Contracts buyback

Miyaoka, J. 2003. Implementing collaborative forecasting through buyback contracts. Working paper. Department of Management Science and Engineering, Stanford University, Stanford, CA. 

RISK SHARING THROUGH BUYBACKS A buyback or returns clause allows a retailer to return unsold inventory up to a specified amount, at an agreed-upon price. In this case, the supplier is sharing risk by agreeing to buy back unsold inventory at the retailer. In a buyback contract, the manufacturer specifies a wholesale price c along with a buyback price b at which the retailer can return any unsold units at the end of the season. We assume that the manufacturer can salvage % for any units that the retailer returns. The manufacturer has a cost of v per unit produced. The retail price is p. 

Table 15-3 (which can be constructed using worksheet Example 15-2) shows supply chain profits for different values of wholesale and buyback prices. Observe that the use of buyback contracts increases total supply chain profits by about 20 percent when the wholesale price is 7 per disc. For a fixed wholesale price, increasing the buyback price always increases retailer profits. In general, there exists a positive buyback price that is a fraction of the wholesale price, at which the manufacturer makes a higher profit compared to offering no buyback. Also observe that buybacks increase profits for the manufacturer more as the mauufacturer s margin increases. In Table 15-3, buybacks are found to be more helpful to the manufacturer when the wholesale... 

TABLE 15-3 1 Order Sizes and Profits in Music Supply Chain Under Different Buyback Contracts ... 

For a fixed wholesale price, as the buyback price increases, the retailer orders more and also returns more. In our analysis in Table 15-3, though, we have not considered the cost associated with a return. As the cost associated with a return increases, buyback contracts become less attractive because the cost of returns reduces supply chain profits. If return costs are high, buyback contracts can reduce the total profits of the supply chain far more than is the case without any buyback. 

In 1932, Viking Press was the first book publisher to accept returns. Today, buyback contracts are common in the book industry, and publishers accept unsold books from retailers. To minimize the cost associated with a return, retailers do not have to return the book, only the cover. When publishers can verify retailer sales electronically, nothing must be returned. The goal in either case is for the publisher to get proof that the book did not sell while reducing the cost of the return. Over the years, considerable debate has taken place about the impact of publishers returns policy on profits in the industry. Our discussion provides some justification for the approach taken by the publishers. 

With more responsive production and centralized inventory, the suppUer can exploit independence of demand across retailers to carry a lower level of inventory. In practice, however, most buyback contracts have decentralized inventory at retailers. As a result, there is a high level of information distortion. 

As in buyback contracts, revenue-sharing contracts also result in the supply chain producing to retailer orders rather than to actual consumer d and. This information distortion results in excess inventory in the supply chain and a greater mismatch between supply and demand. The information distortion increases as the number of retailers to which the supplier sells grows. As... 

Relative to buyback and revenue-sharing contracts, quantity flexibihty contracts have less information distortion. Consider the case with multiple retailers. With a buyback contract, the supply chain must produce based on the retailer orders that are placed well before actual demand arises. This leads to surplus inventory being disaggregated at each retailer. With a quantity flexibility contract, retailers specify only the range within which they will purchase, well before actual demand arises. If demand at various retailers is independent, the supplier does not need to... 

For a manufacturer that sells to many retailers, why does a quantity flexibility contract result in less information distortion than a buyback contract ... 

Fundamentally both classic repo and sell/buybacks are money market instruments that are a means by which one party may lend cash to another party, secured against collateral in the form of stocks and bonds. Both transactions are a contract for one party to sell securities, with a simultaneous agreement to repurchase them at a specified future. They also involve ... 

PRICING FOR COORDINATION In many instances, suitable pricing schemes can help coordinate the supply chain. A manufactmer can use lot-size-based quantity discounts to achieve coordination for commodity products if the manufacturer has large fixed costs associated with each lot (see Chapter 11 for a detailed discussion). For products for which a firm has market power, a manufacturer can use two-part tariffs and volume discounts to help achieve coordination (see Chapter 11 for a detailed discussion). Given demand uncertainty, manufactmers can use buyback, revenue-sharing, and quantity flexibility contracts to spur retailers to provide levels of... 

Risk sharing in a supply chain increases profits for both the supplier and the retailer. Risk sharing mechanisms include buybacks, revenue sharing, and quantity flexibility. Quantity flexibility contracts result in lower information distortion than buyback or revenue-sharing contracts when a supplier sells to multiple buyers or the supplier has excess, flexible capacity. 

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