Supply Chain Contracts

Rohit Kapoor
 Introduction
• Learning:
– Self-Optimization will lead to less than optimal SC
profit
 Further …
• While Rayban and Nayan Optics earn
– an expected profit $14,857
• Why does current supply chain perform
significantly worse than it could?
– Nayan does not order enough Bassanos
• 233 vs. 403
 A Concept
• Nayan’s trepidation w.r.t to ordering
– is due to a phenomenon known as
• Double marginalization
 Options
• Reduce the wholesale price
– Increases the Cu
– Decreases the Co
 A Comparison

Wholesale Price
$35 $65 $75 $85
Cu $80 $50 $40 $30
Co $10 $40 $50 $60
Critical Ratio 0.8888889 0.555555556 0.444444444 0.333333333
Z 1.2206403 0.139710299 -0.139710299 -0.430727299
Q 402.58004 267.4637874 232.5362126 196.1590876
Expected Sales 243.27895 208.3782149 190.9144275 168.6560866
Expected Leftover Inventory 159.30109 59.08557248 41.62178512 27.50300103
Nayan's Expected Profit $17,869.31 $8,055.49 $5,555.49 $3,409.50
Rayban's Expected Profit 0 8023.913621 9301.448506 9807.954379
Tota Supply Chain Profit $17,869.31 $16,079.40 $14,856.94 $13,217.46
 Further Concepts …
• Is it a zero-sum game?
 Part II
• Problem Context
– Analysis
• Cu = 40
• Co = 1.5
– Q?
» 475
– Expected leftover inventory
» 227 units
– Nayan’s profit
» $9,580
• Increase from $5,580 (with no refunds or returns)
 Part II
• Rayban
– Expected profit?
• Has several components
– Selling 475 units to Nayan at the beginning of the season
» 475 * $75 = $35,625
– Production cost
» 475 * $35 = $16,625
– Buy-back from Nayan
» 227 * $75 = $17,025
– Collects in salvage
» 227 * $26.5 = $6,016
– Combining
» $7,991
 Buy-Back Contracts

Wholesale Price $75 $75 $75 $85

Buy-Back Price $55 $65 $75 $75
Cu $40 $40 $40 $30
Co $21.50 $11.50 $1.50 $11.50
Critical Ratio 0.6504065 0.776699029 0.963855422 0.722891566
Z 0.3864182 0.761092296 1.79729275 0.591453105
Q 298.30227 345.136537 474.6615937 323.9316381
Expected Sales 220.60589 233.9160532 248.2033567 228.6213829
Expected Leftover Inventory 77.69638 111.2204838 226.458237 95.31025518
Nayan's Expected Profit $7,153.76 $8,077.61 $9,588.45 $5,762.57
Rayban's Expected Profit $9,717.74 $9,523.47 $8,003.24 $11,574.03
Tota Supply Chain Profit $16,871.51 $17,601.08 $17,591.69 $17,336.61
 Equation Based Optimal Solution

Wholesale Price $35 $45 $55 $65 $75 $85 $95 $105
Buy-Back Price $27 $38 $49 $60 $72 $83 $94 $105
Cu $80 $70 $60 $50 $40 $30 $20 $10
Co $10.00 $8.75 $7.50 $6.25 $5.00 $3.75 $2.50 $1.25
Critical Ratio 0.89 0.89 0.89 0.89 0.89 0.89 0.89 0.89
Z 1.22 1.22 1.22 1.22 1.22 1.22 1.22 1.22
Q 402.58 402.58 402.58 402.58 402.58 402.58 402.58 402.58
Expected Sales 243.28 243.28 243.28 243.28 243.28 243.28 243.28 243.28
Expected Leftover
Inventory 159.30 159.30 159.30 159.30 159.30 159.30 159.30 159.30
Nayan's Expected Profit 17869.31 15635.64 13401.98 11168.32 8934.65 6700.99 4467.33 2233.66
Rayban's Expected
Profit 0.00 2233.66 4467.33 6700.99 8934.65 11168.32 13401.98 15635.64
Tota Supply Chain Profit $17,869.31 $17,869.31 $17,869.31 $17,869.31 $17,869.31 $17,869.31 $17,869.31 $17,869.31