Operations and Supply Chain

Management
SESSION 4

S H I VA N E E P E T H E
Supply Chain Games
SUPPLY CHAIN LENGTHS
Bullwhip Effect
Bullwhip Effect
Complete Information: Graphs
Comparisons
2 Player 3 Player 4 Player
Variance Factory Retailer Factory Distributor Retailer Factory Distributor Wholesaler Retailer
A 171.7 31.8 468.6 490.9 382.2 3455.6 1000.0 361.1 138.9
C 354.8 102.5 3045.9 1285.7 262.2 4591.8 1270.4 576.5 117.3

2 Player 3 Player 4 Player

Mean Factory Retailer Factory Distributor Retailer Factory Distributor Wholesaler Retailer
A 21.3 21.3 18.6 20.0 18.6 38.3 26.7 21.7 18.3
C 24.3 23.6 59.3 30.0 21.4 42.9 27.1 23.6 20.7
Supply Chain Games
INCOMPLETE INFORMATION
Costs
Backorder = max{ Incoming order – Available , 0}
Backorder cost = Backorder * back order cost per unit per period

Inventory = max{ Available – Demand, 0}

Holding cost = Inventory * inv. Holding cost per unit per period

Total Cost = Backorder Cost + Holding Cost

Let’s go a step further…
Week Incoming Order Backorder Inventory Your order
0 - - 15 -
1 19 4 0 25
2 22 11 0 20

• What if some of your backorders were customers who left instead of waiting?

• How would you deal with it as a retail firm? How would the producer deal with it?
Contract Design
2 FIRM GAMES FOR CONTRACTS
Context of the next simulation
Perishable product – either you sell or loose p
the sale
Any product leftover at the retailer is scrapped
Retailer
Selling price (p) = 10 per unit product sold
Standard wholesale price (w) = 5 per unit w
Cost of production (c) = 2 per unit
Demand ~ N(mu=20, sd=4) Manufacturer

c
Instantaneous Production and delivery
Types of Contracts
Revenue Sharing
◦ Retailer shares part of revenue with manufacturer for a lower purchase price (wholesale price=w)

Buyback Contract
◦ Manufacturer buys back the leftover inventory at a price (buyback price =b) lower than the wholesale price (b<w)

Two-part Tariff
◦ The retailer pays the manufacturer a franchisee fee (fixed fee) in return for a lower wholesale price

Quantity Discount
◦ Manufacturer sets discounts for various levels of purchases to encourage higher stock holding
What’s a contract trying to do?
Align incentives of the firms involved
“Increase the pie”
Fairly distribute said increase

To Read: Sections 1 & 2 of the article “Supply Chain Coordination with Contract” by Gerard
Cachon
THANK YOU!
HAPPY DIWALI!