Supply Chain Coordination with Contracts. A Typical Supply Chain. A Paradigm Shift. From optimization within an organization to optimization for a SC. Design incentive structures (contracts) to coordinate various parties of the SC to achieve system optimization. Why Coordination?.
marginal underage = marginal overage
=> [1- F(Q)] ͯ Cu = F(Q) ͯ Co
=> F(Q) = Cu / (Cu+ Co) (1)
=> Q = μ + σ ͯ z,
where z is the z-value based on (1).
= σ ͯ [Normdist(z,0,1,0)-z ͯ (1-Normsdist(z,0,1,1)]
= Exp demand – Exp lost sales
= Q – Exp sales
= (Price-Cost)*Exp sales
– (Cost-Salvage)*Exp inv
Normal ( =250, =125)
=>19% profit increase!
= 241*($75-$35) - 45*($30-$25)=$9,415
All better off.
= 355*($75-$35) - 119*($65-$25)=$9,440
(Price-Cost)/(Price-Cost + Cost-Salvage)
(Price-Whole)/(Price-Whole + Whole-BuyBack)
Price – (Price-Whole Sale Price)*
=> Buy Back contract is flexible!
=> Achieve supply chain coordination.
=> larger Q
=> both share risk of demand uncertainty
=> Q increases