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Strategic components - Supply contracts

11 important questions on Strategic components - Supply contracts

What is a sequential supply chain?

The sequence of events represents a sequential decision-making process. In such a sequential supply chain, each party determines its own course of action independent of the impact of its decisions on other parties.

What happens when the buyer limits his order quantity?

There is a significant increase in the likelihood of out of stock.

How can both the buyer and supplier increase their profitability?

By sharing the risk. If the supplier is willing and able to share some of the risk with the buyer, it may be profitable for the buyer to order more items, thereby reducing out-of-stock probability and increasing profit for both the supplier and the buyer.
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What are buy-back contracts?

In this contract, the seller agrees to buy back unsold goods from the buyer for some agreed-upon price higher than the salvage value.

What are revenue-sharing contracts?

In a revenue-sharing contract, the buyer shares some of its revenues 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.

What are quantity-flexibility contracts?

Quantity-flexibility contracts are contracts in which the supplier provides full refund for returned (unsold) items as long as the number of returns is no larger than a certain quantity. Thus, this contract gives full refund for a portion of the returned items, whereas a buy-back contract provides partial refund for all returned items.

What are sales rebate contracts?

Sales rebate contracts provide a direct incentive to the retailer to increase sales by means of a rebate paid by the supplier for any item sold above a certain quantity.

What is global optimization?

Effective supply contracts provide incentives for supply chain partners to replace traditional strategies, in which each partner optimizes its own profit, with global optimization, where supply chain profit is maximized.

What is the difficulty with global optimization?

It requires the firm to surrender decision-making power to an unbiased decision maker.

Why are supply contracts so important?

They help firms achieve global optimization, without the need for an unbiased decision maker, by allowing buyers and suppliers to share the risk and the potential benefit. In can be shown that carefully designed supply contracts achieve the exact same profit as global optimization.

What is the main drawback of global optimization?

It does not provide a mechanism to allocate supply chain profit between the partners. Effective supply contracts allocate profit to each partner in such a way that no partner can improve his profit by deciding to deviate from the optimal set of decisions.

The question on the page originate from the summary of the following study material:

Designing and Managing the Supply Chain | 9780071270977 | David Simchi Levi

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