Chapter 4: Supply Contracts4-1
4-1 Chapter 4: Supply Contracts
4.1 IntroductionSignificant level of outsourcingMany leading brandOEMs outsourcecompletemanufacturing and design oftheir productsMore outsourcing has meantSearchforlower cost manufacturersDevelopment of design and manufacturing expertisebysuppliersProcurementfunction inOEMsbecomes veryimportantOEMshavetogetintocontractswithsuppliersForboth strategic and non-strategic components4-2
4-2 4.1 Introduction ⚫ Significant level of outsourcing ⚫ Many leading brand OEMs outsource complete manufacturing and design of their products ⚫ More outsourcing has meant ⚫ Search for lower cost manufacturers ⚫ Development of design and manufacturing expertise by suppliers ⚫ Procurement function in OEMs becomes very important ⚫ OEMs have to get into contracts with suppliers ⚫ For both strategic and non-strategic components
4.2 Strategic ComponentsSupply Contract can include the followingPricingand volumediscountsMinimumandmaximumpurchasequantitiesDeliveryleadtimesProductor material qualityProductreturnpolicies4-3
4-3 4.2 Strategic Components Supply Contract can include the following: ⚫ Pricing and volume discounts. ⚫ Minimum and maximum purchase quantities. ⚫ Delivery lead times. ⚫ Product or material quality. ⚫ Product return policies
2-Stage Sequential Supply ChainA buyer and a supplierBuyer's activities:generating a forecastdetermining howmany units to order from the supplierplacing an order to the supplier soas to optimize hisownprofitPurchasebasedonforecastofcustomerdemandSupplier's activities:reactingtothe orderplaced bythebuyerMake-To-Order(MTO)policy4-4
4-4 2-Stage Sequential Supply Chain ⚫ 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
SwimsuitExample 2 Stages:a retailer who faces customer demanda manufacturerwho produces andsells swimsuits tothe retailer.RetailerInformationSummerseasonsalepriceofaswimsuitis$125perunit.Wholesaleprice paid by retailer to manufacturer is$80perunit.Salvage value afterthe summerseason is $20 perunitManufacturer information:Fixed production costis $100,000Variable production costis$35perunit4-5
4-5 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