Week 6: Supply contracts

Question 1

Why doesn’t everybody choose global optimization?

Answer 1

1. No trust in other parties
2. Profit allocation  Every party should have an incentive to join

Question 2

What is make to order and made to stock?

Answer 2

Make to order: supplier produces after buyer places order
Make to stock: Supplier produces before buyer places order

Question 3

Name the five strategic components of supply contracts?

Answer 3

1. Pricing and volume discounts
2. Minimum and maximum purchase quantities
3. Delivery lead times
4. Product or material quality
5. Product return policies

Question 4

What is a buy-back contract?

Answer 4

Seller agrees to buy back all unsold goods from the buyer for some agreed-upon price per unit

Question 4

What is a revenue sharing contract?

Answer 4

Seller agrees to lower the wholesale price and he will receive (1-Alpha) – percentage of the retailer’s revenue

Question 4

Name two different contract types in a make to order seting?

Answer 4

1. Buy back contract
2. Revenue sharing contract

Question 5

What are the drawbacks of a buy-back contract?

Answer 5

1. Requires effective reverse logistics system
2. May increase logistic costs
3. Buyers have incentive to push competing products

Question 6

What are the drawbacks of a revenue sharing contract?

Answer 6

1. Require monitoring of buyer’s revenue
2. Increase administrative costs
3. Buyers have incentive to push competing products

Question 7

Name two types of supply contracts in a make-to-stock setting?

Answer 7

1. Pay-back contract
2. Cost-sharing contract

Question 8

What is a pay-back contract?

Answer 8

Distributor agrees to pay back all unsold goods produced by a manufacturer for some agreed-upon price per unit

Question 9

What is a cost-sharing contract?

Answer 9

Distributor agrees to pay (1-alpha)-percentage of production cost and manufacturer will reduce the wholesale price
- Implementation issue: requires sharing production cost information

Question 10

Name two important elements of an agreement between two parties in supply contracts?

Answer 10

1. Distributor purchases components that manufacturer needs
2. Components remain property of distributor but are shipped to manufacturer’s facility for production of finished goods

Question 11

Name two types of contracts that share information credibly in order to avoid or minimize asymmetric information?

Answer 11

1. Capacity reservation contract
2. Advanced purchase contract