Supply Contracts

Supplier actions in make to order

Supplier produces after buyer places order

Supplier actions in make to stock

Supplier produces before buyer places order

Wholesale contracts

A contract where the supplier charges a fixed price per unit and the buyer assumes all demand and inventory risk

Does wholesale price coordinate the SC

no

Buy back contract

Seller agrees to buy back all unsold goods from buyer for an agreed upon price

Revenue sharing contract

Seller agrees to lower wholesale price in exchange for a percentage of retailers revenue. (1-δ)

Quantity flexibility contracts

Supplier provides full refund for returned/unsold items. Valid as long as number of returns<=certain quantity

Sales rebate contracts

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

Drawbacks of buy back contracts

Require effective reverse logistics system

May increase logistics costs

Buyers have incentive to push competing products

Drawbacks of revenue sharing contracts

Require monitoring of buyers revenue

Increase administrative costs

Buyers have an incentive to push competing products

What are the make to order contracts

Wholesale price contract

Buy back contracrt

Revenue sharing contract

Pay back contract

Distributor agrees to pay back all unsold goods produced by manufacture for an agreed upon price

Cost sharing contract

Distributor agrees to pay (1-δ) percentage of production cost, manufacture reduces wholesale price

Issues of cost sharing contracts

Requires sharing production cost information

What is the ageement between parties in cost sharing contract

Distributor purchases components manufacturer needs

Components remain property of distributor but are shipped to the manufucter facility for the production of FGs

Capacity reservation contract

Buyer pays to reserve a certain level of capacity

Supplier provides menu of reservations

Specific capital level signifies buyers true forecast

Advance purchase contracts

Supplier charges special price before building capacity

price is charged differently when demand is realized

Buyers commitment to special price reveals true forecast

Buyer risk in long term contracts

Buyer takes no financial risk, large inventory risk

What do long term contracts agree on

Contracts specify a fixed amount of supply to be delivered

Spot purchase

Buyers look for additional supply in open market

Focus of spot purchase

Using marketplace to find new suppliers

Forcing competition reduce product price

Option contracts

Buyer pre-pays a relativley small fraction of product price up front and supplier commits to reserve capacity to certain level

Buyer payments in option contracts

Premium (initial payment) and excecution price (when actual units are purchased)

Portfolio contracts

Buyer signs multiple contractsto optimize profit and reduce risk

What do portfolio contracts do

Differ in price and flexibility, hedge against inventory, shortage spot price risk. Meaningful for commodity products

How much to commit to long term contracts

Base commitment

How much supply left uncommitted

Additional supplies in spot market

Risk of trade in portfolio contracts

1. Inventory risk (supplier)

2. Price and shortage risk (buyer)

3. Inventory risk (buyer)

Option level vs commitment level tradeoff

Either the option level or the base commitment level may be high, but not both