How to coordinate the uncoordinated Supply Chain? Case study approach   Abhijeet Ghadge M.Tech., IIT Kharapur INDIA
Co-ordination In Supply Chain  <ul><li>Coordination in Supply Chain refers to  Coordination of information, materials and ...
Why Supply Chain Suffers? <ul><li>When each member of supply chain tries to maximize their own profit. </li></ul><ul><li>W...
Why Coordination is Important in SCM? <ul><li>Communication and Coordination among members of a supply chain enhances its ...
Kind of coordination involve in SC <ul><li>Horizontal Coordination </li></ul><ul><ul><li>Coordination among entities invol...
Solving SCM problems through coordination  <ul><li>Location Decision of Franchisees of One Organization </li></ul><ul><li>...
1. Location Decision of Franchisees of One Organization
Location Decision of Franchisees of One Organization <ul><li>A franchise has multiple outlet to serve customers, spread ou...
Example:  Location Decision of Franchisees <ul><li>Isaac’s Ice Cream had been selling ice-creams in the city, now Isaac wa...
Example:  Location Decision of Franchisees <ul><li>Now Isaac company has two option to establish these franchisees; </li><...
Example:  Location Decision of Franchisees <ul><li>Suppose that a franchisor wishes to open two ice cream parlor along a s...
Example:  Location Decision of Franchisees MM 00 n customer MM 01 n customer MM 02 n  customer MM 04 n  customer MM 03 n  ...
Two Franchisees whose locations are coordinated by Franchisor <ul><li>If the franchisor can locate these franchisees anywh...
Two Franchisees whose locations are coordinated by Franchisor <ul><li>Total demand depends on distance traveled by custome...
Two Franchisees whose locations are coordinated by Franchisor <ul><ul><li>For Franchise 2 demand D 2 </li></ul></ul><ul><l...
Two Franchisees that control their own locations <ul><li>In this case, both franchisee try to maximize their own profit an...
2. Warehouse Decision for Organization
Warehouse Decision for Organization <ul><li>The warehouse is a point in the logistics system where a firm stores or hold r...
Example: Warehouse Decision for Organization <ul><li>Isaac’s Ice Cream has grown and now selling their products over the o...
Example: Warehouse Decision for Organization <ul><li>In second state, company pays only for storage space and ordering and...
Economic Order Quantity Costs <ul><li>Benefits of centralized warehousing in terms of economies-of-scale given by EOQ,   <...
Economic Order Quantity Costs <ul><li>Benefits of centralized warehousing in terms of economies-of-scale given by EOQ, </l...
Economic Order Quantity Costs <ul><li>The saving percent for centralized warehousing with respect to distributed warehousi...
Numerical Example: Economic Order Quantity Costs <ul><li>With regard to EOQ costs, Saving %= [1-( √N)/N]x100 </li></ul>Sol...
Risk pooling benefits in Centralized Warehousing: Newsvendor Environment <ul><li>Suppose that i th  firm choosing its opti...
Risk pooling benefits in Centralized Warehousing: Newsvendor Environment <ul><li>For Centralized SC </li></ul><ul><li>If s...
Risk pooling benefits in Centralized Warehousing: Safety Stock & Service Level <ul><li>The safety stock equals to  z σ , w...
Risk pooling benefits in Centralized Warehousing: Safety Stock & Service Level <ul><li>Saving Cost % for it coordinated SC...
Numerical Example: Cycle Service Level Z new Service levels from Z table Number of Clients 70.00% Z old  = 0.5244 80.00% Z...
3. Demand Forecasting in Supply Chain
Coordinated Demand Forecasting <ul><li>Demand of products varies from downstream to upstream in supply chain due to bullwh...
Example: Coordinated Demand Forecasting Wholesaler and Retailer work individually without sharing any information   Table ...
Example: Coordinated Demand Forecasting Wholesaler and Retailer sharing consumer’s demand information   Table 2
Example: Coordinated Demand Forecasting <ul><li>Equations for Table 1; </li></ul><ul><li>For Retailer,  </li></ul><ul><li>...
<ul><li>  * Back Order =  </li></ul><ul><li>Max[( Previous Backorder + Current Consumer demand – Previous On-hand Inventor...
<ul><li>  * In Transit Inventory for Retailer =  </li></ul><ul><li>Min[( Order Placed by Retailer + Wholesaler’s Previous ...
<ul><li>* Wholesaler’s On-hand Inventory = </li></ul><ul><li>Max[( Previous On-hand Inventory + Previous In Transit Invent...
<ul><li>* Order Placed by Wholesaler =  </li></ul><ul><li>Max[( Next Period forecast – (Wholesaler’s Current On-hand Inven...
Example: Coordinated Demand Forecasting <ul><li>From table 1, wholesaler’s forecast equal to the order received from retai...
<ul><li>Therefore wholesaler’s forecasting is equal to retailer’s forecasting. </li></ul><ul><li>When demand information i...
4. Product Pricing and Marginal cost Problem between Suppliers and Retailers
Coordinated Pricing <ul><li>Pricing of products is important factor for demand and demand vary according to pricing. </li>...
Coordinated Pricing <ul><li>In pricing, can explain by taking two cases; </li></ul><ul><ul><li>Case 1: A System with One R...
Case 1: A System with One Retailer and One Supplier <ul><li>Let Marginal cost for supplier and retailer equal to $90 and $...
Case 1: A System with One Retailer and One Supplier <ul><li>Taking Retailer and supplier as a one firm. </li></ul><ul><li>...
Case 1: A System with One Retailer and One Supplier <ul><li>Taking Retailer and supplier as two individual part of Supply ...
<ul><li>Marginal Costs = 890 – 8Q  ……(9) </li></ul><ul><li>From this equation; </li></ul><ul><li>90 = 890 – 8Q  </li></ul>...
Case 1: A System with One Retailer and One Supplier <ul><li>Retailer also will sell same quantity as supplier’s. </li></ul...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>Now in this case, One Retailer and N-1 Suppliers are involve. ...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>Now let  represent the system profit under  coordination prici...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>denote the price charged by firm  i.   </li></ul><ul><li>is a ...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>For Coordinated Supply Chain </li></ul><ul><li>If there is coo...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>For Coordinated System, Value of eq. (12) putting in eq. (10);...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>From equation 13 and 14; </li></ul><ul><li>Total profit in coo...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>For Uncoordinated Supply Chain </li></ul><ul><li>If there is n...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>Putting m=N+1; </li></ul>System contain One Retailer and N-1 S...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>The Profit of Firm m equals; </li></ul><ul><li>Putting all val...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>From above equations; </li></ul>
Case 2: A System with One Retailer and N-1 Supplier <ul><li>Putting Value of  from equation (17); </li></ul><ul><li>Profit...
<ul><li>Similarly total profit for Supply Chain; </li></ul><ul><li>Putting values of these profits; </li></ul>Case 2: A Sy...
Case 2: A System with One Retailer and N-1 Supplier <ul><li>From eq.(18) & (19),  sum series will become geometric series ...
5.  Identifying right sourcing contract for products (brief overview of different contracts)
Contracts ..a powerful tool <ul><ul><li>A powerful tool in Outsourcing/Procurement to achieve ‘global Optimization’. </li>...
Factors in selecting and negotiating the contract type <ul><li>Price competition </li></ul><ul><li>Price analysis </li></u...
Sourcing Contracts in Supply Chain <ul><li>Buyback  or Return contract </li></ul><ul><li>Quantity flexibility contract </l...
Buyback Contract <ul><li>A manufacturer specifies a wholesale price and a buyback price at which the retailer can return a...
Major results of Buyback Contracts <ul><li>Manufacturer profits and overall supply chain profits increases </li></ul><ul><...
Quantity Flexibility (QF) Contract <ul><li>Manufacturer allows retailer to change order quantity after observing demand </...
Major results of QF Contract <ul><li>higher manufacturer and supply chain profits  </li></ul><ul><li>Increases average amo...
Revenue-Sharing Contract <ul><li>Manufacturer charges Retailer low  wholesale price and shares a fraction of revenue gener...
Major results of RS Contract <ul><li>higher supply chain profits  </li></ul><ul><li>Increases average amount of Retailers ...
Cost sharing contract <ul><li>Manufacturer and Distributor share part of Production cost </li></ul><ul><li>Manufacturer ge...
Portfolio contract <ul><li>Retailer signs multiple contracts in order to optimize expected profit and reduce risk. </li></...
Summary <ul><li>In supply chain management, communication and coordination can greatly enhance the effectiveness of Supply...
<ul><li>As with any group of entities, when all member </li></ul><ul><li>effectively integrated their efforts, synergies m...
<ul><li>Questions ?? </li></ul><ul><li>THANK YOU… </li></ul>
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  • Where all values taken from previous equations
  • How to Coordinate The Uncoordinated Supply Chain Case Study Approach

    1. 1. How to coordinate the uncoordinated Supply Chain? Case study approach Abhijeet Ghadge M.Tech., IIT Kharapur INDIA
    2. 2. Co-ordination In Supply Chain <ul><li>Coordination in Supply Chain refers to Coordination of information, materials and financial flow between organizations in supply chain. </li></ul><ul><li>Brings many organizations as an united team with well established communication channels and optimized resource allocation. </li></ul>
    3. 3. Why Supply Chain Suffers? <ul><li>When each member of supply chain tries to maximize their own profit. </li></ul><ul><li>When each member or group of supply chain tries to optimize individually instead of coordinating their efforts. </li></ul>
    4. 4. Why Coordination is Important in SCM? <ul><li>Communication and Coordination among members of a supply chain enhances its effectiveness which lead to the benefit of whole supply chain. </li></ul><ul><li>For success in the global marketplace requires whole supply chains to compete against other supply chains. </li></ul>
    5. 5. Kind of coordination involve in SC <ul><li>Horizontal Coordination </li></ul><ul><ul><li>Coordination among entities involve at same level of Supply Chain. </li></ul></ul><ul><ul><li>Example: Coordination between supplier to supplier or within the firm. </li></ul></ul><ul><li>Vertical Coordination </li></ul><ul><ul><li>Coordination among entities involve at different levels of Supply Chain. </li></ul></ul><ul><ul><li>Example: Coordination between supplier to retailer or distributor to retailer </li></ul></ul>
    6. 6. Solving SCM problems through coordination <ul><li>Location Decision of Franchisees of One Organization </li></ul><ul><li>Warehouse Decision for Organization </li></ul><ul><li>Demand Forecasting in Supply Chain </li></ul><ul><li>Product Pricing and Marginal cost Problem between Suppliers and Retailers </li></ul><ul><li>Identifying right sourcing contract for products </li></ul>
    7. 7. 1. Location Decision of Franchisees of One Organization
    8. 8. Location Decision of Franchisees of One Organization <ul><li>A franchise has multiple outlet to serve customers, spread out over a town, a city or country. </li></ul><ul><li>Problem for franchise is, where they have to locate their franchisees to get maximum profit in Supply Chain. </li></ul><ul><li>In two ways they can select location </li></ul><ul><ul><li>Two or more Franchisees whose location are coordinated by Franchisor. </li></ul></ul><ul><ul><li>Two or more Franchisees that control their own location. </li></ul></ul>
    9. 9. Example: Location Decision of Franchisees <ul><li>Isaac’s Ice Cream had been selling ice-creams in the city, now Isaac wanted to expand his market to reach summertime tourist by selling his ice-creams through small-carts along the boardwalk on 4 mile beach. </li></ul><ul><li>Isaac company decided to open two franchisees on the beach in 4 mile boardwalk. </li></ul>
    10. 10. Example: Location Decision of Franchisees <ul><li>Now Isaac company has two option to establish these franchisees; </li></ul><ul><ul><li>Two Franchisees whose locations are coordinated by Isaac company (Franchisor). </li></ul></ul><ul><ul><li>Two Franchisees that control their own locations. </li></ul></ul>
    11. 11. Example: Location Decision of Franchisees <ul><li>Suppose that a franchisor wishes to open two ice cream parlor along a stretch of road 4-mile long. </li></ul><ul><li>Potential customers cluster with mile marker [MM] 0,1,2,3 & 4 and each cluster has n number of customer. </li></ul><ul><li>Customer demand is sensitive primarily to distance traveled by customer. </li></ul>
    12. 12. Example: Location Decision of Franchisees MM 00 n customer MM 01 n customer MM 02 n customer MM 04 n customer MM 03 n customer 4 Mile Beach with n customers on each clusters 1 Mile 2 Mile 3 Mile 4 Mile Franchisee 1 Franchisee 1 Case 1 : Franchisor choosing location for both Franchisees Case 2: Two Franchisees that control their own locations Franchisee 1 Franchisee 2
    13. 13. Two Franchisees whose locations are coordinated by Franchisor <ul><li>If the franchisor can locate these franchisees anywhere on the 4-mile of the road, the franchisor will try to maximize total demand of supply chain. </li></ul><ul><li>Demand for franchise will be maximized when the franchise 1(F1) is located at MM1 and franchise 2(F2) is located at MM3. </li></ul>
    14. 14. Two Franchisees whose locations are coordinated by Franchisor <ul><li>Total demand depends on distance traveled by customer, hence, Demand D given as; </li></ul><ul><ul><li>For Franchise 1 demand D 1 </li></ul></ul>
    15. 15. Two Franchisees whose locations are coordinated by Franchisor <ul><ul><li>For Franchise 2 demand D 2 </li></ul></ul><ul><li>Total demand for Supply Chain; </li></ul>
    16. 16. Two Franchisees that control their own locations <ul><li>In this case, both franchisee try to maximize their own profit and demand, knowing that the other franchisee exists and reacting accordingly. </li></ul><ul><li>In this case best location for each one is MM2 and if both franchisees chooses MM2 then; </li></ul><ul><li>Total demand D; </li></ul>
    17. 17. 2. Warehouse Decision for Organization
    18. 18. Warehouse Decision for Organization <ul><li>The warehouse is a point in the logistics system where a firm stores or hold raw materials, semi finished goods or finished goods. </li></ul><ul><li>The firms can use distributed warehousing or centralized warehousing for storage system. </li></ul>
    19. 19. Example: Warehouse Decision for Organization <ul><li>Isaac’s Ice Cream has grown and now selling their products over the other state through 200 retail-outlets, which are equally distributed between these two states. </li></ul><ul><li>In first state, Isaac company leased warehouse space near each shop. </li></ul><ul><li>In second state, Isaac company tried storing goods for all 100 shops in that state at a central location. </li></ul>
    20. 20. Example: Warehouse Decision for Organization <ul><li>In second state, company pays only for storage space and ordering and receiving costs. </li></ul><ul><li>Firm has always carried safety stock to protect against unusual high demand. </li></ul><ul><li>In centralized warehousing, two benefits are involved; </li></ul><ul><ul><ul><ul><li>Economies of scale in setup costs and holding costs </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Risk pooling in stochastic demand environment </li></ul></ul></ul></ul>
    21. 21. Economic Order Quantity Costs <ul><li>Benefits of centralized warehousing in terms of economies-of-scale given by EOQ, </li></ul><ul><li>For distributed warehousing; </li></ul>
    22. 22. Economic Order Quantity Costs <ul><li>Benefits of centralized warehousing in terms of economies-of-scale given by EOQ, </li></ul><ul><li>For Centralized Warehousing </li></ul>In this condition supplier combine the whole demand instead of single client demand.
    23. 23. Economic Order Quantity Costs <ul><li>The saving percent for centralized warehousing with respect to distributed warehousing; </li></ul>EOQ of Distributed SC EOQ of Coordinated SC
    24. 24. Numerical Example: Economic Order Quantity Costs <ul><li>With regard to EOQ costs, Saving %= [1-( √N)/N]x100 </li></ul>Solving as Saving %=(1- √N/N)*100 =(1- √7/7)*100 =(1-0.3779)*100 =62.20% Number of Clients Cost Saving % 2 29.29 3 42.26 4 50.00 5 55.28 6 59.18 7 62.20 8 64.64 9 66.67 10 68.38 Number of Clients Cost Saving % 11 69.85 12 71.13 20 77.64 25 80.00 40 84.42 50 85.86 100 90.00 1000 96.84 2500 98.00
    25. 25. Risk pooling benefits in Centralized Warehousing: Newsvendor Environment <ul><li>Suppose that i th firm choosing its optimal order quantity has expected overage and underage costs equal to K σ i . </li></ul><ul><li>Where σ i is firms i’s standard deviation of demand </li></ul><ul><li>And K is constant. </li></ul><ul><li>For distributed SC </li></ul><ul><li>Each client has same overage and underage cost per unit, but with normal probability demand distribution with mean µ and variance σ 2 ; </li></ul><ul><li>For N client overage and underage cost = NK σ </li></ul>
    26. 26. Risk pooling benefits in Centralized Warehousing: Newsvendor Environment <ul><li>For Centralized SC </li></ul><ul><li>If supplier combines the demands of its all clients N, </li></ul><ul><li>Normal probability demand distribution with mean Nµ and variance N σ 2 , </li></ul><ul><li>For N client overage and underage cost , </li></ul>
    27. 27. Risk pooling benefits in Centralized Warehousing: Safety Stock & Service Level <ul><li>The safety stock equals to z σ , where z represents the number of standard deviation over the mean to achieve a desired cycle service level, </li></ul><ul><li>In distributed warehousing system, </li></ul><ul><li>Safety Stock Level for Supply Chain = z σ N </li></ul><ul><li>In centralized warehousing system, </li></ul><ul><li>Supplier combines the demand for all clients </li></ul><ul><li>Safety Stock Level for Supply Chain = z σ√ N </li></ul>
    28. 28. Risk pooling benefits in Centralized Warehousing: Safety Stock & Service Level <ul><li>Saving Cost % for it coordinated SC, </li></ul><ul><li>Service Levels can improve in centralized warehousing system by improving z value in centralized warehousing; </li></ul>Standard deviation in distributed SC Standard deviation in coordinated SC
    29. 29. Numerical Example: Cycle Service Level Z new Service levels from Z table Number of Clients 70.00% Z old = 0.5244 80.00% Z old =0.8416 90.00% Z old =1.2816 2 77.08% 88.30% 96.50% 3 81.81% 92.75% 98.68% 4 85.29% 95.38% 99.48% 5 87.95% 97.01% 99.79% 6 90.05% 98.04% 99.92% 7 91.73% 98.70% 99.97% 8 93.10% 99.14% 99.99% 9 94.22% 99.42% 99.99% 10 95.14% 99.61% 100.00% 15 97.51% 99.94% 100.00% 25 99.56% 100.00% 100.00% 50 99.99% 100.00% 100.00% 100 100.00% 100.00% 100.00%
    30. 30. 3. Demand Forecasting in Supply Chain
    31. 31. Coordinated Demand Forecasting <ul><li>Demand of products varies from downstream to upstream in supply chain due to bullwhip effect in supply chain. </li></ul><ul><li>As demand of products varies in supply chain, So forecasting of demand of product also varies from downstream to upstream. </li></ul><ul><li>Due to lack of communication between retailers, distributor, wholesaler and supplier demand forecasting may suffer in supply chain. </li></ul>
    32. 32. Example: Coordinated Demand Forecasting Wholesaler and Retailer work individually without sharing any information Table 1 Next period Forecast=Current consumer’s Demand
    33. 33. Example: Coordinated Demand Forecasting Wholesaler and Retailer sharing consumer’s demand information Table 2
    34. 34. Example: Coordinated Demand Forecasting <ul><li>Equations for Table 1; </li></ul><ul><li>For Retailer, </li></ul><ul><li>Next period forecast= Consumer current demand </li></ul><ul><li>C5 = B5 </li></ul><ul><li>* On-hand Inventory = </li></ul><ul><li>Max[( Previous On-hand Inventory + Previous In Transit Inventory – Previous Back order – Current Consumer demand),0] </li></ul><ul><li>D5= MAX(D4 + G4 – E4 – B5, 0) </li></ul>
    35. 35. <ul><li> * Back Order = </li></ul><ul><li>Max[( Previous Backorder + Current Consumer demand – Previous On-hand Inventory – Previous In Transit Inventory), 0] </li></ul><ul><li>E5 = MAX( E4 + B5 – D4 – G4, 0) </li></ul><ul><li> * Order Placed by Retailer = </li></ul><ul><li>Max[( Next Period forecast – (On-hand Inventory + wholesaler’s Previous Backorder – Retailer’s Previous Backorder)), 0] </li></ul><ul><li>F5 = MAX ( C5 – (D5 + J4 – E5), 0) </li></ul>Example: Coordinated Demand Forecasting
    36. 36. <ul><li> * In Transit Inventory for Retailer = </li></ul><ul><li>Min[( Order Placed by Retailer + Wholesaler’s Previous Backorder), (Wholesaler’s On-hand Inventory + wholesaler’s In Transit Inventory)] </li></ul><ul><li>G5 = MIN (F5 + J4 , I4 + L4) </li></ul><ul><li>Equations for Table 1; </li></ul><ul><li>For Wholesaler; </li></ul><ul><li> * Next Forecast = Order Placed by Retailer </li></ul><ul><li>H5 = B5 </li></ul>Example: Coordinated Demand Forecasting
    37. 37. <ul><li>* Wholesaler’s On-hand Inventory = </li></ul><ul><li>Max[( Previous On-hand Inventory + Previous In Transit Inventory – Previous Backorder – Order Placed by Retailer ) , 0] </li></ul><ul><li>I5 = MAX ( I4 + L4 – J4 – F5 , 0 ) </li></ul><ul><li>* Wholesaler’s Backorder = </li></ul><ul><li>Max[( Wholesaler’s Previous Backorder + Order Placed by Retailer - Previous Wholesaler’s On-hand Inventory – Previous Wholesaler’s In Transit Inventory) , 0] </li></ul><ul><li>J5 = MAX ( J4 + F5 – I4 – L4 , 0 ) </li></ul>Example: Coordinated Demand Forecasting
    38. 38. <ul><li>* Order Placed by Wholesaler = </li></ul><ul><li>Max[( Next Period forecast – (Wholesaler’s Current On-hand Inventory – Current Backorder for Wholesaler) , 0] </li></ul><ul><li>K5 = MAX ( H5 – (I5 – J5) , 0 ) </li></ul><ul><li>For Table 2, </li></ul><ul><li>Everything will remain same except Next period forecast of wholesaler. </li></ul><ul><li>Next Period forecast for wholesaler = Current Consumer demand </li></ul><ul><li>H5 = B5 </li></ul>Example: Coordinated Demand Forecasting
    39. 39. Example: Coordinated Demand Forecasting <ul><li>From table 1, wholesaler’s forecast equal to the order received from retailer in current period. </li></ul><ul><li>And therefore wholesaler’s on-hand inventory is very high due to low information sharing between them. </li></ul><ul><li>From table 2, retailer and wholesaler are sharing the information of customer demand. </li></ul>
    40. 40. <ul><li>Therefore wholesaler’s forecasting is equal to retailer’s forecasting. </li></ul><ul><li>When demand information is shared, the wholesaler’s total on-hand inventory held over 20 periods is 42% smaller. </li></ul><ul><li>In the uncoordinated case wholesaler overreacting to the retailer’s catch-up order and assuming that consumer demand will be larger in future. </li></ul>Example: Coordinated Demand Forecasting
    41. 41. 4. Product Pricing and Marginal cost Problem between Suppliers and Retailers
    42. 42. Coordinated Pricing <ul><li>Pricing of products is important factor for demand and demand vary according to pricing. </li></ul><ul><li>The Supply Chain loses money when the firms do not coordinate their pricing. </li></ul><ul><li>In traditional way, supplier first set the wholesale price and the retailer react accordingly and set his own price according to his marginal cost. </li></ul>
    43. 43. Coordinated Pricing <ul><li>In pricing, can explain by taking two cases; </li></ul><ul><ul><li>Case 1: A System with One Retailer and One Supplier </li></ul></ul><ul><ul><li>Case 2; A System with One Retailer and N-1 Supplier </li></ul></ul><ul><li>Suppose </li></ul><ul><ul><ul><ul><ul><li>P = Retail Price of Product </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Q = Quantity Sold </li></ul></ul></ul></ul></ul>
    44. 44. Case 1: A System with One Retailer and One Supplier <ul><li>Let Marginal cost for supplier and retailer equal to $90 and $10 respectively. </li></ul><ul><li>Total Revenue for Retailer = PxQ </li></ul><ul><li>Marginal Revenue for Retailer is the derivative of total revenue (eq.1) with respect to Q; </li></ul>
    45. 45. Case 1: A System with One Retailer and One Supplier <ul><li>Taking Retailer and supplier as a one firm. </li></ul><ul><li>Total Marginal Cost for Supply Chain=$90+$10 </li></ul><ul><li>=$100 </li></ul><ul><li>Optimal quantity Q * given as; </li></ul><ul><li>Total Channel profits = Q(P-C) ……..(7) </li></ul><ul><li> = 200[500-($90+$10)]=$80,000 </li></ul><ul><li>Where C = Supply Chain Marginal Costs </li></ul>
    46. 46. Case 1: A System with One Retailer and One Supplier <ul><li>Taking Retailer and supplier as two individual part of Supply chain. </li></ul><ul><li>From eq.6, wholesaler know that Retailer will set marginal cost according to wholesaler’s price charged. </li></ul><ul><li>So, 900-4Q=10 + W </li></ul><ul><li>Where W = Wholesale price charged </li></ul><ul><li>Therefore demand curve for Supplier; </li></ul><ul><li>W = 890 – 4Q ……(8) </li></ul><ul><li>Therefore supplier’s total revenue W x Q = 890Q-4Q 2 </li></ul>
    47. 47. <ul><li>Marginal Costs = 890 – 8Q ……(9) </li></ul><ul><li>From this equation; </li></ul><ul><li>90 = 890 – 8Q </li></ul><ul><li>(As marginal cost for supplier is $90) </li></ul><ul><li>Q * = 100 Unit </li></ul><ul><li>W * = 890 – 4 x 100 (From Equation 8) </li></ul><ul><li>W * = $490 </li></ul><ul><li>Total revenue of Supplier = 100[$490 - $90] = $40,000 </li></ul><ul><li>(From eq. 7) </li></ul>Case 1: A System with One Retailer and One Supplier
    48. 48. Case 1: A System with One Retailer and One Supplier <ul><li>Retailer also will sell same quantity as supplier’s. </li></ul><ul><li>Retail Price P = 900 – 2 x 100 </li></ul><ul><li>Retail Price P * = $700 </li></ul><ul><li>(From equation (4)) </li></ul><ul><li>Total revenue for Retailer = 100[$700-($10+$490)] </li></ul><ul><li>= $20,000 </li></ul><ul><li>Total Channel Profit = $40,000 + $ 20,000 </li></ul><ul><li>= $ 60,000 </li></ul><ul><li>Which is 33% lesser than coordinated pricing, Cooperative optimization produces more than independent optimization would produce. </li></ul>
    49. 49. Case 2: A System with One Retailer and N-1 Supplier <ul><li>Now in this case, One Retailer and N-1 Suppliers are involve. </li></ul><ul><li>In this, supply chain consisting of one retailer, and retailer’s supplier and retailer’s supplier’s supplier and so on. </li></ul><ul><li>In this case Retailer’s linear demand curve given as; </li></ul><ul><li>Where ( a, b>0 ) </li></ul>
    50. 50. Case 2: A System with One Retailer and N-1 Supplier <ul><li>Now let represent the system profit under coordination pricing and represent the system profit under uncoordinated pricing. </li></ul><ul><li>Let C i be the marginal cost of firm i (i=1,2,3……N) and where i = 1 denotes the retailer, i = 2 denotes the retailer’s supplier and i = 3 denotes the retailer's supplier’s supplier. </li></ul>
    51. 51. Case 2: A System with One Retailer and N-1 Supplier <ul><li>denote the price charged by firm i. </li></ul><ul><li>is a decision variable and represent the quantity sold to the final customer. </li></ul><ul><li>represent the optimal quantity for profit maximization . </li></ul>
    52. 52. Case 2: A System with One Retailer and N-1 Supplier <ul><li>For Coordinated Supply Chain </li></ul><ul><li>If there is coordination among the N firms, all the N firms are considered as one organization, </li></ul><ul><li>Thus Marginal revenue; </li></ul><ul><li>and Marginal Cost given as; </li></ul><ul><li>Retail Price given as; </li></ul>
    53. 53. Case 2: A System with One Retailer and N-1 Supplier <ul><li>For Coordinated System, Value of eq. (12) putting in eq. (10); </li></ul><ul><li>So, total Profit given as; </li></ul>
    54. 54. Case 2: A System with One Retailer and N-1 Supplier <ul><li>From equation 13 and 14; </li></ul><ul><li>Total profit in coordinated Supply Chain; </li></ul>
    55. 55. Case 2: A System with One Retailer and N-1 Supplier <ul><li>For Uncoordinated Supply Chain </li></ul><ul><li>If there is no coordination among the N firms, </li></ul><ul><li>From eq. (11); </li></ul>Price Set by m th Firm
    56. 56. Case 2: A System with One Retailer and N-1 Supplier <ul><li>Putting m=N+1; </li></ul>System contain One Retailer and N-1 Suppliers therefore P N+1 =0
    57. 57. Case 2: A System with One Retailer and N-1 Supplier <ul><li>The Profit of Firm m equals; </li></ul><ul><li>Putting all values; </li></ul>P m+1 = P m P m+1
    58. 58. Case 2: A System with One Retailer and N-1 Supplier <ul><li>From above equations; </li></ul>
    59. 59. Case 2: A System with One Retailer and N-1 Supplier <ul><li>Putting Value of from equation (17); </li></ul><ul><li>Profit For firm ‘m’; </li></ul>Multiplying by 4 in numerator & denominator
    60. 60. <ul><li>Similarly total profit for Supply Chain; </li></ul><ul><li>Putting values of these profits; </li></ul>Case 2: A System with One Retailer and N-1 Supplier
    61. 61. Case 2: A System with One Retailer and N-1 Supplier <ul><li>From eq.(18) & (19), sum series will become geometric series and after summing this series by geometric sum; </li></ul><ul><li>System Profit Ratio in Coordinated SC vs. Uncoordinated SC, from eq. (15) & (20); </li></ul>
    62. 62. 5. Identifying right sourcing contract for products (brief overview of different contracts)
    63. 63. Contracts ..a powerful tool <ul><ul><li>A powerful tool in Outsourcing/Procurement to achieve ‘global Optimization’. </li></ul></ul><ul><ul><li>A tool to better manage trade off between cost and risk. </li></ul></ul><ul><ul><li>Motivates supply chain parties to reveal their true forecast of customer demand. </li></ul></ul><ul><ul><li>Encourages to reduce the “Bullwhip effect”. </li></ul></ul><ul><ul><li>Increases in Administrative cost for maintaining the Contract terms and Conditions. </li></ul></ul>
    64. 64. Factors in selecting and negotiating the contract type <ul><li>Price competition </li></ul><ul><li>Price analysis </li></ul><ul><li>Type and complexity of the requirement </li></ul><ul><li>Urgency of the requirement </li></ul><ul><li>Period of performance or length of production run </li></ul><ul><li>Contractor’s technical capability and financial responsibility </li></ul><ul><li>Concurrent contracts </li></ul>
    65. 65. Sourcing Contracts in Supply Chain <ul><li>Buyback or Return contract </li></ul><ul><li>Quantity flexibility contract </li></ul><ul><li>Revenue sharing Contract </li></ul><ul><li>There are several other contracts like…. </li></ul><ul><li>Cost sharing contract </li></ul><ul><li>Portfolio contract </li></ul><ul><li>Many more… </li></ul>
    66. 66. Buyback Contract <ul><li>A manufacturer specifies a wholesale price and a buyback price at which the retailer can return any unsold items at the end of the season/period. </li></ul><ul><li>Results in an increase in the salvage value for the retailer, which induces the retailer to order a larger quantity </li></ul><ul><li>The manufacturer is willing to take on some of the cost of overstocking because the supply chain will end up selling more on average. </li></ul><ul><li>Example :- fashion garments </li></ul>
    67. 67. Major results of Buyback Contracts <ul><li>Manufacturer profits and overall supply chain profits increases </li></ul><ul><li>Counters Double marginalization by lowering the cost of Overstocking . </li></ul><ul><li>Leads to lower Retailer’s effort in selling in case of Overstocking. </li></ul><ul><li>Increased Information distortion. </li></ul>
    68. 68. Quantity Flexibility (QF) Contract <ul><li>Manufacturer allows retailer to change order quantity after observing demand </li></ul><ul><li>No returns are required unlike Buy back </li></ul><ul><li>The manufacturer bears some of the risk of excess inventory </li></ul><ul><li>Retailer commits to order the set minimum quantity </li></ul><ul><li>Example :- Electronic and computer Industry </li></ul>
    69. 69. Major results of QF Contract <ul><li>higher manufacturer and supply chain profits </li></ul><ul><li>Increases average amount of Retailers purchase </li></ul><ul><li>Manufacturer has to bears risk of maintaining excess Inventory. </li></ul><ul><li>More effective when cost of returns is high. </li></ul>
    70. 70. Revenue-Sharing Contract <ul><li>Manufacturer charges Retailer low wholesale price and shares a fraction of revenue generated by the Retailer. </li></ul><ul><li>There are no returns allowed unlike Buyback contract </li></ul><ul><li>lower wholesale price decreases cost to Retailer in case of Overstock </li></ul><ul><li>Retailer increase the level of product availability </li></ul><ul><li>Example :-Entertainment/music Industry </li></ul>
    71. 71. Major results of RS Contract <ul><li>higher supply chain profits </li></ul><ul><li>Increases average amount of Retailers purchase </li></ul><ul><li>Manufacturer doesn’t have to bears risk of maintaining excess Inventory. </li></ul><ul><li>More effective when cost of returns is high. </li></ul><ul><li>Increased Information distortion. </li></ul>
    72. 72. Cost sharing contract <ul><li>Manufacturer and Distributor share part of Production cost </li></ul><ul><li>Manufacturer gets incentive/share to produce more units </li></ul><ul><li>Distributors loss due to sharing is compensated by discount on wholesale price. </li></ul><ul><li>Example :- Core competency manufacturing components </li></ul>
    73. 73. Portfolio contract <ul><li>Retailer signs multiple contracts in order to optimize expected profit and reduce risk. </li></ul><ul><li>It can be combination of any two or more contracts (discussed earlier) based on level of flexibility of contract. </li></ul><ul><li>Example :-Commodity products with pool of suppliers. </li></ul>
    74. 74. Summary <ul><li>In supply chain management, communication and coordination can greatly enhance the effectiveness of Supply Chain. </li></ul><ul><li>Through coordination we can improve total profit of supply chain management, inventory control, pricing control and demand forecasting. </li></ul><ul><li>In SCM, the actions of rational managers of firms </li></ul><ul><li>independently create natural inefficiencies. </li></ul>
    75. 75. <ul><li>As with any group of entities, when all member </li></ul><ul><li>effectively integrated their efforts, synergies may emerge and SC profit also increase. </li></ul><ul><li>Sourcing contracts allows sharing of risks, increasing supply chain Profit . </li></ul><ul><li>Coordination in SCM helps to reduce uncertainty in market through proper Information sharing. </li></ul>
    76. 76. <ul><li>Questions ?? </li></ul><ul><li>THANK YOU… </li></ul>

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