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Summary of chapter 4 'supply contracts'
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Summary of chapter 4 'supply contracts' of the book Designing and Managing the Supply Chain
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HC3 supply contractsWe kunnen kijken naar de impact van verschillende soorten supply contracts op supply
chain performance. En of er contracten zijn die effectief zijn alle supply chain partners, dus
de supply chain in z’n geheel.
MTO
Om naar supply contracts te kijken, gaan we uit van een two-stage supply chain bestaande
uit een buyer en een supplier:
The sequence of events in such a supply chain is as follows. The buyer (retailer) starts by
generating a forecast, determines how many units to order from the supplier, and places an
order to the supplier so as to optimize his own profit; the supplier reacts to the order placed
by the buyer. Thus, in this supply chain, the supplier has a maketo-order (MTO) supply chain
while the buyer is purchasing items prior to knowing customer demand, based on a
forecast.
De optimale service levels voor de retailer, de manufacturer en de supply chain zijn. We
weten dat C U = sales price – purchase costs en C O = purchase costs – salvage value:
Retailer
CU 125−80 45
= = =43 %
CU +C O 125−80+80−20 105
Manufacturer
100 %
Supply chain
CU 125−35 90
= = =86 %
CU +C O 125−35+35−20 10 5
Since the buyer limits his order quantity (only a service level of 43%), there is a significant
increase in the likelihood of out of stock. If the supplier is willing and able to share some of
the risks with the buyer, it may be profitable for the buyer to order more items, thereby
reducing outof-stock probability and increasing profit for both the supplier and the buyer.
It turns out that a variety of supply contracts enable this risk sharing, and therefore increase
profits for both supply chain entities.
Buy-back contracts
The seller agrees to buy back unsold goods from the buyer for some agreed-upon price. Of
course, the buyer therefore has an incentive to order more. The risk for the supplier clearly
, increases. The increase in the buyer’s order quantity decreases the likelihood of out of stock
and this compensates the supplier for the higher risk. The increase in order quantity placed
by the buyer, and hence the decrease in the likelihood of out of stock, more than
compensates the supplier for the increase in risk.
Buy-back contracten hebben nadelen:
Require suppliers to have an effective reverse logistics system and may increase
logistics costs.
Retailers have an incentive to push the products not under the buy back contract.
Retailer’s risk is much higher for the products not under the buy back contract.
Revenue-sharing contracts
In a revenue-sharing contract, the buyer shares some of its revenue with the seller, in return
for a discount on the wholesale price. If somehow the buyer can convince the supplier to
reduce the wholesale price, then clearly the buyer will have an incentive to order more
units. Of course, a reduction in wholesale price will decrease the supplier's profit if it is
unable to sell more units. Therefore, the buyer transfers a portion of the revenue from each
unit sold to the end customer.
Revenue-sharing contracts hebben nadelen:
Require suppliers to monitor the buyer’s revenue and thus increases administrative
cost.
Buyers have an incentive to push competing products with higher profit margins.
Similar products from competing suppliers with whom the buyer has no revenue
sharing agreement.
The idea of both contracts is thus:
A mechanism to share risk across the supply chain parties. The retailer orders a higher
amount of product. The profit for the whole supply chain increases (the total pie increases).
Both the profit of the manufacturer and the retailer may increase.
In both contracts, if the parameters are set correctly, the supply chain optimum can be
achieved.
Quantity-flexibility contracts (MTO)
Supplier provides full refund for returned (unsold) items. As long as the number of returns is
no larger than a certain quantity.
Sales rebate contracts
A rebate (= vermindering) is paid by the supplier for any item sold above a certain quantity.
Provides a direct incentive to the retailer to increase sales.
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