11Recap on Feb 28¡ Compared centralized and decentralized supply chainsl Double marginalization¡ Coordinating contractsl Take-it or leave-itl Supplier sells at wholesale costl Revenue sharing¡ Revenue sharing with multiple retailers2Two-part Tariff¡ Supplier charges a fixed fee F and wholesale price w per unit¡ Centralized system:l Π(q) = R(q) – (cS+cR)ql Π’(q) => R’(q) = cR+cS= c¡ Decentralized:l ΠR= R(q) – (w+cR)q-Fl ΠS=F+(w-cS)q¡ Decisions?23Additional Calculations4Quantity Discounts¡ “We offer a quantity discount for orders of 10 pieces and more of the same products.”(www.decor24.com)¡ “Server quantity discounts start at 10 units, with further breaks at 25, 50, 100, 250 and above.”(www.greyware.com)¡ “Quantity discounts on miscellaneous accessories:” (www.frye.com)l 0 - 4 = 0%l 5 - 9 = 5% l 10 - 24 = 10%l 25 - 49 = 15%l 50 - up = 20%35Additional Calculations6Coordinating with buy-back contracts¡ Supplierl Each unit costs c to the supplierl Supplier sells items to a retailer at wper unitl Purchases left-over units at the end of the selling season for b per unit, b<w¡ Retailerl Let R(q) = pS(q)l Price is given, not a decision variable47Additional Calculations8Buy-back Contracts under Uncertainty¡ Simple modell Single selling period, retail price pl Random demand with probability distribution F(x)¡ Retailer’s expected profitP(q,w,b)= p(q- ∫0→qF(x)dx) + b ∫0→qF(x)dx - wqOptimal q:F(q)=(p-w)/(p-b)¡ The profit of the integrated systemP(q) = p(q- ∫0→qF(x)dx)-cqOptimum qI:F(qI)=(p-c)/p59Buy-back contracts¡ F(q)=(p-w)/(p-b)¡ F(qI)=(p-c)/p in the integrated systemF(qI)=F(q) if (p-c)/p = (p-w)/(p-b) w=? b=?Set b=p(1- α), w=p(1- α)+αc (0< α <1)(p-w) =p - p + αp - αc = α(p-c)(p-b) = p - p + αp = αpF(q)=(p-w)/(p-b) = α(p-c)/αp = (p-c)/p = F(qI)10Quantity Flexibility Contracts¡ Supplierl Charges w per unitl Compensates retailer for unsold units, up to a pre-determined quantity¡ Retailerl Gets a credit of min{I,δq}*(w+cR)¡ I is # of unsold units; 0 < δ < 1¡ How is this different from buyback?611Voluntary vs. Forced Compliance¡ Forced compliance: l Supplier delivers exactly the amount ordered by the retailer¡ Voluntary compliance: l Supplier delivers an amount (not exceed q) to maximize her profits¡ How do the quantities and coordination differ under these schemes?12Compliance Scenarios¡ Wholesale price contractl ΠS= (w-cS)q¡ Revenue sharing contractl Supplier’s profit is affine transformation of CSC profitl Implications?¡ Buy-back, Quantity discount¡ Two-part tariffl ΠS= F since units sold at cost713Franchise Contracts14Vertical vs. virtual integrationLogisticsSuppliersManagamentMarketingAndSalesR & DManuf.After SalesServiceCore FirmVERTICAL INTEGRATIONLogisticsSuppliersManagamentMarketingAndSalesR & DManuf.After SalesServiceCore FirmVIRTUAL INTEGRATIONB2BB2BB2BB2C815Dell Computer¡ Direct sales¡ Virtually integrated with suppliers and service providersl provide production requirements to suppliersl communicate inventory levels and replenishment needsl share design databases and methodologiesl direct shipment from suppliers (e.g. Sony)l real time information on service measuresl high involvement in planning customers' PC needs (e.g. Boeing)¡ Inventory turns 30 times per year¡ Founded in 1984, $12 billion company in 199816Cisco Systems - online sales¡ Phase 0: The old way (1996)l manually fill order forms, fax, call for pricingl reconfigure products multiple times¡ Phase 1: Information Centerl provide one-way informationl product/pricing information, order status¡ Phase 2: Marketplace and Internetworking Product Centerl configuration, pricing, order entryl order status917Cisco Systems - integrated supply chain¡ Demand managementl single forecast for supply chainl build requirements transmitted daily¡ Supply managementl suppliers monitor and replenish inventory, using actual demand infol integrate suppliers on new product development¡ Manufacturingl outsources most production to contract manufacturers that operate 37 factories, all linked via the Netl Suppliers make all the components, perform 90% of the subassembly work and do 55% of the final assemblyl testing automated on supplier line with Cisco methodologyl scheduling performed by supplier on actual demand signal18Cisco Systems¡ Customer managementl 70+% of orders handled through the web (order placement, configuration, pricing, status, lead times)l decentralized shipment, coordinated deliveryl large customers tie their inventory and procurement systems to Cisco's systems¡ Benefits of integrated supply chainl $70 million annual savingsl 25% faster time to marketl increased investment in R&Dl more coordinated supply chainl 55% of products outsourced1019Benefits of an integrated supply chain¡ Increased velocity of material, information and cash flowl Customer driven (“pull”) supply chain l Less need for physical inventoryl Shorter fulfillment timesl Shorter cash-to-cash cycle time¡ Increased responsiveness and flexibilityl Faster innovation cyclesl Faster time to marketl Higher product variety, mass customization20Non-contractual practices for SC coordination¡ Information sharing1121WholesalerRetailer Distributor FactoryOrdersShipmentsDelayDelayDelayDelayCustomerMulti-stage supply chain22The “Bullwhip” EffectOrder QtyTimeConsumer SalesRetailer’s Order to Distr. ChannelsOrder QtyTimeOrder QtyTimeDistr. Channel’s Order to ManufacturerOrder QtyTimeManufacturer’s Order to Supplier1223All have access to customer demand