LSMS2035 SUPPLY CHAIN COORDINATION AND SOURCING 1(7)

UCL/LSML/CESCM/AGRELL 16.06.2010
Name: Prog:

LSMS2035
EXAMINATION 16.06.2010

Grading
Question 1 2 3 Total
Score
Total 30 40 30 100

INSTRUCTIONS
1. Exam is closed book, open notes.
2. Only allowed material is a page (two faces) of
notes.
3. The questions may be solved independently.
4. Answer only one question per answer sheet.
5. Explain and justify your answer in clear English,
including any additional assumptions.
6. Do not unstaple the exam paper.
7. Write your full name on each submitted paper.
LSMS2035 SUPPLY CHAIN COORDINATION AND SOURCING 2(7)
UCL/LSML/CESCM/AGRELL 16.06.2010
Name: Prog:

QUESTION 1 30 p

A single-period single-item supply chain inventory problem consists of two

parties, an upstream supplier and a downstream retailer, where the retailer faces
a stochastic demand with known density function f(x) and distribution function
F(x) under a fixed exogenous price p and a salvage value v per unit. The goodwill
costs per unit not delivered are defined as gr and gs for the retailer and the
supplier, respectively. The supplier has a marginal cost cs > 0. The retailer incurs
a marginal cost of cr per unit sold (for repackaging, delivery etc).

Assume as that p + gr + gs > v , p – cr > v and cr > v.

Initially, assume a general mechanism T(q) paid by the retailer to the supplier for
a transfer of q units.
a) Formulate the decision problem for maximizing the retailer expected profit for
the case indicated.
b) Formulate the decision problem for maximizing the supplier expected profit
for the case indicated.
c) Formulate the decision problem for maximizing the expected joint profit for
the case indicated.
d) Show that T(q) = wq, w > 0 is either inefficient or inflexible with respect to
profit allocation for the case above.
LSMS2035 SUPPLY CHAIN COORDINATION AND SOURCING 4(7)
UCL/LSML/CESCM/AGRELL 16.06.2010
Name: Prog:

QUESTION 2 40 p

A single-period single-item supply chain inventory problem consists of two

parties, an upstream supplier and a downstream retailer, where the retailer faces
a stochastic demand with known density function f(x) and distribution function
F(x) under a fixed exogenous positive price p. Ignore all goodwill costs g = 0. The
supplier has a marginal cost c = cs > 0. There is no retail cost per unit stocked,
the retailer only occurs a cost per unit served (included in p) and the salvage
value is 0 (v = 0).

Consider the use of a revenue-sharing contract with relevant non-zero

parameters for the scenario
a) Derive the optimal solution with its intermediate steps, i.e. formulate the
decision problem and solve the relevant part, whether the revenue sharing
contract is efficient and flexible for profit allocation under forced compliance.
b) Show under what conditions a revenue sharing contract is equivalent to a
buy-back contract. How will order quantities, costs and profits for the retailer
and supplier compare under the two regimes?

Qualitatively, reconsider the revenue-sharing under asymmetric information.

c) How do your conclusions from (a) change?

LSMS2035 SUPPLY CHAIN COORDINATION AND SOURCING 6(7)
UCL/LSML/CESCM/AGRELL 16.06.2010
Name: Prog:

QUESTION 3 30 p

A fast-food outlet sells desserts for a manufacturer in a specific fridge (storage space)
as a complement to a menu of other choices. Currently, they operate a VMI contract
(Vendor managed inventory) with consignment. The desserts are day-fresh and must
be disposed of (i.e. destructed) if unsold at the end of the day. The outlet pays a fee
for garbage collection and destruction of their left-overs.

The service level (non-stockout probability) is considered too low by the outlet,
leading to lower sales of complementary products as coffee or the outlet’s own
desserts.

A consultant analyzes the problem and suggests that the effort of the manufacturer
is too low and the contract should be redefined in terms of service-level targets with
a penalty for stock-outs.

Evaluate the proposal from a coordination viewpoint;

a) Analyze qualitatively the functioning of the policy from a supply chain
coordination viewpoint (no modeling necessary, but be sure to refer to
relevant findings in the literature).
b) Is the consultant right in his analysis of the relevant contract?
c) Given that you were to keep the current contract type and just change the
parameters, what should be done?
d) From the manufacturer’s side, would you accept the proposed contract?
When/when not?