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Supply Chain Contracts_Abhijeet Ghadge

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Supply chain contract management

Supply chain contract management

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  • great! would be nice to get some sources for the math (especially for the QF contract).. !?
    additionally i think there is a mistake in the formula on slide 8.. in the first line there is (p-s) twice in the first term.. and in the second line it moved to the second term..
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  • im working on supply chain management...pls send me on sach.modgil@gmail.com
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  • very informative can you plz send me on this white_night001@yahoo.com
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  • very informative presentation....thanks for sharing.......can i have a copy at waqa0001@ntu.edu.sg
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  • very informative presentation....thanks for sharing.......can i have a copy at waqa0001@ntu.edu.sg
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Supply Chain Contracts_Abhijeet Ghadge Supply Chain Contracts_Abhijeet Ghadge Presentation Transcript

  • Abhijeet S.Ghadge. M.Tech.(Industrial Engineering & Management) (2007-2009) INDIAN INSTITUTE OF TECHNOLOGY , KHARAGPUR
  • SOURCING CONTRACTS
    • Specifies the parameters within which a buyer places orders and a supplier fulfills them
    • Example of parameters: Quantity, price, Lead time, quality, Return policies
    • Double marginalization :
    • buyer and seller make decisions acting independently instead of acting together – gap between potential total supply chain profits and actual supply chain profits results
  • Sourcing Contracts in Supply Chain
    • Buyback or Return contract
    • Quantity flexibility contract
    • Revenue sharing Contract
    • There are several other contracts like….
    • Sales rebate(Incentive) contract
    • Cost sharing contract
    • Portfolio contract
    • Etc….
  • Terminology used in Contract
    • Manufacturing/Production cost = v
    • wholesale price( Manf. Selling price)= c
    • Market price(Retailers selling price) = p
    • Manufactures salvage cost= s m
    • Retailers salvage cost= s r
    • Market Demand =D
    • Retailers Order Quantity = Q
    • Cycle service level = CSL also called as critical fractile
    • service level is measure to quantify companies Market conformance.
    • Cycle service level:- Ability to satisfy demand requirement
  • Optimal level of Product availability
    • Influencing factors
    • Cost of overstocking per product : C 0 = c-s
    • Cost of under stocking per product : C u = p-c
    • Optimal order size = Q*
    • Demand is normally distributed for the period with Mean and SD .
    • Probability density function=
    • Cumulative normal distribution function=
    • Normal distribution with Mean=0 and SD=1 is refered as
    • Standard normal distribution.
    • Represented as ;
    • f s (x) =f(x,0,1)
    • F s (x)=F(x,o,1)
  • Order Quantity
    • Optimal Order Quantity Q*
    • = Inverse of the normal cumulative distribution with given Mean & SD.
  • Expected profit
  • Expected overstock & understock
    • Expected Overstock=
    • Expected understock=
  • (Example)
    • At a Retailers shop, Demand of Trendy Toys is Normally distributed with a mean quantity = 350 and standard deviation of  = 100
    • Wholesale price = $100
    • Retailers market price = $250
    • Salvage value for Retailer = $85
    • How many units should be ordered? And what are the Expected Overstock, Under stock Quantities with Expected Profit for Retailer on ordered Quantity?
  •  Q* Expected Overstock Expected Understock Expected Profit for Retailer 150 550 204.7 4.5 48451 120 510 163.8 3.6 49261 100 483 136.5 3.0 49800 90 470 122.8 2.7 50070 60 430 81.9 1.8 50880 30 390 40.9 0.9 51690 0 350 0.0 0.0 52500
  • Buyback Contract
    • 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.
    • Results in an increase in the salvage value for the retailer, which induces the retailer to order a larger quantity
    • The manufacturer is willing to take on some of the cost of overstocking because the supply chain will end up selling more on average.
    • Example:- fashion garments
  • Buy back contract variables
    • Manufacturing cost =v
    • Wholesale price= c
    • Buy back price= b
    • Manufactures salvage price= s m
    • Retailers salvage value = s r =b
    • Expected Manufactures profit=
  • Impact of Supply Chain Contracts on Profitability: Buyback Contracts
    • Example…….
    • Tech Fiber ( TF ) produces jacket at v = $10 and charges a wholesale price of c = $100.
    • Ski Adventure (SA) sells jacket for p = $200.
    • Unsold jackets have no salvage value.
    • Demand is normally distributed with mean 1000 and SD of 300.
    • Assume that there are no transportation or any other ( holding, etc)costs associated in any returns.
    • Should TF be willing to buy back unsold jackets? Why?
    • What is overall Expected supply chain profit for buy back price $0,$30,$60?
  • Wholesale Price c Buy Back Price b Optimal Order size for SA Expected Profit for SA Expected Returns to TF (Overstock) Expected Profit for TF Expected Supply Chain Profit 100 0 1000 76063 120 90000 166063 100 30 1067 80154 156 91338 171492 100 60 1170 85724 223 91886 177610 100 95 1501 96875 506 86935 183810 110 78 1191 78074 239 100480 178555 110 105 1486 86938 493 96872 183810 120 96 1221 70508 261 109225 179733 120 116 1501 77500 506 106310 183810
  • Major effects of Buyback Contracts
    • Manufacturer profits and overall supply chain profits increases
    • Counters Double marginalization by lowering the cost of Overstocking .
    • Leads to lower Retailer’s effort in selling in case of Overstocking.
    • Increased Information distortion.
  • Quantity Flexibility (QF) Contract
    • Manufacturer allows retailer to change order quantity after observing demand
    • No returns are required unlike Buy back
    • The manufacturer bears some of the risk of excess inventory
    • Retailer commits to order the set minimum quantity
    • Example:- Electronic and computer Industry
  • Manufactures manufacturing cost = v wholesale price= c Retailers selling price = p Manufactures salvage price= s m Retailers salvage value = s r Retailers initial order Quantity Q Manufacture commits to supply Quantity N = (1+  ) Q Retailer commits to buy quantity q =(1-  ) Q Market demand quantity = D
    • Assuming manufacturer produces( committed) N units.
    • Retailer
    • purchases q units if demand ; D ≤ q
    • Purchases D units if demand; q ≤ D ≤ N
    • Purchases N units if demand; N ≤ D
  •  
  •  
  • Impact of Supply Chain Contracts on Profitability: QF Contract
    • Example…….
    • Tech Fiber ( TF ) produces jacket at v = $10 and charges a wholesale price of c = $100.
    • Ski Adventure (SA) sells jacket for p = $200.
    • Unsold jackets have no salvage value.
    • Demand is normally distributed with mean 1000 and SD of 300.
    • What is overall Expected supply chain profit for  equals to 0,0.20 & 0.40 values (Assume  =  )?
  •   Wholesale price c Optimal Order size Q Expected purchase by SA Expected sale by SA Expected profits for SA Expected profits for TF Expected supply chain profit 0 0 100 1000 1000 880 76063 90000 166063 0.2 0.2 100 1050 1024 968 91167 89830 180997 0.4 0.4 100 1070 1011 994 97689 86122 183811 0 0 110 962 962 860 66252 96200 162452 0.15 0.15 110 1014 1009 945 78153 99282 177435 0.42 0.42 110 1048 1007 993 87932 95879 183811 0 0 120 924 924 838 56819 101640 158459 0.2 0.2 120 1000 1000 955 70933 108000 178933 0.5 0.5 120 1040 1003 996 78874 104803 183677
    • higher manufacturer and supply chain profits
    • Increases average amount of Retailers purchase
    • Manufacturer has to bears risk of maintaining excess Inventory.
    • More effective when cost of returns is high.
    • Manufacturer charges Retailer low wholesale price and shares a fraction of revenue generated by the Retailer.
    • There are no returns allowed unlike Buyback contract
    • lower wholesale price decreases cost to Retailer in case of Overstock
    • Retailer increase the level of product availability
    • Example:-Entertainment/music Industry
  • Manufacturing/Production cost = v wholesale price= c Retailers selling price = p Fraction of Retailers revenue= f Retailers salvage value = s r Retailers order Quantity Q Cost of overstocking per product : C 0 = c-s r Cost of under stocking per product : C u = (1-f)p-c
  •  
  • Impact of Supply Chain Contracts on Profitability: RS Contracts
    • Example…….
    • Tech Fiber ( TF ) charges a wholesale price of c = $10.
    • Ski Adventure (SA) sells jacket for p = $200. and shares the fraction f of revenue with TF
    • Unsold jackets have no salvage value.
    • Demand is normally distributed with mean 1000 and SD of 300.
    • What is overall Expected supply chain profit for f equals to 0.3,0.5 & 0.7 values ?
  • Wholesale price c Revenue sharing fraction f Optimal Order size Q for SA Expected Overstock at SA Expected profits for SA Expected profits for TF Expected supply chain profit 10 0.3 1440 449 124273 59429 183702 10 0.5 1384 399 84735 98580 183315 10 0.7 1290 317 45503 136278 181781 20 0.3 1320 342 110523 71886 182409 20 0.5 1252 286 71601 109176 180777 20 0.7 1129 195 33455 142051 175506
    • higher supply chain profits
    • Increases average amount of Retailers purchase
    • Manufacturer doesn’t have to bears risk of maintaining excess Inventory.
    • More effective when cost of returns is high.
    • Increased Information distortion.
  • Sales rebate Contract
    • Manufacturer provides incentive to Retailer
    • This is to increase sales by means of a rebate paid by Manufacturer for items sold above certain Quantity.
    • Incentives for meeting Target sales
    • Manufacturer and Distributor share part of Production cost
    • Manufacturer gets incentive/share to produce more units
    • Distributors loss due to sharing is compensated by discount on wholesale price.
    • Example:-
    • Retailer signs multiple contracts in order to optimize expected profit and reduce risk.
    • It can be combination of any two or more contracts (discussed earlier) based on level of flexibility of contract.
    • Example:-Commodity products with pool of suppliers.
    • A powerful tool in Outsourcing/Procurement to achieve global Optimization
    • A tool to better manage trade off between cost and risk.
    • Motivates supply chain parties to reveal their true forecast of customer demand.
    • Encourages to reduce the “Bullwhip effect”.
    • Increases in Administrative cost for maintaining the Contract terms and Conditions.
  •