全英文课《DesigningandManagingSupplyChainSystem》授课教案Chapter 4 (lecture7) supply contractOBJECTIVES(1) Know the supply contracts for strategic components(2) Know the MTS and MTO supply chain contracts: Pay-Back Contracts andCost-Sharing Contracts.(3) Learn to calculate the expected profit for the manufacturer and distributor ina contract.TEACHINGCONTENT4.1IntroductionIn the last few years, we have seen significant increase in the level ofoutsourcing, companies outsource everything from the manufacturing of specificcomponents to the design and assembly of the entire product. Interestingly, manybrand-name manufacturers now outsource both the entire design and manufacturing ofsome of their products.One important driver is the search for low-cost countries that allowmanufacturers to significantly reduce labor cost. At the same time, many companies inthe Far East developed significant capability to design and manufacture high-quality,low-cost products.Indeed, the increase in the level of outsourcing implies that the procurementfunction becomes criticalforanOEMtoremain incontrol of itsdestiny.Adifferentapproach has been applied by OEMs for nonstrategic components. In this case,products can be purchased from a variety of suppliers, and flexibility to marketconditions is perceived as more important than a permanent relationship with thesuppliers.4.2Supply contracts for strategic componentsEffective procurement strategies require the development of relationships withsuppliers. These relationships can take many forms, both formal and informal, butoften, to ensure adequate supplies and timely deliveries, buyers and supplierstypically agree on supply contracts. These contracts address issues that arise betweena buyer and a supplier, whether the buyer is a manufacturer purchasing raw materialsfrom a supplier, an OEM purchasing components, or a retailer purchasing goods. In atypical supplycontract,thebuyerand supplier.(1)Pricing and volume discounts.(2)Minimum andmaximum purchasequantities(3)Delivery lead times.(4)Product or material quality(5)Product return policies
全英文课《Designing and Managing Supply Chain System》 授课教案 Chapter 4 (lecture 7) supply contract OBJECTIVES (1) Know the supply contracts for strategic components (2) Know the MTS and MTO supply chain contracts: Pay-Back Contracts and Cost-Sharing Contracts. (3) Learn to calculate the expected profit for the manufacturer and distributor in a contract. TEACHING CONTENT 4.1 Introduction In the last few years, we have seen significant increase in the level of outsourcing; companies outsource everything from the manufacturing of specific components to the design and assembly of the entire product. Interestingly, many brand-name manufacturers now outsource both the entire design and manufacturing of some of their products. One important driver is the search for low-cost countries that allow manufacturers to significantly reduce labor cost. At the same time, many companies in the Far East developed significant capability to design and manufacture high-quality, low-cost products. Indeed, the increase in the level of outsourcing implies that the procurement function becomes critical for an OEM to remain in control of its destiny. A different approach has been applied by OEMs for nonstrategic components. In this case, products can be purchased from a variety of suppliers, and flexibility to market conditions is perceived as more important than a permanent relationship with the suppliers. 4.2 Supply contracts for strategic components Effective procurement strategies require the development of relationships with suppliers. These relationships can take many forms, both formal and informal, but often, to ensure adequate supplies and timely deliveries, buyers and suppliers typically agree on supply contracts. These contracts address issues that arise between a buyer and a supplier, whether the buyer is a manufacturer purchasing raw materials from a supplier, an OEM purchasing components, or a retailer purchasing goods. In a typical supply contract, the buyer and supplier. (1)Pricing and volume discounts. (2)Minimum and maximum purchase quantities. (3)Delivery lead times. (4)Product or material quality. (5)Product return policies
全英文课《Designing and ManagingSupplyChainSystem》授课教案4.2.1Supplycontracts(1)2-Stage Seguential Supply Chain (nocontract)A buyer and a supplier.Buyer's activities:Generating a forecastDetermining how many units to order from the supplierPlacing an order to the supplier so as to optimize his own profitPurchasebasedonforecastofcustomerdemandSupplier's activities:Reacting to the order placed by the buyerMake-To-Order (MTO) policySwimsuit ExampleO2 Stages:aretailer whofaces customerdemandamanufacturerwhoproduces and sells swimsuitstotheretailerRetailer Information:Summer season sale price of a swimsuit is $125 per unitWholesalepricepaid by retailer tomanufacturer is s80 perunitSalvage value after the summer season is s20 per unitManufacturerinformationFixed production cost is $100,000Variable production cost is $35 per unitOOptimalOrderQuantityDemand0.2830%iei0.220.1815%0.1110%5%0%8000 1000012000140001600018000QuantityRetailer marginal profit is the same as the marginal profit of the manufacturer,$45.Retailer's marginal profit for selling a unit during the season, $45, is smaller thanthe marginal loss, $60, associated with each unit sold at the end of the season todiscountstores.Optimal orderquantitydependsonmarginal profitandmarginal lossbutnot onthefixed costRetailer optimal policy is to order 12,000 units for an average profit of $470,700→detail...0retailer's expected profite.g.Q=12000:
全英文课《Designing and Managing Supply Chain System》 授课教案 4.2.1 Supply contracts (1)2-Stage Sequential Supply Chain (no contract) A buyer and a supplier. Buyer’s activities: Generating a forecast Determining how many units to order from the supplier Placing an order to the supplier so as to optimize his own profit Purchase based on forecast of customer demand Supplier’s activities: Reacting to the order placed by the buyer. Make-To-Order (MTO) policy Swimsuit Example 2 Stages: a retailer who faces customer demand a manufacturer who produces and sells swimsuits to the retailer. Retailer Information: Summer season sale price of a swimsuit is $125 per unit. Wholesale price paid by retailer to manufacturer is $80 per unit. Salvage value after the summer season is $20 per unit Manufacturer information: Fixed production cost is $100,000 Variable production cost is $35 per unit Optimal Order Quantity Retailer marginal profit is the same as the marginal profit of the manufacturer, $45. Retailer’s marginal profit for selling a unit during the season, $45, is smaller than the marginal loss, $60, associated with each unit sold at the end of the season to discount stores. Optimal order quantity depends on marginal profit and marginal loss but not on the fixed cost. Retailer optimal policy is to order 12,000 units for an average profit of $470,700. →detail. retailer’s expected profit e.g. Q =12000：
全英文课《DesigningandManagingSupplyChainSystem》授课教案revenue in particular demand=sale units*45-excess inventory*60DemandProfitProfitProb.Probability80000.1112000013200100000.1133000036300120000.285400001512000.22140005400001188000.1816000540000972000.11800054000054000Sum470700Retailer's Riskdue to excess inventoryRetailer's expected profit as a function of order quantityExpectedProfit500000400000300000200000100000060008000180002000010000120001400016000OrderQuantityManufacturer'sprofit* If the retailer places this order, 12000, themanufacturer's profit is=12.000(80-35)-100,000=$440.000So,Retailer'sorderquantity=12000units*Retailer's expected profit=470700$*Manufacturer'sprofit=440000s*Profitof theSC=910700$ORiskSharing&supplycontractsRisk in the sequential supply chain:Buyerassumes all oftheriskof havingmoreinventorythan salesBuyer limits his order quantity because of the huge financial riskSupplier takes no riskSupplier would like the buyer to order as much as possibleSince the buyer limits his order quantity, there is a significant increase in thelikelihood ofout of stock.If the supplier shares some of the risk with the buyerit may be profitable for buyer to order morereducing out of stock probability
全英文课《Designing and Managing Supply Chain System》 授课教案 revenue in particular demand =sale units*45-excess inventory*60 Retailer’s Risk due to excess inventory Retailer’s expected profit as a function of order quantity Manufacturer’s profit Risk Sharing & supply contracts Risk i n the sequential supply chain: Buyer assumes all of the risk of having more inventory than sales Buyer limits his order quantity because of the huge financial risk. Supplier takes no risk. Supplier would like the buyer to order as much as possible Since the buyer limits his order quantity, there is a significant increase in the likelihood of out of stock. If the supplier shares some of the risk with the buyer it may be profitable for buyer to order more reducing out of stock probability
全英文课《DesigningandManagingSupplyChainSystem》授课教案increasing profit for both the supplier and the buyerSupply contracts enable this risk sharing(2)Buy-Back ContractIn this contract, the seller agrees to buy back unsold goods from the buyer forsome agreed-upon price higher than the salvage value. Clearly, this gives the buyerincentive to order more units, since the risk associated with unsold units is decreasedOn the other hand, the supplier's risk clearly increases. Thus, the contract is designedsuch that the increase in order quantity placed by the buyer, and hence the decrease inthe likelihood of out of stock, more than compensates the supplier for the increase inrisk. Let's return to the swimsuit example.?Buy-Back Contract: Swimsuit ExampleAssume the manufacturer offers to buy unsold swimsuits from the retailer for$55.Retailerhasanincentivetoincreaseitsorderquantityto14,o00units,foraprofitof$513,800while the manufacturer's average profit increases to $471,900Total 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)Profit vs. Order Quantity60000500,00040000Ret.P30000Mig.P200.0100,00003,0006,0009,00012,00015,00018,00021,00xQuantitFIGURE 4-2: Buy-back contract14000demandprob.0.11231008000210000100000.1135000038500120000.284900001372000.2214000630000138600160000.186300001134000.11800063000063000513800expectedprofit
全英文课《Designing and Managing Supply Chain System》 授课教案 increasing profit for both the supplier and the buyer. Supply contracts enable this risk sharing (2)Buy-Back Contract In this contract, the seller agrees to buy back unsold goods from the buyer for some agreed-upon price higher than the salvage value. Clearly, this gives the buyer incentive to order more units, since the risk associated with unsold units is decreased. On the other hand, the supplier's risk clearly increases. Thus, the contract is designed such that 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. Let's return to the swimsuit example. 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) FIGURE 4-2: Buy-back contract 14000 demand prob. 8000 0.11 210000 23100 10000 0.11 350000 38500 12000 0.28 490000 137200 14000 0.22 630000 138600 16000 0.18 630000 113400 18000 0.1 630000 63000 expected profit 513800
全英文课《DesigningandManagingSupplyChainSystem》授课教案600.000$513,800500.000O400.000300.000200,000100.000eop.o.cooo.co.o.co.co.aoo.co.co.o.comOrderQuantityProfit ofretailerManufacturer's profit (=$55)600,000$471,90050000400,000DIF300,000200,000ew100,000nProduction QuantityWin-winTotal max.profit of SC=471900+ 513800=985700sProfitadded=75000$(3)RevenueSharingContractObserve that, in the sequential supply chain, one important reason for the buyerto order a limited number of units is the high wholesale price. If somehow the buyercan convincethe supplier to reducethe wholesaleprice,then clearlythebuyer willhave an incentive to order more units.Of course,a reduction in wholesale price willdecrease the supplier's profit if it is unable to sell more units. This is addressed byrevenue-sharing contracts. In a revenue-sharing contract, the buyer shares some of itsrevenuewiththeseller,inreturnforadiscount onthewholesaleprice.That is,inthiscontract,thebuyertransfersaportionoftherevenuefromeachunitsoldtotheendcustomer.Considerthe swimsuitexample.Revenue Sharing Contract: Swimsuit ExampleManufacturer agrees to decrease the wholesale price from $80 to $60In return, the retailer provides 15 percent of the product revenue to themanufacturer.Retailer has an incentive to increase his order quantity to 14,000 for a profit of$504.325This order increase leads to increased manufacturer's profit of $481,375Supplychaintotal profit=$985,700 (=$504,325+$481,375)0.00600,000500,000:00400,000.00t300,000..00a.0so$.0001.00014.00017.000
全英文课《Designing and Managing Supply Chain System》 授课教案 Profit of retailer Manufacturer’s profit (=$55) Total max. profit of SC=471900+ 513800=985700$ Profit added =75000$ （3）Revenue Sharing Contract Observe that, in the sequential supply chain, one important reason for the buyer to order a limited number of units is the high 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. This is addressed by 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. That is, in this contract, the buyer transfers a portion of the revenue from each unit sold to the end customer. Consider the swimsuit example. Revenue Sharing Contract: Swimsuit Example Manufacturer agrees to decrease the wholesale price from $80 to $60 In return, the retailer provides 15 percent of the product revenue to the manufacturer. Retailer has an incentive to increase his order quantity to 14,000 for a profit of $504,325 This order increase leads to increased manufacturer’s profit of $481,375 Supply chain total profit= $985,700 (= $504,325+$481,375)