Example 15-1: Impact of Local Optimization
Inputs
Independent
Retailer
Vertically
Integrated
Supply Chain
Mean Demand, μ1,000 1,000
Standard Deviation of demand
300 300
Retailer’s Cost, c = 5$
Retailer’s Sale price, p = 10$
Retailer’s Salvage value, s = b = –$ –$ Supply Chain Salvage Value
Mfg’s Cost, v1$ 1$ Supply Chain Cost
Mfg’s Sale price, c5$ 10$ Supply Chain Sale Price
Intermediate Calculations
Cost of Understocking, Cu5$ 9$
Cost of Overstocking, Co5$ 1$
Outputs
Order size, O* 1,000 1,384
Expected overstock 120 399
Expected understock
120 14
Retailer’s Expected Profit 3,803$
Manufacturer’s Expected Profit
4,000$
Total Supply Chain Expected Profit =
7,803$ 8,474$
We analyze the case where the retailer orders independently
and where the supply chain is vertically integrated. Cell B20
contains supply chain profits with an independent retailer
and Cell C20 contains supply chain profits for the vertically
integrated case.
Example 15-2: Impact of Risk Sharing Through Buybacks
Inputs
Mean Demand, μ1,000
Standard Deviation of demand 300
Retailer’s Cost, c = 5$
Retailer’s Sale price, p = 10$
Retailer’s Salvage value, s = b = 3$
Retailer’s Return cost = –$
Mfg’s Cost, v1$
Mfg’s Sale price, c5$
Mfg’s Buyback Price, b3.00$
Mfg’s Salvage Value, sm–$
Intermediate Calculations for Retailer
Cost of Understocking, Cu5$
Cost of Overstocking, Co2$
Outputs
Order size, O* 1,170
Expected overstock 223
Expected understock
53
Retailer’s Expected Profit 4,286$
Manufacturer’s Expected Profit 4,009$
Total Supply Chain Expected Profit =
8,296$
Steps to Build Table 15-3
1. Enter the desired value of buyback price b in Cell B11
and the wholesale price cin Cell B10.
2. Optimal retailer order, expected overstock, and expected sales
are shown in Cells B17:19. Profits are shown in Cells B20:22.
Example 15-4: Impact of Risk Sharing Through Quantity Flexibility
Inputs
Mean Demand, μ1,000
Standard Deviation of Demand, σ300
Manufacturer‘s Sale Price, c =5.00$
Manufacturer‘s Cost, v =1.00$
Manufacturer salvage value, sM = –$
Retailer’s Sale Price, p =10.00$
Retailer salvage value, sR = –$
Order size, O = 1,017
Quantity Flexibility Contract
alpha α =0.05
beta β =0.05
Q = (1+α)O = 1,068
q = (1-β)O = 966
Output
Retailer’s Expected purchase = 1,015
Retailer’s Expected sales = 911
Expected Manufacturer’s profits = 4,006$
Expected Retailer’s profits = 4,038$
Expected Supply chain profit = 8,044$
Steps to Build Table 15-5
1. Enter the desired value of αin Cell B12 and the desired value of β
in Cell B13.
2. Run Solver (Data | Analysis | Solver) to find order size O(Cell B10) that maximizes
retailer profits (Cell B20).