Chapter 4 11 14 Designing And Managing The Supply Chain Contracts Summary In your report, you are recommended to summarize all key points/concepts/quantita

Chapter 4 11 14 Designing And Managing The Supply Chain Contracts Summary In your report, you are recommended to summarize all key points/concepts/quantitative methods of a chapter or chapters. Bullet points can be used as effective ways to organize these points/concepts. You shall be as thorough as possible while keeping total report length within check. Balancing between brevity and detail is of paramount consideration for your reports. The goal of these reports is not only to timely structure your thoughts for better knowledge retainment, but also to prepare a summary report for your tests. Yes, it is like forcing you to take notes for yourself. I may comment on your report, but no grades will be given to an individual report. Your report submission will be considered when it comes to grading your participation. Reports and discussion participations will jointly determine your participation grade. Supply Chain Contract
Exercise Questions
• Under a make-toorder system:
– Manufacturer:
• whole sale price = $90
• variable cost per unit =
$45
• Fixed cost = $100,000
– Retailer:
• Retail price = $150
• Salvage value = $50
• Demand:
Probability
8000
0.2
10000
0.2
12000
0.25
14000
0.15
16000
0.1
18000
0.1
a. What would the retailer order quantity be
without any contract incentives?
b. How much would the retailer and
manufacturer profits be?
Answer: Retailor Order Quantity
Retail price
Whole sale price
Salvage Value
Retailer
150 Cu (Retail -Whole Sale)
90 Co (Whole sale – Salvage)
50 Service Probability ( Cu / (Cu + Co))
Demand Distribution
60 Demand Probability Cumulative Probability
40 8000
0.2
0.2
0.6 10000
0.2
0.4
12000
0.25
0.65
14000
0.15
0.8
16000
0.1
0.9
18000
0.1
1
Answer: Profit Calculation
8000
10000
12000
14000
16000
18000
Probability Cumulative
0.2
0.2
0.2
0.4
0.25
0.65
0.15
0.8
0.1
0.9
0.1
1
1
Sum:
Retailer
Manufactuer
Supply Chain Profit
8000
480000
480000
480000
480000
480000
480000
96000
96000
120000
72000
48000
48000
480000
10000
400000
600000
600000
600000
600000
600000
80000
120000
150000
90000
60000
60000
560000
12000
320000
520000
720000
720000
720000
720000
64000
104000
180000
108000
72000
72000
600000
14000
240000
440000
640000
840000
840000
840000
48000
88000
160000
126000
84000
84000
590000
16000
160000
360000
560000
760000
960000
960000
32000
72000
140000
114000
96000
96000
550000
600000
440000
1040000
Example: 520000 = [ 150 * 10000 – 90 * 12000 + 50 * (12000 – 10000)]
104000 = 520000 * 0.2
18000
80000
280000
480000
680000
880000
1080000
16000
56000
120000
102000
88000
108000
490000
c. What would be the order quantity under a
buy back contract of $65?
d. What would retailer and manufacturer
profits be under the buy back contract?
Answer: Retailor Order Quantity
Retail price
Whole sale price
Salvage Value
Retailer
150 Cu (Retail -Whole Sale)
90 Co (Whole sale – Salvage)
65 Service Probability ( Cu / (Cu + Co))
Demand Distribution
60 Demand Probability Cumulative Probability
25 8000
0.2
0.2
0.705882 10000
0.2
0.4
12000
0.25
0.65
14000
0.15
0.8
16000
0.1
0.9
18000
0.1
1
Answer: Profit Calculation
8000
10000
12000
14000
16000
18000
Probability Cumulative
0.2
0.2
0.2
0.4
0.25
0.65
0.15
0.8
0.1
0.9
0.1
1
1
Sum:
Retailer
Manufactuer
8000
480000
480000
480000
480000
480000
480000
96000
96000
120000
72000
48000
48000
480000
10000
430000
600000
600000
600000
600000
600000
86000
120000
150000
90000
60000
60000
566000
12000
380000
550000
720000
720000
720000
720000
76000
110000
180000
108000
72000
72000
618000
14000
330000
500000
670000
840000
840000
840000
66000
100000
167500
126000
84000
84000
627500
16000
280000
450000
620000
790000
960000
960000
56000
90000
155000
118500
96000
96000
611500
627500
530000 Gross Profit
Manufacturer help = 15
Adjust for buy back costs
6000
90000
18000
4000
60000
12000
2000
30000
7500
0
0
0
0
0
0
0
0
0
Total Buyback =
37500
492500 Net Expected Profit
18000
230000
400000
570000
740000
910000
1080000
46000
80000
142500
111000
91000
108000
578500
e.What would be the order quantity under a
revenue sharing contract that lowers
whole price to $75 in return for retail15%
of sales?
f. What would retailer and manufacturer
profits be under the revenue sharing
contract?
Answer: Retailor Order Quantity
Retail price
Whole sale price
Salvage Value
Retailer
127.5 Cu (Retail -Whole Sale)
75 Co (Whole sale – Salvage)
50 Service Probability ( Cu / (Cu + Co))
Demand Distribution
52.5 Demand Probability Cumulative Probability
25 8000
0.2
0.2
0.677419 10000
0.2
0.4
12000
0.25
0.65
14000
0.15
0.8
16000
0.1
0.9
18000
0.1
1
Answer: Profit Calculation
8000
10000
12000
14000
16000
18000
Probability Cumulative
0.2
0.2
0.2
0.4
0.25
0.65
0.15
0.8
0.1
0.9
0.1
1
1
Sum:
8000
420000
420000
420000
420000
420000
420000
84000
84000
105000
63000
42000
42000
420000
10000
370000
525000
525000
525000
525000
525000
74000
105000
131250
78750
52500
52500
494000
12000
320000
475000
630000
630000
630000
630000
64000
95000
157500
94500
63000
63000
537000
14000
270000
425000
580000
735000
735000
735000
54000
85000
145000
110250
73500
73500
541250
16000
220000
375000
530000
685000
840000
840000
44000
75000
132500
102750
84000
84000
522250
541250
320000 Gross Profit
Adjust for retail revenue sharing 15% Retail
180000
36000
225000
45000
270000
67500
315000
47250
315000
31500
315000
31500
Total Revenue Shared
258750
578750 Net Expected Profit
Supply Chain Profit 1120000
18000
170000
325000
480000
635000
790000
945000
34000
65000
120000
95250
79000
94500
487750
Retailer
Manufactuer
22.5
Coordinated
Product and
Supply Chain
Design
Thailand Flood:
Hard Disk Drive:
Hard Disk Drive
• Digital Trends:
– 1 TB hard disk drive prices skyrocket
180%
Supply Chain vs Products
• The success of your product
depends greatly on your supply
chain efficiency.
• Your product, on the other hand,
also enormously influences your
supply chain:
– Uncertainty:
• Shorter life cycle
• Demand pattern change
Hard Disk Drive
• Bang Pa-In Industrial Park,
Navanakorn Industrial Park and
Bangkadi Industrial Park:
– Near Bangkok
– WD: 60% of hard disk capacity in
Thailand
– Toshiba: 50% of hard disk capacity in
Thailand
2009 Kia Borrego
• Motor Trend:
– the Borrego is a solid, well-done
piece that does a lot, holds a ton, and
is plenty satisfying to drive.
2009 Kia Borrego
• Motor Trends: As Clint Eastwood’s Dirty Harry
once said: “I know what you’re thinking.” What
is Kia, or anyone, doing introducing a midsize,
truck-style framed, V-6- and V-8-powered
sport/utility into a shell-shocked economy still
getting used to $4- to $5-per-gallon fuel prices?
Kia has to be asking itself the same thing.
Supply Chain vs Products
• Fisher (1997), Harvard Business
Review:
– The demand pattern classified your
product into two categories:
• Functional:
– Soup, beers, tires etc.
• Innovative:
– High clock-speed with short life cycle
Product type changes over
time:
Pull – Push Supply Chain
• Pull:
– Dell’s online order
– Nike’s self-design
– Basset furniture’s customized cloth
sofa
• Push:
– Traditional business model
• Push – Pull: boundary
Framework for Matching Product
Design and Supply Chain
Strategies
FIGURE 11-3: The impact of demand uncertainty and product
introduction frequency on product design and supply chain strategy
Design for Logistics
• Economic packing and
transportation
• Concurrent and parallel processing
• standardization
Economic packing and
transportation
• International Design Excellence
Award (IDEA) – 2007
– Design Strategy: Gourmet Settings at
Costco
• By Kerr & Co. and Hahn Smith Design
– Kerr $ Co. – flatware design
– Hahn Smith – Packaging
Economic packing and
transportation
• Kerr & Co.:
– Visual: Sleek, modern,
and sculptural
– Feeling: “heavy” to
convey the quality sense
– Process:
• Computer 3-D rendering
• Foam prototype to test the
shape
• Then wood prototype along
with technical drawings:
– To manufacturing – easy
to match up
Economic packing and
transportation
• Tight advertising budget:
Economic packing and
transportation
• Back-end logistics:
– Light-weighted package
– Shape the package to maximize the
container usage
Concurrent and Parallel
Engineering
• Decoupling: physically separate parts
and processes
Concurrent and Parallel
Engineering
Standardization:
• A modular product:
– Product from a variety of modules, where
each module offers a number of options
• A modular process:
– Discrete operations
– Inventory stored in partially finished form
– Product are differentiated by each discrete
process
– Example:
• Semiconductor wafer
• Oil Refining – not
Standardization:
• Part Standardization:
– use common parts across products
– Reduce costs (EOS), reduce inventory, reduce part
proliferation, improves predictability of parts.
– Watch for cannibalization effect
• Process standardization:
– Delay differentiation
– Risk pooling across products or varieties
– Example:
• HP printer with local supply of manuals and power
supplies
• Honda redesign its assembly line to enable assemble
wagons, sedans, and sports cars.
Benetton
Old Manufacturing
Process
Spin or Purchase Yarn
Dye Yarn
Finish Yarn
Manufacture Garment Parts
Join Parts
Benetton
New Manufacturing Process
Spin or Purchase Yarn
Manufacture Garment Parts
Join Parts
Dye Garment
Finish Garment
This step is postponed
Standardization:
• Product Standardization:
– Advertise a large variety of products,
but carries only the most important
items (80/20 rule)
– Downward substitution:
• Rental car
• Higher functionality chips
– Standardize the product for different
markets:
• Power supply
Standardization:
• Procurement standardization:
– Leverages commonality in part and
equipment purchasing
• Common equipments
• Common parts
– Better utilization of production resources
and reduce raw material inventory
– Example:
• Application specific integrated circuits (ASICs):
– Highly customized
– Common but expensive equipments
– Procure the standard equipment
Operational Strategies for
Standardization
Process
Nonmodular
Modular
Modular
Parts standardization
Process standardization
Nonmodular
Product standardization
Procurement standardization
Product
The Spectrum of Supplier
Integration
• No single “appropriate level” of supplier integration
• None
– Supplier is not involved in design.
– Materials/subassemblies supplied as per customer
specifications/design
• White box
– Informal level of integration
– Buyer “consults” with the supplier informally when designing
products and specifications
– No formal collaboration
• Grey box
– Formal supplier integration
– Collaborative teams between buyer’s and supplier’s engineers
– Joint development
• Black box
– Buyer gives the supplier a set of interface requirements
– Supplier independently designs and develops the required
component
Appropriate Level
Depends on the Situation
• Process Steps to follow:
– Determine internal core
competencies.
– Determine current and future new
product developments.
– Identify external development and
manufacturing needs.
Appropriate Level
Depends on the Situation
• Black Box
– If future products have components that require
expertise that the firm does not possess, and
development of these components can be separated
from other phases of product development, then
taking
• Grey Box
– If separation is not possible
• White Box
– If buyer has some design expertise but wants to
ensure that supplier can adequately manufacture the
component
Keys to Supplier Integration
• Making the relationship a success:
– Select suppliers and build relationships with them
– Align objectives with selected suppliers
• Which suppliers can be integrated?
– Capability to participate in the design process
– Willingness to participate in the design process
– Ability to reach agreements on intellectual property
and confidentiality issues.
– Ability to commit sufficient personnel and time to the
process.
– Co-locating personnel if appropriate
– Sufficient resources to commit to the supplier
integration process.
Chapter 4 Supply Chain Contracts
Agenda
• A basic scenario using news vendor example.
• Supply chain contracts and numerical examples.
• Essence of supply chain contracts.
Example: Vaccine -The Production and
Delivery Process
Flu season
Growing viruses in millions
of fertilized eggs
Northern hemisphere
Immunity takes
About 2 weeks
Example: Vaccine – The different players and
their objectives
• Governments (CDC in US), State health
departments
– Balance the public health benefits and the vaccination
program costs
• Focus on high-risk individuals.
• In the US, in 1999, 66.9% of individuals of age 65 and older
were vaccinated (GAO-2001).
Example: Vaccine – The different players and
their objectives
• Manufacturer
– Production volume and the need for profitability
– Highly uncertain production yield due to biological nature of
production process
• Considerable shortage of flu vaccination in 2000-01.
According to the US GAO
– Unanticipated problems growing the new influenza strains
– Quality control issues raised by FDA
• Considerable shortage in 2003-04
– Early break of the epidemic
• Significant shortage in 2004-05
– Chiron’s manufacturing plant in the U.K. was shut down due to bacterial
contamination
Example: Vaccine – Summary
• Uncertain production yield is an important reason
for insufficient supply of vaccine
• Cost sharing contracts can have a major impact
on the influenza vaccination supply chain
• Production risk taken by the manufacturers
maybe the reason why only a small number of
manufacturer exists
Order System:
• Make to Order:
Order
• Make to Stock:
Order
A Numerical Example
Fixed Production Cost =$100,000
Variable Production Cost=$35
Wholesale Price =$80
Selling Price=$125
Salvage Value=$20
Manufacturer
Manufacturer DC
Retail DC
Stores
A Numerical Example
• Possible demand:
Probability
8000
0.11
10000
0.11
0.30
12000
0.28
14000
0.22
16000
0.18
18000
0.1
0.28
0.25
0.22
0.20
0.18
0.15
Series2
0.11
0.11
8000
10000
0.10
0.10
0.05
0.00
12000
14000
16000
18000
A Numerical Example
• How much should the retailer order?
• Say 8,000:
– Demand 8,000: 125 x 8000 – 80 x 8000 = 360,000
– Demand 10,000: 125 x 8000 – 80 x 8000 = 360,000
• Say 10,000:
– Demand 8,000: 125 x 8000 – 80 x 10000 + 20 x 2000
= 240,000
– Demand 10,000: 125 x 10000 – 80 x 10000 = 450,000
– Demand 12,000: 125 x 10000 – 80 x 10000 = 450,000
A Numerical Example
Demand
8,000
10,000
12,000
14,000
16,000
18,000
Expected Profits
8,000
$360,000.00
$360,000.00
$360,000.00
$360,000.00
$360,000.00
$360,000.00
$360,000.00
10,000
$240,000.00
$450,000.00
$450,000.00
$450,000.00
$450,000.00
$450,000.00
$426,900.00
Order Quantity
12,000
14,000
$120,000.00
$0.00
$330,000.00 $210,000.00
$540,000.00 $420,000.00
$540,000.00 $630,000.00
$540,000.00 $630,000.00
$540,000.00 $630,000.00
$470,700.00 $455,700.00
16,000
-$120,000.00
$90,000.00
$300,000.00
$510,000.00
$720,000.00
$720,000.00
$394,500.00
18,000
-$240,000.00
-$30,000.00
$180,000.00
$390,000.00
$600,000.00
$810,000.00
$295,500.00
Prob
0.11
0.11
0.28
0.22
0.18
0.1
A Numerical Example
Expected Profits
$500,000.00
$450,000.00
$400,000.00
$350,000.00
$300,000.00
$250,000.00
Expected Profits
$200,000.00
$150,000.00
$100,000.00
$50,000.00
$0.00
8,000
10,000
12,000
14,000
16,000
18,000
A Numerical Example
• Now, the retailer choose 12,000 units:
– Expected profits: $470,700
• The manufacturer, on the other hand:
– Profits: 12,000 x (80 – 35) – 100,000 = $440,000
Buy Back Contract:
• Say, the manufacturer offers to buy back every unsold
units at a price of $55:
Demand
8,000
10,000
12,000
14,000
16,000
18,000
Expected Profits
Price
Cost
Salvage
8,000
$360,000.00
$360,000.00
$360,000.00
$360,000.00
$360,000.00
$360,000.00
$360,000.00
125
80
55
10,000
$310,000.00
$450,000.00
$450,000.00
$450,000.00
$450,000.00
$450,000.00
$434,600.00
Order Quantity
12,000
14,000
$260,000.00
$210,000.00
$400,000.00
$350,000.00
$540,000.00
$490,000.00
$540,000.00
$630,000.00
$540,000.00
$630,000.00
$540,000.00
$630,000.00
$493,800.00
$513,800.00
16,000
$160,000.00
$300,000.00
$440,000.00
$580,000.00
$720,000.00
$720,000.00
$503,000.00
18,000
$110,000.00
$250,000.00
$390,000.00
$530,000.00
$670,000.00
$810,000.00
$467,000.00
Prob
0.11
0.11
0.28
0.22
0.18
0.1
Buy Back Contract:
• Manufacturer:
– Sell 14000:
• 14000 x (80 – 35) – 100000 =
530000
– Expected buy back cost:
• Pay additional $35 (55 – 20
) to the retailer:
• If 8000 units sold, $210,000
• If 10,000 units sold, $140,000
• If 12,000 units sold, $70,000
• Total expected cost:
– $58,100
– Net profit:
• $471,900
Buy Back Cost
Expected Costs
14,000
$23,100.00
$210,000.00
$15,400.00
$140,000.00
$19,600.00
$70,000.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$58,100.00
SUM:
530000
Sales
$471,900.00
Profit:
Buy Back Contract:
•
With Buy back contract:
– Retailer expected profits = $513,800
– Manufacturer profits = $471,900
– Sum:$985,700
•
Without the contract:
– Retailer expected profits = $470,700
– Manufacturer profits = $440,000
– Sum: $910,700
Expected Profits
$600,000.00
$500,000.00
$400,000.00
$300,000.00
Expected Profits
$200,000.00
$100,000.00
$0.00
8,000
10,000
12,000
14,000
16,000
18,000
Revenue sharing contract
• Lower whole sale price in return for a percentage of the
retail revenue
– 15% of revenue
Demand
8,000
10,000
12,000
14,000
16,000
18,000
Price
Cost
Salvage
8,000
$370,000.00
$370,000.00
$370,000.00
$370,000.00
$370,000.00
$370,000.00
$370,000.00
106.25
60
20
10,000
$290,000.00
$462,500.00
$462,500.00
$462,500.00
$462,500.00
$462,500.00
$443,525.00
85% of 125
Order Quantity
12,000
14,000
$210,000.00
$130,000.00
$382,500.00
$302,500.00
$555,000.00
$475,000.00
$555,000.00
$647,500.00
$555,000.00
$647,500.00
$555,000.00
$647,500.00
$498,075.00
$504,325.00
16,000
$50,000.00
$222,500.00
$395,000.00
$567,500.00
$740,000.00
$740,000.00
$472,625.00
18,000
-$30,000.00
$142,500.00
$315,000.00
$487,500.00
$660,000.00
$832,500.00
$409,875.00
Prob
0.11
0.11
0.28
0.22
0.18
0.1
Revenue sharing contract
• Manufacturer side:
– First, wholesale price lowered to $60:
• 14000 x (60-35) – 100,000 = $250,000
– But, additional gain as 15% of the revenue:
• As the retailer orders 14,000
– 125 x 0.15 x sell quantity (8,000, 10,000, 12,000, 14,000, 16,000,
18000)
231375
– Weight by individual probability
– Total: $481,375
Revenue sharing contract
•
With revenue sharing contract:
– Retailer expected profits = $504,325
– Manufacturer profits = $481,375
– Sum: $985,700
•
Without the contract:
– Retailer expected profits = $470,700
– Manufacturer profits = $440,000
– Sum: $910,700
Expected Profits
$600,000.00
$500,000.00
$400,000.00
$300,000.00
Expected Profits
$200,000.00
$100,000.00
$0.00
8,000
10,000
12,000
14,000
16,000
18,000
Quantity-flexible Contracts
• Full refund for returned items as long as the
number of return is no larger than a pre-set
quantity.
Sales Rebate Contracts:
• Sales rebate paid by the manufacturer for any
item sold above a certain quantity
Essence of Supply Chain
Contracts
• As if the supply chain is operating as one firm so that a
global optimization could be achieved:
– Assume one firm:
• Profit: 125 – 35 = $90
• Overstock cost: 35 – 20 = $15
• By our news vendor problem:
– Under-stock / (under-stock + over-stock)
– 90/ (90 + 15) = 0.8571
8000
Probability
Accumulative
0.11
0.11
10000
0.11
0.22
12000
0.28
0.5
14000
0.22
0.72
16000
0.18
0.9
18000
0.1
1
Essence of Supply Chain
Contracts
• Total profit:
– 16000 x 90 – 100000 = $1,014,500
– Buy back and revenue sharing example: $985,700
– Without any contracts: $910,700
Demand
8,000
10,000
12,000
14,000
16,000
18,000
Price
Cost
Salvage
8,000
$612,000.00
$612,000.00
$612,000.00
$612,000.00
$612,000.00
$612,000.00
$612,000.00
125
35
20
10,000
$690,000.00
$900,000.00
$900,000.00
$900,000.00
$900,000.00
$900,000.00
$876,900.00
Order Quantity
12,000
14,000
$660,000.00 $630,000.00
$870,000.00 $840,000.00
$1,080,000.00 $1,050,000.00
$1,080,000.00 $1,260,000.00
$1,080,000.00 $1,260,000.00
$1,080,000.00 $1,260,000.00
$1,010,700.00 $1,085,700.00
16,000
$600,000.00
$810,000.00
$1,020,000.00
$1,230,000.00
$1,440,000.00
$1,440,000.00
$1,114,500.00
18,000
$570,000.00
$780,000.00
$990,000.00
$1,200,000.00
$1,410,000.00
$1,620,000.00
$1,105,500.00
Essence of Supply Chain
Contracts
•…
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