Supply Chain Management: Contracts, Strategies & 3PL Growth

Posted on Sep 7, 2024 in Economy

CHAPTER 4

Question 1 (Buy Back, Pay Back, Option Contract)

All these contracts are appropriate to increase the likelihood that the retailer purchases a higher number of items from the supplier and hence ultimately sells more to the customer. Without the contract, the risk to the retailer is high if bought items remain unsold – with the contract, this risk is shared with the suppliers. On the other hand, because of the uncertainty in the demand, the probability of selling more also increases.

Question 5 (Make to Order and Make to Stock)

The factors that affect the choice of the supply contract type include the following:

  1. Business Convention: Companies tend to choose the contract form that is most common in their type of business.
  2. Information Availability: The type of information available may dictate what type of contract can be implemented in practice. Depending on the contract type, suppliers and buyers require access to different types of information, and some information may be difficult for the supplier to acquire but easier for the retailer, or vice versa.
  3. Decision Making and Incentives: To achieve the optimal profit for the whole system and to allocate it properly, both suppliers and retailers must understand that decisions must be made collaboratively. All parties must be aware that they have to give up part of the control in their individual systems, and the choice of the supply contract type depends on the level of control that parties are willing to share with each other.

Buy-back contracts:

  1. Advantages:
    1. Commonly used in many businesses.
    2. The coordinating prices are not very sensitive to the demand distribution.
  2. Disadvantages:
    1. The supplier may have to buy back a large quantity of the product when demand is low.
    2. Extra transportation and re-stocking costs for returned items.

Revenue-sharing contracts:

  1. Advantages:
    1. Easy to understand.
    2. The optimal values of the decision variables are not very sensitive to the demand distribution.
  2. Disadvantages:
    1. Need to monitor the total revenue.

Quantity-flexible contracts:

  1. Advantages:
    1. Commonly used in many businesses.
  2. Disadvantages:
    1. The optimal values of the decision variables are sensitive to the demand distribution.
    2. Extra transportation and re-stocking costs for returned items.

Sale-rebate contracts:

  1. Advantages:
    1. It is a direct incentive to the retailer to increase sales.
  2. Disadvantages:
    1. Difficult to track and implement.

CHAPTER 8 – STRATEGIC ALLIANCES (3PL GROWTH)

Question 2

Logistics is a complex set of tasks that requires vast resources, analytical expertise, related software and a significant amount of investment in information technology which goes out of date very rapidly. Thus, unless logistics is a core competency of the company and it has resources to dedicate to it, it is difficult to design and implement effective logistics operations. Therefore, companies are increasingly willing to outsource logistics operations to third parties who have the analytical expertise, necessary software and sufficient resources to keep their information systems up-to-date. In addition, since these third-party logistics providers have several (or many) customers, they have sufficient economies of scale to make the necessary capital investments to operate an advanced logistics system.

Question 3 (Quick Response, Continuous Replenishment, Vendor Management)

  1. Quick Response: In a quick response system, the retailer determines the order quantities and replenishment times, while suppliers analyze POS data to improve their forecasting and production scheduling. This system could be preferred when the retailer-supplier relationship is new, and trust between the two parties has not been fully developed yet. In this strategy, the retailer has complete control on its inventory, but helps suppliers improve operations by providing POS data. Additionally, this type of partnership could be preferred if financial and personnel resources to develop a more integrated relationship are not available.
  2. Continuous Replenishment: In a continuous replenishment system, vendors receive POS data and use these data to prepare shipments at previously agreed-upon intervals to maintain specific levels of inventory. This type of partnership is a system between quick response and VMI, because suppliers and buyers together agree on target inventory and service levels. It involves less risk for retailers than VMI, and typically leads to a more stable and long-term relationship between suppliers and retailers than quick response does.
  3. Vendor-Managed Inventory (VMI): In a vendor-managed inventory system, suppliers decide on the appropriate inventory level for each product and the appropriate inventory policies to maintain these levels. The retailers give the vendors full authority to manage inventory replenishment. This system is more integrated than the previous two systems, and requires a high level of trust between the supplier and the buyer. If implemented properly, VMI can lead to more overall system savings than the other two types of partnerships. However, VMI requires more commitment, and initially, significant investment in information infrastructure, time and personnel.