《供应链系统设计与管理》课程授课教案（讲义）Chapter 04（Lecture 7）supply contract

全英文课《DesigningandManagingSupplyChainSystem》授课教案Chapter 4 (lecture7) supply contractOBJECTIVES(1) Know the supply contracts for strategic components(2) Know the MTS and MTO supply chain contracts: Pay-Back Contracts andCost-Sharing Contracts.(3) Learn to calculate the expected profit for the manufacturer and distributor ina contract.TEACHINGCONTENT4.1IntroductionIn the last few years, we have seen significant increase in the level ofoutsourcing, companies outsource everything from the manufacturing of specificcomponents to the design and assembly of the entire product. Interestingly, manybrand-name manufacturers now outsource both the entire design and manufacturing ofsome of their products.One important driver is the search for low-cost countries that allowmanufacturers to significantly reduce labor cost. At the same time, many companies inthe Far East developed significant capability to design and manufacture high-quality,low-cost products.Indeed, the increase in the level of outsourcing implies that the procurementfunction becomes criticalforanOEMtoremain incontrol of itsdestiny.Adifferentapproach has been applied by OEMs for nonstrategic components. In this case,products can be purchased from a variety of suppliers, and flexibility to marketconditions is perceived as more important than a permanent relationship with thesuppliers.4.2Supply contracts for strategic componentsEffective procurement strategies require the development of relationships withsuppliers. These relationships can take many forms, both formal and informal, butoften, to ensure adequate supplies and timely deliveries, buyers and supplierstypically agree on supply contracts. These contracts address issues that arise betweena buyer and a supplier, whether the buyer is a manufacturer purchasing raw materialsfrom a supplier, an OEM purchasing components, or a retailer purchasing goods. In atypical supplycontract,thebuyerand supplier.(1)Pricing and volume discounts.(2)Minimum andmaximum purchasequantities(3)Delivery lead times.(4)Product or material quality(5)Product return policies

全英文课《Designing and Managing Supply Chain System》 授课教案 Chapter 4 (lecture 7) supply contract OBJECTIVES (1) Know the supply contracts for strategic components (2) Know the MTS and MTO supply chain contracts: Pay-Back Contracts and Cost-Sharing Contracts. (3) Learn to calculate the expected profit for the manufacturer and distributor in a contract. TEACHING CONTENT 4.1 Introduction In the last few years, we have seen significant increase in the level of outsourcing; companies outsource everything from the manufacturing of specific components to the design and assembly of the entire product. Interestingly, many brand-name manufacturers now outsource both the entire design and manufacturing of some of their products. One important driver is the search for low-cost countries that allow manufacturers to significantly reduce labor cost. At the same time, many companies in the Far East developed significant capability to design and manufacture high-quality, low-cost products. Indeed, the increase in the level of outsourcing implies that the procurement function becomes critical for an OEM to remain in control of its destiny. A different approach has been applied by OEMs for nonstrategic components. In this case, products can be purchased from a variety of suppliers, and flexibility to market conditions is perceived as more important than a permanent relationship with the suppliers. 4.2 Supply contracts for strategic components Effective procurement strategies require the development of relationships with suppliers. These relationships can take many forms, both formal and informal, but often, to ensure adequate supplies and timely deliveries, buyers and suppliers typically agree on supply contracts. These contracts address issues that arise between a buyer and a supplier, whether the buyer is a manufacturer purchasing raw materials from a supplier, an OEM purchasing components, or a retailer purchasing goods. In a typical supply contract, the buyer and supplier. (1)Pricing and volume discounts. (2)Minimum and maximum purchase quantities. (3)Delivery lead times. (4)Product or material quality. (5)Product return policies

全英文课《Designing and ManagingSupplyChainSystem》授课教案4.2.1Supplycontracts(1)2-Stage Seguential Supply Chain (nocontract)A buyer and a supplier.Buyer's activities:Generating a forecastDetermining how many units to order from the supplierPlacing an order to the supplier so as to optimize his own profitPurchasebasedonforecastofcustomerdemandSupplier's activities:Reacting to the order placed by the buyerMake-To-Order (MTO) policySwimsuit ExampleO2 Stages:aretailer whofaces customerdemandamanufacturerwhoproduces and sells swimsuitstotheretailerRetailer Information:Summer season sale price of a swimsuit is $125 per unitWholesalepricepaid by retailer tomanufacturer is s80 perunitSalvage value after the summer season is s20 per unitManufacturerinformationFixed production cost is $100,000Variable production cost is $35 per unitOOptimalOrderQuantityDemand0.2830%iei0.220.1815%0.1110%5%0%8000 1000012000140001600018000QuantityRetailer marginal profit is the same as the marginal profit of the manufacturer,$45.Retailer's marginal profit for selling a unit during the season, $45, is smaller thanthe marginal loss, $60, associated with each unit sold at the end of the season todiscountstores.Optimal orderquantitydependsonmarginal profitandmarginal lossbutnot onthefixed costRetailer optimal policy is to order 12,000 units for an average profit of $470,700→detail...0retailer's expected profite.g.Q=12000:

全英文课《Designing and Managing Supply Chain System》 授课教案 4.2.1 Supply contracts (1)2-Stage Sequential Supply Chain (no contract) A buyer and a supplier. Buyer’s activities: Generating a forecast Determining how many units to order from the supplier Placing an order to the supplier so as to optimize his own profit Purchase based on forecast of customer demand Supplier’s activities: Reacting to the order placed by the buyer. Make-To-Order (MTO) policy  Swimsuit Example 2 Stages: a retailer who faces customer demand a manufacturer who produces and sells swimsuits to the retailer. Retailer Information: Summer season sale price of a swimsuit is $125 per unit. Wholesale price paid by retailer to manufacturer is $80 per unit. Salvage value after the summer season is $20 per unit Manufacturer information: Fixed production cost is $100,000 Variable production cost is $35 per unit  Optimal Order Quantity Retailer marginal profit is the same as the marginal profit of the manufacturer, $45. Retailer’s marginal profit for selling a unit during the season, $45, is smaller than the marginal loss, $60, associated with each unit sold at the end of the season to discount stores. Optimal order quantity depends on marginal profit and marginal loss but not on the fixed cost. Retailer optimal policy is to order 12,000 units for an average profit of $470,700. →detail.  retailer’s expected profit e.g. Q =12000：

全英文课《DesigningandManagingSupplyChainSystem》授课教案revenue in particular demand=sale units*45-excess inventory*60DemandProfitProfitProb.Probability80000.1112000013200100000.1133000036300120000.285400001512000.22140005400001188000.1816000540000972000.11800054000054000Sum470700Retailer's Riskdue to excess inventoryRetailer's expected profit as a function of order quantityExpectedProfit500000400000300000200000100000060008000180002000010000120001400016000OrderQuantityManufacturer'sprofit* If the retailer places this order, 12000, themanufacturer's profit is=12.000(80-35)-100,000=$440.000So,Retailer'sorderquantity=12000units*Retailer's expected profit=470700$*Manufacturer'sprofit=440000s*Profitof theSC=910700$ORiskSharing&supplycontractsRisk in the sequential supply chain:Buyerassumes all oftheriskof havingmoreinventorythan salesBuyer limits his order quantity because of the huge financial riskSupplier takes no riskSupplier would like the buyer to order as much as possibleSince the buyer limits his order quantity, there is a significant increase in thelikelihood ofout of stock.If the supplier shares some of the risk with the buyerit may be profitable for buyer to order morereducing out of stock probability

全英文课《Designing and Managing Supply Chain System》 授课教案 revenue in particular demand =sale units*45-excess inventory*60 Retailer’s Risk due to excess inventory  Retailer’s expected profit as a function of order quantity  Manufacturer’s profit  Risk Sharing & supply contracts Risk i n the sequential supply chain: Buyer assumes all of the risk of having more inventory than sales Buyer limits his order quantity because of the huge financial risk. Supplier takes no risk. Supplier would like the buyer to order as much as possible Since the buyer limits his order quantity, there is a significant increase in the likelihood of out of stock. If the supplier shares some of the risk with the buyer it may be profitable for buyer to order more reducing out of stock probability

全英文课《DesigningandManagingSupplyChainSystem》授课教案increasing profit for both the supplier and the buyerSupply contracts enable this risk sharing(2)Buy-Back ContractIn this contract, the seller agrees to buy back unsold goods from the buyer forsome agreed-upon price higher than the salvage value. Clearly, this gives the buyerincentive to order more units, since the risk associated with unsold units is decreasedOn the other hand, the supplier's risk clearly increases. Thus, the contract is designedsuch that the increase in order quantity placed by the buyer, and hence the decrease inthe likelihood of out of stock, more than compensates the supplier for the increase inrisk. Let's return to the swimsuit example.?Buy-Back Contract: Swimsuit ExampleAssume the manufacturer offers to buy unsold swimsuits from the retailer for$55.Retailerhasanincentivetoincreaseitsorderquantityto14,o00units,foraprofitof$513,800while the manufacturer's average profit increases to $471,900Total average profit for the two parties = $985,700 (= $513,800 + $471,900)Compare to sequential supply chain when total profit = $910,700 (= $470,700 +$440,000)Profit vs. Order Quantity60000500,00040000Ret.P30000Mig.P200.0100,00003,0006,0009,00012,00015,00018,00021,00xQuantitFIGURE 4-2: Buy-back contract14000demandprob.0.11231008000210000100000.1135000038500120000.284900001372000.2214000630000138600160000.186300001134000.11800063000063000513800expectedprofit

全英文课《Designing and Managing Supply Chain System》 授课教案 increasing profit for both the supplier and the buyer. Supply contracts enable this risk sharing (2)Buy-Back Contract In this contract, the seller agrees to buy back unsold goods from the buyer for some agreed-upon price higher than the salvage value. Clearly, this gives the buyer incentive to order more units, since the risk associated with unsold units is decreased. On the other hand, the supplier's risk clearly increases. Thus, the contract is designed such that the increase in order quantity placed by the buyer, and hence the decrease in the likelihood of out of stock, more than compensates the supplier for the increase in risk. Let's return to the swimsuit example.  Buy-Back Contract: Swimsuit Example Assume the manufacturer offers to buy unsold swimsuits from the retailer for $55. Retailer has an incentive to increase its order quantity to 14,000 units, for a profit of $513,800. while the manufacturer’s average profit increases to $471,900. Total average profit for the two parties = $985,700 (= $513,800 + $471,900) Compare to sequential supply chain when total profit = $910,700 (= $470,700 + $440,000) FIGURE 4-2: Buy-back contract 14000 demand prob. 8000 0.11 210000 23100 10000 0.11 350000 38500 12000 0.28 490000 137200 14000 0.22 630000 138600 16000 0.18 630000 113400 18000 0.1 630000 63000 expected profit 513800

全英文课《DesigningandManagingSupplyChainSystem》授课教案600.000$513,800500.000O400.000300.000200,000100.000eop.o.cooo.co.o.co.co.aoo.co.co.o.comOrderQuantityProfit ofretailerManufacturer's profit (=$55)600,000$471,90050000400,000DIF300,000200,000ew100,000nProduction QuantityWin-winTotal max.profit of SC=471900+ 513800=985700sProfitadded=75000$(3)RevenueSharingContractObserve that, in the sequential supply chain, one important reason for the buyerto order a limited number of units is the high wholesale price. If somehow the buyercan convincethe supplier to reducethe wholesaleprice,then clearlythebuyer willhave an incentive to order more units.Of course,a reduction in wholesale price willdecrease the supplier's profit if it is unable to sell more units. This is addressed byrevenue-sharing contracts. In a revenue-sharing contract, the buyer shares some of itsrevenuewiththeseller,inreturnforadiscount onthewholesaleprice.That is,inthiscontract,thebuyertransfersaportionoftherevenuefromeachunitsoldtotheendcustomer.Considerthe swimsuitexample.Revenue Sharing Contract: Swimsuit ExampleManufacturer agrees to decrease the wholesale price from $80 to $60In return, the retailer provides 15 percent of the product revenue to themanufacturer.Retailer has an incentive to increase his order quantity to 14,000 for a profit of$504.325This order increase leads to increased manufacturer's profit of $481,375Supplychaintotal profit=$985,700 (=$504,325+$481,375)0.00600,000500,000:00400,000.00t300,000..00a.0so$.0001.00014.00017.000

全英文课《Designing and Managing Supply Chain System》 授课教案 Profit of retailer Manufacturer’s profit (=$55) Total max. profit of SC=471900+ 513800=985700$ Profit added =75000$ （3）Revenue Sharing Contract Observe that, in the sequential supply chain, one important reason for the buyer to order a limited number of units is the high wholesale price. If somehow the buyer can convince the supplier to reduce the wholesale price, then clearly the buyer will have an incentive to order more units. Of course, a reduction in wholesale price will decrease the supplier's profit if it is unable to sell more units. This is addressed by revenue-sharing contracts. In a revenue-sharing contract, the buyer shares some of its revenue with the seller, in return for a discount on the wholesale price. That is, in this contract, the buyer transfers a portion of the revenue from each unit sold to the end customer. Consider the swimsuit example.  Revenue Sharing Contract: Swimsuit Example Manufacturer agrees to decrease the wholesale price from $80 to $60 In return, the retailer provides 15 percent of the product revenue to the manufacturer. Retailer has an incentive to increase his order quantity to 14,000 for a profit of $504,325 This order increase leads to increased manufacturer’s profit of $481,375 Supply chain total profit= $985,700 (= $504,325+$481,375)

全英文课《DesigningandManagingSupplyChainSystem》授课教案FIGURE4-3:Revenue-sharing contractRetailer'sprofits (price=$60,RS=15%)600,000$504,325500,0004000030000191200.000100,000电电Order QuantityManufacturer'sprofits(RS=15%)700,000600.000$481,375500,000e400.000300,000200,000100,000oooProduction Quantity(4)GlobalOptimization StrategyThe various contracts described above raise an important question: What is themost profit both the supplier and the buyer can hope to achieve? To answer thisquestion, we take a completely different approach. What if an unbiased decisionmaker is allowed to identify the best strategy for the entire supply chain? Thisunbiased decision maker would consider the two supply chain partners, the supplierand the buyer, as two members of the same organization. That is, the transfer ofmoney between the parties is ignored and the unbiased decision maker will maximizesupply chain profit.GlobalOptimization:SwimsuitExampleRelevant dataSelling price, $125Salvage value, $20Variable production costs, $35Fixed production cost.Supply chain marginal profit, 90 = 125 - 35Supply chain marginal loss, 15=35-20Supply chain will produce more than average demand.Optimal production quantity=16,000 unitsExpected supply chain profit= $1,014,500

全英文课《Designing and Managing Supply Chain System》 授课教案 FIGURE 4-3: Revenue-sharing contract Retailer’s profits (price=$60，RS=15%) Manufacturer’s profits (RS=15%) （4）Global Optimization Strategy The various contracts described above raise an important question: What is the most profit both the supplier and the buyer can hope to achieve? To answer this question, we take a completely different approach. What if an unbiased decision maker is allowed to identify the best strategy for the entire supply chain? This unbiased decision maker would consider the two supply chain partners, the supplier and the buyer, as two members of the same organization. That is, the transfer of money between the parties is ignored and the unbiased decision maker will maximize supply chain profit.  Global Optimization: Swimsuit Example Relevant data Selling price, $125 Salvage value, $20 Variable production costs, $35 Fixed production cost. Supply chain marginal profit, 90 = 125 - 35 Supply chain marginal loss, 15 = 35 – 20 Supply chain will produce more than average demand. Optimal production quantity = 16,000 units Expected supply chain profit = $1,014,500

全英文课《DesigningandManagingSupplyChainSystem》授课教案Profit vs.Order Quantity1,200,0001,000,000O800.0006000040000200,000o3,0009,0006,00012,00015,00018,00021,0000QuantityFIGURE 4-4:Profit using global optimization strategySCprofit1,200,000$1,014,5001,000,000800,000600,00040000200,000cooooooo.ozooooo.cooProduction QuantityCompare among four supply strategiesstrategiesretailermanufacturetotalsequential(12000)470700440000910700buy-back(14000513800471900985700504325481375revenue sharing(14000)9857001014500global optimization(5)GlobalOptimizationandSupplyContractsUnbiased decision makerCarefully designed supply contracts can achieve as much as global optimizationGlobal optimization does not provide a mechanism to allocate supply chainprofitbetweenthepartners.(limitation)Supply contracts allocate this profit among supply chain members.Effectivesupplycontracts allocateprofit toeachpartnerinawaythatnopartnercan improve his profit by deciding to deviate from the optimal set of decisions.4.3Contractsfor Make-to-Stock/Make-to-OrderSupply ChainsA key assumption in all the contracts discussed so far is that the supplier has amake-to-order supply chain.Thisimpliesthat,inthe sequential supplychainanalyzedearlier, the supplier takes no risk while the buyer takes all the risk. The contractsdescribed earlier suggest mechanisms for transferring some of the risk from the buyertothe supplierAn importantquestion,thus,iswhat theappropriatecontractsarewhen the supplier has a make-to-stock (MTS) supply chain. To better understandsome of the issues involved, consider the following example.Ex.4-9 Supply Chain for Fashion Products: Ski-Jackets

全英文课《Designing and Managing Supply Chain System》 授课教案 FIGURE 4-4: Profit using global optimization strategy SC profit Compare among four supply strategies strategies retailer manufacture total sequential(12000) 470700 440000 910700 buy-back(14000 513800 471900 985700 revenue sharing(14000) 504325 481375 985700 global optimization 1014500 （5）Global Optimization and Supply Contracts Unbiased decision maker Carefully designed supply contracts can achieve as much as global optimization Global optimization does not provide a mechanism to allocate supply chain profit between the partners.(limitation) Supply contracts allocate this profit among supply chain members. Effective supply contracts allocate profit to each partner in a way that no partner can improve his profit by deciding to deviate from the optimal set of decisions. 4.3 Contracts for Make-to-Stock/Make-to-Order Supply Chains A key assumption in all the contracts discussed so far is that the supplier has a make-to-order supply chain. This implies that, in the sequential supply chain analyzed earlier, the supplier takes no risk while the buyer takes all the risk. The contracts described earlier suggest mechanisms for transferring some of the risk from the buyer to the supplier. An important question, thus, is what the appropriate contracts are when the supplier has a make-to-stock (MTS) supply chain. To better understand some of the issues involved, consider the following example.  Ex. 4-9 Supply Chain for Fashion Products: Ski-Jackets

全英文课《DesigningandManagingSupplyChainSystem》授课教案Mft. produces Ski-jackets prior to receiving distributor OrdersProbabilisticforecastofdemandisthesameasFig.2-5Selling season starts in Sep.and ends by DecProduction starts 12 months before the selling seasonDistributor places orders with the manufacturer six months later.At that time, production is complete, distributor receives firms orders fromretailers.Ex.4-9&? Supply Chain for Fashion Products: Ski-JacketsDatainformation:The distributor sells ski-jackets to retailers for $125 per unit.The distributor pays the manufacturer s$80 per unit.For the manufacturer:Fixedproductioncost=$100,o00The variable production cost per unit= $55Salvage value for any ski-jacket not purchased by the distributors= s20RProfit and Loss without contractsFor the manufacturerMarginal profit = 80-55=$25Marginal loss = $55-20 = $ 35. (***)Or:=$80-20=$ 60(?)So, the manufacturer should produce less than average demand, i.e., less than13000 units.Make-to-Stock: Ski JacketsFIGURE 4-5: Manufacturer's expected profitExpected Profit$175,000$150,000$125,000$100,0002$75,000$50,000$25,00006,0008,00010,00012,00014,00016,000Production QuantityManufacturer optimal policy=12000 unitsAverage profit= $160,400Distributor average profit = $510,300Profit and Loss without contractManufacturer takes all the risk limiting its production quantityDistributortakes no riskWhat will result in?M:Less production quantityD: Out of stock

全英文课《Designing and Managing Supply Chain System》 授课教案 Mft. produces Ski-jackets prior to receiving distributor Orders Probabilistic forecast of demand is the same as Fig. 2-5 Selling season starts in Sep. and ends by Dec. Production starts 12 months before the selling season Distributor places orders with the manufacturer six months later. At that time, production is complete; distributor receives firms orders from retailers.  Ex. 4-9 Supply Chain for Fashion Products: Ski-Jackets Data & information: The distributor sells ski-jackets to retailers for $125 per unit. The distributor pays the manufacturer $80 per unit. For the manufacturer: Fixed production cost = $100,000. The variable production cost per unit = $55 Salvage value for any ski-jacket not purchased by the distributors= $20.  Profit and Loss without contracts For the manufacturer Marginal profit = 80-55=$25 Marginal loss = $55-20 = $ 35. (***) Or: = $80-20= $ 60 ( ?) So, the manufacturer should produce less than average demand, i.e., less than 13000 units.  Make-to-Stock: Ski Jackets FIGURE 4-5: Manufacturer’s expected profit Manufacturer optimal policy = 12000 units Average profit = $160,400. Distributor average profit = $510,300  Profit and Loss without contract Manufacturer takes all the risk limiting its production quantity Distributor takes no risk. M: Less production quantity D: Out of stock What will result in?

全英文课《DesigningandManagingSupplyChainSystem》授课教案BuyershouldtakemeasurestostimulatemanufacturertoproducemoreunitsPay-BackContractCost-Sharing Contract(1)Pay-BackContractIn this contract, the buyer agrees to pay some agreed-upon price for any unitproduced by the manufacturer but not purchased by the distributor. Clearly, this givesthe manufacturer incentive to produce more units,since therisk associated withunused capacity is decreased.On the other hand, the distributor's risk clearly increasesThus, the contract is designed such that the increase in production quantities morethan compensates the distributor for the increase in risk. Let's return to the ski jacketexamplePay-Back Contract: Ski Jacket ExampleOAssume the distributor offers to pay $18 for each unit produced by themanufacturer but not purchased.Manufacturer marginal loss = 55-20-18=$17Manufacturer marginal profit = $25.Manufacturer has an incentive to produce more than average demandManufacturer increases production quantity to 14,000 unitsManufacturer profit=$180,280;(>$160,400)Distributor profit increases to $525,420. (>$510,300)Total profit= $705,400Compare to total profit in sequential supply chain= $670,000 (= $160,400 +$510,300)80$175,00$150,00S125102$25,0856008,10016,00010,00012,00014,00018,00dFIGURE4-6:Manufacturer's average profit (pay-back contract)Pay-BackContract Ski JacketExample (cont)?

全英文课《Designing and Managing Supply Chain System》 授课教案 （1）Pay-Back Contract In this contract, the buyer agrees to pay some agreed-upon price for any unit produced by the manufacturer but not purchased by the distributor. Clearly, this gives the manufacturer incentive to produce more units, since the risk associated with unused capacity is decreased. On the other hand, the distributor's risk clearly increases. Thus, the contract is designed such that the increase in production quantities more than compensates the distributor for the increase in risk. Let's return to the ski jacket example.  Pay-Back Contract：Ski Jacket Example Assume the distributor offers to pay $18 for each unit produced by the manufacturer but not purchased. Manufacturer marginal loss = 55-20-18=$17 Manufacturer marginal profit = $25. Manufacturer has an incentive to produce more than average demand. Manufacturer increases production quantity to 14,000 units Manufacturer profit = $180,280 ; ( >$160,400 ) Distributor profit increases to $525,420. (>$510,300) Total profit = $705,400 Compare to total profit in sequential supply chain= $670,000 (= $160,400 + $510,300) FIGURE 4-6: Manufacturer’s average profit (pay-back contract)  Pay-Back Contract Ski Jacket Example (cont) Buyer should take measures to stimulate manufacturer to produce more units: Pay-Back Contract Cost-Sharing Contract

全英文课《DesigningandManagingSupplyChainSystem》授课教案5600,005625,4205500,0005400,000ad5300,00$100,000e8,00010,00012,00016,00014,00018,00OrderquantityFIGURE 4-7: Distributor's average profit (pay-back contract)(2)Cost-SharingContractObserve that, in the sequential supply chain,one important reason why themanufacturer does not produce enough is the high production cost.If somehow themanufacturer can convince the distributor to share some of the production cost, then,clearly,themanufacturer will have an incentivetoproducemore units.Of course,paying part of the production cost will decrease the distributor's profit if it is unable tosell more units. This is addressed through cost-sharing contracts. In a cost-sharingcontract,thebuyershares someoftheproductioncostwiththemanufacturer,in returnforadiscountonthewholesaleprice.Considertheskijacketexample..Cost-Sharing Contract: Ski-Jacket ExampleManufacturer agrees to decrease the wholesale price from $80 to $62In return,distributorpays 33%of the manufacturer production costManufacturer increases production quantity to14,000Manufacturer profit=$182,380Distributor profit=$523,320The supply chain total profit = $705,700Similar to the profit under pay-back contracts182.38($175,00X5150,00量5125.000525,00Poono8,00012:0010,00016,00014,0008nodcmrFIGURE 4-8: Manufacturer's average profit (cost-sharing contract)OCost-SharingContract:Ski-JacketExample (cont)

全英文课《Designing and Managing Supply Chain System》 授课教案 FIGURE 4-7: Distributor’s average profit (pay-back contract) （2）Cost-Sharing Contract Observe that, in the sequential supply chain, one important reason why the manufacturer does not produce enough is the high production cost. If somehow the manufacturer can convince the distributor to share some of the production cost, then, clearly, the manufacturer will have an incentive to produce more units. Of course, paying part of the production cost will decrease the distributor's profit if it is unable to sell more units. This is addressed through cost-sharing contracts. In a cost-sharing contract, the buyer shares some of the production cost with the manufacturer, in return for a discount on the wholesale price. Consider the ski jacket example.  Cost-Sharing Contract：Ski-Jacket Example Manufacturer agrees to decrease the wholesale price from $80 to $62 In return, distributor pays 33% of the manufacturer production cost Manufacturer increases production quantity to 14,000 Manufacturer profit = $182,380 Distributor profit = $523,320 The supply chain total profit = $705,700 Similar to the profit under pay-back contracts FIGURE 4-8: Manufacturer’s average profit (cost-sharing contract)  Cost-Sharing Contract：Ski-Jacket Example (cont)