(1) Buy-Back Contract* Seller agrees to buy back unsold goods fromthe buyer for some agreed-upon price.* Buyerhasincentiveto order more* Supplier's risk clearly increases.Increase in buyer's order quantity* Decreases the likelihood of out of stock* Compensates the supplier for the higher risk16
(1) Buy-Back Contract Seller agrees to buy back unsold goods from the buyer for some agreed-upon price. Buyer has incentive to order more Supplier’s risk clearly increases. Increase in buyer’s order quantity Decreases the likelihood of out of stock Compensates the supplier for the higher risk 16
Swimsuit ExampleBuy-Back Contract:*Assume the manufacturer offers to buy unsoldswimsuits from the retailer for $55* Retailer has an incentive to increase its orderquantity to 14,000 units, for a profit of $513,800.* while the manufacturer's average profit increasesto $471,900 Total average profit for the two parties= $985,700 (= $513,800 + $471,900)* Compare to sequential supply chain when totalprofit= $910,700 (= $470,700 + $440,000)17
Buy-Back Contract: Swimsuit Example Assume the manufacturer offers to buy unsold swimsuits from the retailer for $55. Retailer has an incentive to increase its order quantity to 14,000 units, for a profit of $513,800. while the manufacturer’s average profit increases to $471,900. Total average profit for the two parties = $985,700 (= $513,800 + $471,900) Compare to sequential supply chain when total profit = $910,700 (= $470,700 + $440,000) 17