Supply Chain Contracts

Rohit Kapoor

Coverage
25-08-2015

Introduction
Learning:
Self-Optimization will lead to less than
optimal SC profit

Further
While Rayban and Nayan Optics earn
an expected profit $14,857

Why does current supply chain

perform significantly worse than it
could?
Nayan does not order enough Bassanos
233 vs. 403

A Concept
Nayans trepidation w.r.t to ordering
is due to a phenomenon known as
Double marginalization

Options
Reduce the wholesale price
Increases the Cu
Decreases the Co

A Comparison

Cu
Co
Critical Ratio
Z
Q
Expected Sales
Expected Leftover
Inventory
Nayan's Expected Profit
Rayban's Expected Profit
Tota Supply Chain Profit

$35
$80
$10
0.888888
9

Wholesale Price
$65
$75
$50
$40
$40
$50
0.55555555 0.44444444
6
4
0.13971029 0.13971029
9
9
267.463787 232.536212
4
6
208.378214 190.914427
9
5
59.0855724 41.6217851
8
2

$85
$30
$60
0.33333333
3
0.43072729
9
196.159087
6
168.656086
6
27.5030010
3

1.220640
3
402.5800
4
243.2789
5
159.3010
9
$17,869.3
1
$8,055.49 $5,555.49
$3,409.50
8023.91362 9301.44850 9807.95437
0
1
6
9
$17,869.3
1
$16,079.40 $14,856.94 $13,217.46

Further Concepts
Is it a zero-sum game?

Part II
Problem Context
Analysis
Cu = 40
Co = 1.5
Q?
475
Expected leftover inventory
227 units
Nayans profit
$9,580
Increase from $5,580 (with no refunds or
returns)

Part II
Rayban
Expected profit?
Has several components
Selling 475 units to Nayan at the beginning of the season
475 * $75 = $35,625
Production cost
475 * $35 = $16,625
Buy-back from Nayan
227 * $75 = $17,025
Collects in salvage
227 * $26.5 = $6,016
Combining
$7,991

Buy-Back Contracts

Wholesale Price
Buy-Back Price
Cu
Co
Critical Ratio
Z
Q
Expected Sales
Expected Leftover
Inventory
Nayan's Expected Profit
Rayban's Expected Profit
Tota Supply Chain Profit

$75
$75
$55
$65
$40
$40
$21.50
$11.50
0.650406 0.77669902
5
9
0.386418 0.76109229
2
6
298.3022
7
345.136537
220.6058 233.916053
9
2
111.220483
77.69638
8
$7,153.76 $8,077.61
$9,717.74 $9,523.47
$16,871.5
1
$17,601.08

$75
$85
$75
$75
$40
$30
$1.50
$11.50
0.96385542 0.72289156
2
6
0.59145310
1.79729275
5
474.661593 323.931638
7
1
248.203356 228.621382
7
9
95.3102551
226.458237
8
$9,588.45 $5,762.57
$8,003.24 $11,574.03
$17,591.69 $17,336.61

Equation Based Optimal

Solution
Wholesale Price
$35
Buy-Back Price
$27
Cu
$80
Co
$10.00
Critical Ratio
0.89
Z
1.22
Q
402.58
Expected Sales
243.28
Expected Leftover
Inventory
159.30
Nayan's Expected
Profit
17869.31
Rayban's Expected
Profit
0.00
Tota Supply Chain $17,869.
Profit
31

$45
$38
$70
$8.75
0.89
1.22
402.58
243.28

$55
$49
$60
$7.50
0.89
1.22
402.58
243.28

$65
$60
$50
$6.25
0.89
1.22
402.58
243.28

$75
$72
$40
$5.00
0.89
1.22
402.58
243.28

$85
$83
$30
$3.75
0.89
1.22
402.58
243.28

159.30 159.30
159.30 159.30 159.30
15635.6
4
13401.98 11168.32 8934.65 6700.99
11168.3
2233.66 4467.33 6700.99 8934.65
2
$17,869. $17,869. $17,869. $17,869. $17,869.
31
31
31
31
31

$95
$94
$20
$2.50
0.89
1.22
402.58
243.28

$105
$105
$10
$1.25
0.89
1.22
402.58
243.28

159.30

159.30

4467.33 2233.66
13401.9 15635.6
8
4
$17,869. $17,869.
31
31

Supply Chain Contracts

Quantity Discounts
Options Contracts
Revenue Sharing
Quantity Flexibility Contract
Price Protection

Quantity Discount
Two types
All units discount
Incremental discount

Options Contract
A buyer pays one price to purchase
options
Another price to exercise the option

These options are used when buyer

wants a supplier to build extra capacity

Revenue Sharing
A retailer pays a wholesale price per
unit to a supplier
But then also pays a portion of the
revenue earned on that unit

Quantity Flexibility Contract

Sun-Microsystem vs Sony
Product: Monitor
25% QF?

Price Protection
Supplier keeps on cutting the
wholesale price frequently and
without notice!
E.g., 1000 PC at $2000 each
Price reduced to $1800 each next week