344 - Supply Contracts

Question 1

Risk Sharing

Answer 1

Buyer assumes all of the risk of having more inventory than sales.
Buyer limits his order quanitiy because of financial risk.
Supplier takes no risk.
Since the buyer limits his order quantity, there is a significant increase in the likelihood of out of stock.

Question 2

If supplier shares risk:

Answer 2

It may be profitable for buyer to order more
Reducing out of stock probability
Increasing profit for both the supplier and buyer.

Question 3

Types of Contracts:

Answer 3

Buy-Back Contract
Revenue Sharing Contract
Quantity-Flexibility Contract
Sales Rebate Contract

Question 4

Buy-Back Contract

Answer 4

Seller agrees to buy back unsold goods form the buyer for some agreed-upon price.

Question 5

Revenue Sharing Contract

Answer 5

Buyer shares some of its revenue with the supplier.

Buyer transfers a portion of the revenue form each unit sold back to the supplier.

Question 6

Blockbuster Case Study

Answer 6

Revenue sharing contract

Question 7

Quantity-Flexibility Contract

Answer 7

Supplier provides full refund for returned (unsold) items.

As long as the number of returns is no larger than a certain quantity.

Question 8

Sales Rebate Contracts

Answer 8

Rebate paid by supplier for any item sold above a certain quantity.

Question 9

Pay-back contract

Answer 9

Buyer agrees to pay some agreed-upon price for any unit produced by the manufacturer but not purchased.
Buyer’s risk increases.

Question 10

Cost-sharing contract

Answer 10

Buyer shares some the production cost with manufacturer, in return for a discount on the price.

Question 11

Drawbacks of Buy-back contract

Answer 11

Creates reverse logistics system, and increases logistics costs.
Incentive to push non contract products.

Question 12

Drawbacks of Revenue Sharing Contract

Answer 12

Suppliers monitor buyers revuenue, which increases administrative costs.
Buyers push competing products.