Opm/305 Week 4

Koç University

OPSM 305 Supply Chain Management
Class 10:
Incentive issues

Zeynep Aksin [e-mail] 1

Hamptonshire Express
§ Anna has a degree from journalism & operations research § She has started a daily newspaper in her hometown
§ She used a leased PC: lease cost $10 per day
§ A local printer prints newspapers at 0.20 per copy
§ Sales the next day between 6 am and 10 am
§ Newsstand rental $30 per day
§ Express sold to customers at $1 per copy
§ Copies not sold by 10 am are discarded
§ Anna estimates daily demand to be distributed
N(500,100)
2

Question 1
§ Optimal stocking quantity?
§ Profit at this stocking quantity?

3

Ordering Level and Profits in Vertically
Integrated
Assume the opportunity cost of her time is $10 per hour. § Compare optimal profits to previous scenario 6

Optimal Level of Effort in Vertically
Integrated Channel
§ Demand potential increases by 50 h
§ Expected profit increases by 0.8*50 h h à h+1

0.8 * 50 * ( h + 1 − h )

0 à 1

40

1 à 2

16.56

2 à 3

12.71

3 à 4

10.71

4 à 5

9.44

i* = 684
E[Profit]
12

Inefficiencies in a Differentiated Channel
§ Supplier chooses w, retailer chooses i*
§ Retail ignores +ve effect of stocking one more unit on supplier
§ Supplier ignores +ve effect of cutting wholesale price/increasing effort on retailer
§ Supplier prices above marginal cost/exerts low effort
§ Retailer stocks less
§ Supply chain profits shrink
13

Contracts
§ Specifies the parameters within which a buyer places orders and a supplier fulfills them
§ Example parameters: quantity, price, time, quality
§ Double marginalization: buyer and seller make decisions acting independently instead of acting together; both of them make a margin on the same sale – gap between potential total supply chain profits and actual supply chain profits results § Buyback contracts can be offered that will increase total supply chain profit
14

Returns policies
§ Rationale: set buyback price b so that
(retailer cost structure w−b c − s
=
= supply cost structure) r −b r − s
§ Supplier can use both w and b
§ Supplier is bundling insurance with the good 15

Example
Breakdown of profits under a buyback scheme

8