supply contracts.pptVIP

Cost-Sharing ContractSki-Jacket Example Manufacturer agrees to decrease the wholesale price from $80 to $62 In return, distributor pays 33% of the manufacturer production cost Manufacturer increases production quantity to 14,000 Manufacturer profit = $182,380 Distributor profit = $523,320 The supply chain total profit = $705,700 Same as the profit under pay-back contracts Cost-Sharing ContractSki-Jacket Example FIGURE 4-8: Manufacturer’s average profit (cost-sharing contract) Cost-Sharing ContractSki-Jacket Example (cont) FIGURE 4-9: Distributor’s average profit (cost-sharing contract) Implementation Issues Cost-sharing contract requires manufacturer to share production cost information with distributor Agreement between the two parties: Distributor purchases one or more components that the manufacturer needs. Components remain on the distributor books but are shipped to the manufacturer facility for the production of the finished good. Global Optimization Relevant data: Selling price, $125 Salvage value, $20 Variable production costs, $55 Fixed production cost. Cost that the distributor pays the manufacturer is meaningless Supply chain marginal profit, 70 = 125 – 55 Supply chain marginal loss, 35 = 55 – 20 Supply chain will produce more than average demand. Optimal production quantity = 14,000 units Expected supply chain profit = $705,700 Same profit as under pay-back and cost sharing contracts Global Optimization FIGURE 4-10: Global optimization 4.5 Contracts for Non-Strategic Components Variety of suppliers Market conditions dictate price Buyers need to be able to choose suppliers and change them as needed Long-term contracts have been the tradition Recent trend towards more flexible contracts Offers buyers option of buying later at a different price than current Offers effective hedging strategies against shortages Long-Term Contracts Also called forward or fixed commitment contracts Contracts specify a fixed amount of supply to be delivered at som