Example 15-1: Impact of Local Optimization

Vertically
Independent Integrated
Inputs Retailer Supply Chain
Mean Demand, μ 1,000 1,000
Standard Deviation of demand 300 300
Retailer's Cost, c = $ 5
Retailer's Sale price, p = $ 10
Retailer's Salvage value, s = b = $ - $ -
Mfg's Cost, v $ 1 $ 1
Mfg's Sale price, c $ 5 $ 10
Intermediate Calculations
Cost of Understocking, Cu $ 5 $ 9
Cost of Overstocking, Co $ 5 $ 1

Outputs
Order size, O* 1,000 1,384
Expected overstock 120 399
Expected understock 120 14
Retailer's Expected Profit $ 3,803
Manufacturer's Expected Profit $ 4,000
Total Supply Chain Expected Profit = $ 7,803 $ 8,474
We analyze the case where the retailer orders independently
and where the supply chain is vertically integrated. Cell B20
contains supply chain profits with an independent retailer
and Cell C20 contains supply chain profits for the vertically
integrated case.
Supply Chain Salvage Value
Supply Chain Cost
Supply Chain Sale Price
Example 15-2: Impact of Risk Sharing Through Buybacks
Inputs
Mean Demand, μ 1,000 Steps to Build Table 15-3
1. Enter the desired value of buyback price b in Cell B
Standard Deviation of demand 300 and the wholesale price c in Cell B10.
Retailer's Cost, c = $ 5 2. Optimal retailer order, expected overstock, and ex
are shown in Cells B17:19. Profits are shown in Cells
Retailer's Sale price, p = $ 10
Retailer's Salvage value, s = b = $ 3
Retailer's Return cost = $ -
Mfg's Cost, v $ 1
Mfg's Sale price, c $ 5
Mfg's Buyback Price, b $ 3.00
Mfg's Salvage Value, sm $ -
Intermediate Calculations for Retailer
Cost of Understocking, Cu $ 5
Cost of Overstocking, Co $ 2

Outputs
Order size, O* 1,170
Expected overstock 223
Expected understock 53
Retailer's Expected Profit $ 4,286
Manufacturer's Expected Profit $ 4,009
Total Supply Chain Expected Profit = $ 8,296
15-3
value of buyback price b in Cell B11
ice c in Cell B10.
der, expected overstock, and expected sales
7:19. Profits are shown in Cells B20:22.
Example 15-3: Impact of Risk Sharing Through Revenue Sharing

Inputs
Whole sale price, c = $ 1 Steps to Build Table 15-4
1. Enter the desired value of revenue sharing frac
Production cost, v = $ 1 and the wholesale price in Cell B4.
Retail price, p = $ 10 2. Optimal retailer order, expected overstock, and
are shown in Cells B12:15. Profits are shown in Ce
Revenue share fraction, f = 0.45
Mean demand, μ = 1,000
SD of demand, σ = 300

Retailer's Response
Optimal cycle service level = 0.818
Optimal order quantity, O* = 1,273
Expected overstock = 302
Expected sales = 970

Output
Expected manufacturer profit = $ 4,367
Expected retailer profit = $ 4,064
Expected Supply Chain profit = $ 8,431
 able 15-4
ired value of revenue sharing fraction f in Cell B7
ale price in Cell B4.
ler order, expected overstock, and expected sales
ells B12:15. Profits are shown in Cells B18:20.
Example 15-4: Impact of Risk Sharing Through Quantity Flexibility

Inputs
Steps to Build Table 15-5
Mean Demand, μ 1,000 1. Enter the desired value of α in Cell B12 and the desired
Standard Deviation of Demand, σ 300 in Cell B13.
2. Run Solver (Data | Analysis | Solver) to find order size O
Manufacturer's Sale Price, c = $ 5.00 retailer profits (Cell B20).
Manufacturer's Cost, v = $ 1.00
Manufacturer salvage value, sM = $ -
Retailer's Sale Price, p = $ 10.00
Retailer salvage value, sR = $ -
Order size, O = 1,017
Quantity Flexibility Contract
alpha α = 0.05
beta β = 0.05
Q = (1+α)O = 1,068
q = (1-β)O = 966
Output
Retailer's Expected purchase = 1,015
Retailer's Expected sales = 911
Expected Manufacturer's profits = $ 4,006
Expected Retailer's profits = $ 4,038
Expected Supply chain profit = $ 8,044
15-5
value of α in Cell B12 and the desired value of β

| Analysis | Solver) to find order size O (Cell B10) that maximizes

B20).