Global Optimization StrategyWhat is the best strategy for the entiresupplychain?TreatbothsupplierandretailerasoneentityTransferof moneybetween the parties isignored4-16
4-16 Global Optimization Strategy ⚫ What is the best strategy for the entire supply chain? ⚫ Treat both supplier and retailer as one entity ⚫ Transfer of money between the parties is ignored
Global OptimizationSwimsuitExampleRelevant dataSelling price,$125Salvage value, $20Variableproductioncosts,$35Fixedproductioncost.Supply chain marginal profit,90 = 125-35Supplychainmarginal loss,15=35-20Supply chain will produce more than averagedemandOptimal productionquantity=16,000unitsExpectedsupply chain profit=$1,014,5004-17
4-17 Global Optimization Swimsuit Example ⚫ Relevant data ⚫ Selling price, $125 ⚫ Salvage value, $20 ⚫ Variable production costs, $35 ⚫ Fixed production cost. ⚫ Supply chain marginal profit, 90 = 125 - 35 ⚫ Supply chain marginal loss, 15 = 35 – 20 ⚫ Supply chain will produce more than average demand. ⚫ Optimal production quantity = 16,000 units ⚫ Expected supply chain profit = $1,014,500
GlobalOptimizationSwimsuitExampleProfitvs.OrderQuantity1,200,0001,000,000(s)ior800,000600,000400,000200,000003,0006,0009,00012,00015,00018,00021,000QuantityFIGURE4-4:Profit usingglobal optimization strategy4-18
4-18 Global Optimization Swimsuit Example FIGURE 4-4: Profit using global optimization strategy
Global Optimization and SupplyContractsUnbiased decisionmaker unrealisticReguiresthefirmtosurrenderdecision-makingpowerto anunbiaseddecisionmakerCarefullydesigned supply contractscanachieveasmuch as global optimizationGlobal optimization does not provide a mechanism toallocate supply chainprofit between thepartnersSupplycontractsallocatethisprofitamong supplychainmembersEffective supply contracts allocate profitto each partnerina waythat no partnercan improve hisprofitbydeciding to deviate from the optimal set of decisions4-19
4-19 Global Optimization and Supply Contracts ⚫ Unbiased decision maker unrealistic ⚫ Requires the firm to surrender decision-making power to an unbiased decision maker ⚫ Carefully designed supply contracts can achieve as much as global optimization ⚫ Global optimization does not provide a mechanism to allocate supply chain profit between the partners. ⚫ Supply contracts allocate this profit among supply chain members. ⚫ Effective supply contracts allocate profit to each partner in a way that no partner can improve his profit by deciding to deviate from the optimal set of decisions
Implementation Drawbacks ofSupply ContractsBuy-backcontractsRequire suppliers to have an effective reverse logisticssystemand mayincreaselogisticscostsRetailers have an incentive to push the products notunderthebuybackcontract.Retailer'sriskismuchhigherfortheproductsnotunderthebuybackcontract.Revenuesharing contractsRequire suppliers to monitor the buyer's revenue and thusincreasesadministrativecost.Buyers have an incentive to push competing products withhigher profitmarginsSimilarproductsfromcompetingsupplierswithwhomthebuyerhasnorevenuesharingagreement.4-20
4-20 Implementation Drawbacks of Supply Contracts ⚫ Buy-back contracts ⚫ 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 ⚫ 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