers the combined profits of both the retailer and manufacturer.

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Cost of Understocking

The cost associated with having too little inventory on hand, calculated as the product of the profit per unit (p) and the fraction of demand that is unmet (f), minus the wholesale price (w).

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Cost of Overstocking

The cost associated with having too much inventory on hand, calculated as the difference between the wholesale price (w) and the salvage value (s).

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Critical Ratio (CSL)

A crucial metric used to determine the optimal inventory level, calculated as the ratio of the cost of understocking (Cu) to the sum of the cost of understocking and the cost of overstocking (Co).

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Inventory Management with Safety Stock

A common approach for managing inventory levels, where the order quantity (Q) is calculated based on the average demand (D), the safety stock (SS) to buffer against demand fluctuations, and the lead time (L).

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Expected Stockout

The expected quantity of demand that cannot be met due to insufficient inventory, calculated as the product of the lead time demand (L) and the standard deviation of demand (σ).

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Expected Sales

The expected quantity of sales, calculated as the average demand minus the expected stockout.

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Expected Excess Inventory

The expected quantity of inventory left over at the end of a period, calculated as the order quantity (Q) minus the expected sales.

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Revenue Sharing Contracts

A strategic approach to managing inventory levels that involves sharing revenue between the manufacturer and the retailer, often through a profit-sharing agreement.

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SC Efficiency

A measure of how well the supply chain is performing, calculated by dividing the actual profit by the maximum possible profit.

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Retailer's Share

The value of the retailer's share in the total supply chain profit, expressed as a percentage.

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Wholesale Price (W)

The fixed wholesale price set by the supplier for each unit sold to the retailer.

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Quantity (Q)

The quantity of goods the retailer demands from the supplier.

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Manufacturer's Profit (Pm)

The profit earned by the manufacturer based on the difference between the sales revenue and the production cost.

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Retailer's Profit (Pr)

The profit earned by the retailer based on the difference between the selling price and the wholesale price, multiplied by the quantity sold.

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Quantity Discount Contract

A contract where the manufacturer sets a fixed wholesale price for the retailer, but the price decreases as the retailer orders more units.

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Rebate Contract

The supplier offers a discount to the retailer for each unit sold above a certain threshold. This incentivizes the retailer to increase sales.

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Consignment Model

The manufacturer decides the quantity stocked at the retailer and takes on the risk of unsold inventory. The retailer only pays for the goods sold. This is common for new manufacturers and unknown brands.

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Supply Chain Coordination

A supply chain model where participants, such as manufacturers and retailers, collaborate to share risk and optimize the supply chain's overall performance.

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Creator Economy

A system where content creators produce goods like music, videos, or apps and distribute them through platforms like TikTok or YouTube. The platforms leverage advertising to finance the consumption of this content.

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Risk Sharing in supply chain contracts

This risk-sharing approach helps to ensure that both the manufacturer and the retailer are incentivized to work together to maximize their profits. This can lead to increased sales and a more efficient supply chain.

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Study Notes

Supply Chain Coordination through Contracts

  • Contracts legally bind two parties, typically manufacturers and retailers.
  • The role of supply chain (SC) contracts extends beyond the terms and conditions.
  • Contracts detail which party bears the risk and define the payoffs.
  • SC entities make local optimization decisions based on agreed-upon risk and incentives in a decentralized setting.
  • The incentives of other organizations in the supply chain are evaluated for alignment.
  • Poorly designed contracts can lead to conflicts and damage overall SC performance.

Contract Characteristics

  • Wholesale Price Contract: The supplier (upstream) offers a fixed wholesale price to the retailer (downstream).
  • The risk of demand uncertainty is borne by the retailer.
  • This contract type is the simplest and has the lowest administrative cost.

Wholesale Price Contract Detail

  • Selling Price (p) = 100
  • Manufacturing Cost (c) = 20
  • Salvage Value (s) = 0
  • Mean Demand (μ) = 100
  • Standard Deviation (σ) = 30
  • Wholesale Price (w) varies (20, 30, ..., 90)
  • Calculations for Q, Pm, Pr, and Psc are needed.

Data for Wholesale Price Contracts

(A table of data is presented, showing calculations for different wholesale prices.)

Buyback Contract

  • This contract is common with limited shelf-life products.
  • The supplier sells each unit to the retailer at a fixed wholesale price.
  • Unsold units are returned to the supplier at a buyback price.
  • The risk of demand uncertainty is shared.
  • Examples include pharmaceuticals, computer hardware, newspapers, and books.

Buyback Contract Detail

  • Selling Price (p) = 100
  • Wholesale Price (w) = 80
  • Manufacturing Cost (c) = 20
  • Salvage Value (s) = 0
  • Mean Demand (μ) = 100
  • Standard Deviation (σ) = 30
  • Buyback value (b) varies (0, 10, 20, ..., 79)
  • Calculations for Q,Pm, Pr, and Psc are needed.

Data for Buyback Contracts

(A table of data is presented, showing calculations for different buyback prices.)

Impact of Wholesale Price

  • A graph shows the relationship between wholesale price and profits for manufacturers, retailers, and the supply chain.

Markdown Money

  • Department stores use this to share risk with clothing suppliers.
  • When a product is marked down, a portion (chargeback) is passed to the supplier.

Revenue Sharing Contract

  • Common in service industries (entertainment, telecom, medical clinics, e-commerce).
  • The supplier sets a fixed wholesale price.
  • The retailer shares a portion of the sales revenue with the supplier.
  • Examples include entertainment, telecom, surgery devices, and e-commerce.

Revenue Sharing Contract Examples

  • Many firms have successfully used revenue-sharing contracts to improve supply chain performance, such as the video rental industry.
  • Blockbuster increased its market share by about 5% the year after implementing the revenue-sharing contract.

Additional Contract Examples

  • Bharti used revenue sharing programs for telecom network equipment vendors and their IT vendor.
  • Apple changed its app revenue-sharing method to 15-85 split to developers.

Phoenix Marketcity Mumbai

  • A percentage of retailer's gross sales above a minimum guarantee were sought by the mall in return for lower fixed rents.
  • The deal aimed to encourage retailers to occupy and market the new mall location.
  • However, the contract resulted in the mall receiving no rental income for the first ten months after its launch, causing business failure.

Different Revenue Sharing Contract Types and Effects

  • Different contracts (e.g., wholesale, buyback) vary in terms of the division of risk between the manufacturer and retailer.
  • Graphs and tables analyze the impacts of different choices (e.g., wholesale price, buyback value) on manufacturer, retailer, and overall supply chain profits and efficiency under varied demands.

Consignment Model

  • The manufacturer sets the quantity of goods stocked.
  • The manufacturer is responsible for the inventory until the goods are sold.
  • The retailer is not responsible for unsold goods.
  • This is common in garment and unbranded product industries.

Designing Contracts for Creator Economy

  • Large platforms attract millions of viewers.
  • The creators produce content (music, movies, games, etc.) which is financially supported by the advertisement.

Cash Flow for the Creator Economy

  • Viewers subscribe to and pay creators for high-value content.
  • Platforms take a cut from advertisements or sales from content.

Summary of Contracts and Coordination

  • Different contracts enable risk sharing and better coordination, leading to profit for both parties.

Additional Contract Types

  • Quantity Flexibility Contract: The supplier sells each unit to the retailer at a fixed wholesale price. The supplier compensates the retailer for any losses from unsold inventory.
  • Sales Rebate Contract: The supplier sells to the retailer at a fixed wholesale price. A rebate is given to the retailer for each unit sold above a certain threshold.
  • Quantity Discount Contract: Wholesale price decreases with the increasing number of ordered units.

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Supply Chain Coordination through Contracts PDF

Description

This quiz examines the essential role of contracts in supply chain coordination, particularly focusing on the wholesale price contract. It covers how contracts influence risk sharing, decision-making, and overall supply chain performance. Test your understanding of contract characteristics and their implications on supply chain efficiency.

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