Supply chain and forms of the contract

Supply chain and forms of the contract

Supply chain and forms of the contract

Introduction

A number of different contract types are identified and their benefits and drawbacks are illustrated. The first model has a single supplier selling to a single retailer that faces the newsvendor problem. In that model the retailer orders a single product from the supplier well in advance of a selling season with stochastic demand. The supplier produces after receiving the retailer's order and delivers her production to the retailer at the start of the selling season. The retailer has no additional replenishment opportunity. How much the retailer chooses to order depends on the terms of trade, i.e., the contract, between the retailer and the supplier. (Marvel, H. and J. Peck. 2005, 56-78)

The newsvendor model is not complex, but it is succulently rich to study three important questions in supply chain coordination. First, which contracts coordinate the supply chain? A contract is said to coordinate the supply chain if the set of supply chain optimal actions is Nash equilibrium, i.e., no …rm has a pro…table unilateral deviation from the set of

Supply chain optimal actions. Ideally, the optimal actions should also be a unique Nash equilibrium; otherwise the …rms may "coordinate" on a sub-optimal set of actions. In the newsvendor model the action to coordinate is the retailer's order quantity (and in some cases, as is discussed later, the supplier's production quantity also needs coordination). (Marvel, H. and J. Peck. 2005, 56-78)

Second, which contracts have succulent texibility (by adjusting parameters) to allow for any division of the supply chain's pro…t among the …rms? If a coordinating contract can allocate rents arbitrarily, then there always exists a contract that Pareto dominates a no coordinating contract, i.e., each …rm's pro…t is no worse o¤ and at least one …rm is strictly better o¤ with the coordinating contract. Third, which contracts are worth adopting? Although coordination and taxable rent allocation are desirable features, contracts with those properties tend to be costly to administer. The concept of a compliance regime is introduced. The compliance regime determines the consequences for failing to adhere to a contract. For example, it is assumed that the supplier cannot force the retailer to accept more product than the retailer orders, i.e., the retailers could clearly use the courts to prevent any attempt to do so. However, it is debatable whether the supplier is required to deliver the retailer's entire order. The compliance regime matters because it nuances the kinds of contracts that coordinate the supply chain: there exist contracts that coordinate with one compliance regime, but not another. (Marvel, H. and J. Peck. 2005, 56-78)

Explantion

The wholesale price contract

With a wholesale price contract the supplier charges the retailer 9 per unit purchased:

7 %( /+9) = 9/( Marx, L. and G. Sha¤er. 2001, 65-77) for a more complete analysis of this contract in the context of the newsvendor problem. (Marx, L. and G. ...