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Supply Chain Management: Strategy, Planning, and Operation: Seventh Edition, Global Edition
Supply Chain Management: Strategy, Planning, and Operation: Seventh Edition, Global Edition
Chapter 15
Sourcing Decisions in a
Supply Chain
1. Capacity aggregation
2. Inventory aggregation
3. Transportation aggregation by transportation intermediaries
4. Transportation aggregation by storage intermediaries
5. Warehousing aggregation
6. Procurement aggregation
7. Information aggregation
8. Receivables aggregation
9. Relationship aggregation
10. Lower costs and higher quality
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Factors Influencing Growth of Surplus by
a Third Party (1 of 2)
• Scale
– Large scale it is unlikely that a third party can achieve
further scale economies and increase the surplus
• Uncertainty
– If requirements are highly variable over time, third party
can increase the surplus through aggregation
• Specificity of assets
– If assets required are specific to a firm, a third party is
unlikely to increase the surplus
• Cost and quantity of available capital
– Third party may have available or lower cost capital
Copyright © 2019 Pearson Education, Ltd.
Factors Influencing Growth of Surplus by
a Third Party (2 of 2)
Table 15-1 Growth in Surplus by Third Party as a Function of
Scale, Uncertainty, and Specificity
Blank Blank Specificity of Assets Specificity of Assets
Involved in Function (Low) Involved in Function (High)
Firm scale Low High growth in surplus Low to medium growth in
surplus
Blank High Low growth in surplus No growth in surplus unless
cost of capital is lower for third
party
Demand Low Low to medium growth in Low growth in surplus
uncertainty surplus
for firm
Blank High High growth in surplus Low to medium growth in
surplus
pc Cu 1
CSL* Prob(Demand O*)
p s Cu Co Co
1
Cu
O * F 1(CSL*, , ) NORMINV(CSL *, , )
(O )
Expected understock ( O ) 1 NORMDIST
,0,1,1
(O )
NORMDIST
,0,1,1
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Impact of Local Optimization (1 of 2)
• Selling compact disks – Independent retailer
1. Buyback or returns
2. Revenue sharing
3. Quantity flexibility
1. How will risk sharing affect the firm’s profits and total
supply chain profits?
2. Will risk sharing introduce any information distortion?
3. How will risk sharing influence supplier performance along
key performance measures?
Buyback price = $3 Co $5 $3 $2
Cu $10 $5 $5
5
Target service level 0.71
2 5
5
Order NORMINV 1,170 disks
7, 1000, 300
Optimal
Order Size Expected Expected Expected Expected
Wholesale Buyback for Music Profit for Returns to Profit for Supply Chain
Price c Price b Store Music Store Supplier Supplier Profit
$5 $0 1,000 $3,803 120 $4,000 $7,803
Cu (1 f )p c
CSL* probability (demand O*)
Cu Co (1 f )p sR
Wholesale price c = $1 sR = 0
Revenue share f = .45 Co = c sR = $1 $0 = $1
Cu = (1 f )p c = 1 0.45 10 1 = $4.50
4.5
Target service level CSL * 0.818
4.5 1
4.5
Order NORMINV , 1000, 300 1,273 disks
5.5
• 0 , 1
Expected QR c (Q QR )sM Q v
manufacturer profit
1015 5 1068 1015 0 1068 1 $ 4,006