Coordination supply chain profit

How coordinated are the supply chain choices with the company strategy How does this differ from our competitors If our competitors have a coordinated supply chain and we do not, then the relative efficiency of competitors may require coordination of our supply chain. Note that the coordination of all competing supply chains does not guarantee improved profits, but only su ests a competitive necessity. The decision then is whether to continue to eng e as needed or to change market focus. 

Figure 5.2 shows the manufacturer, retailer and supply chain profits for different possible values of the manufacturer capacity. Notice from this picture that it is optimal for the manufacturer to choose a capacity of 17 units because that capacity maximizes the manufacturers profits. Notice, however, that the capacity level does not maximize the supply chain profits. This example illustrates that wholesale price agreements may not be able to coordinate a supply chain. 

It is thus clear that the wholesale price contract caimot always create a coordinated supply chain, that is, that the profits added across individual companies do not attain the supply chain maximum profit because the optimal capacity decision, from a supply chain perspective, is not chosen. The next section describes a coordinating agreement that can generate a coordinated supply chain. 

Notice that this agreement also generates a Pareto-improving contract. Also, because the supply chain profit attains the maximum possible level, the agreement coordinates the supply chain. As before, any of the different w and p combinations correspond to the different possible splits of the total supply chain pie of profits. Details regarding the negotiations to split increased profits will be left out of this discussion. 

The key message is that in many supply chain contexts coordinating agreements can deliver significant improvements that all involve expanding the supply chain profit pie, thus enabling Pareto-improving profit situations. 

Having identified obstacles to coordination, we now focus on actions a manager can take to help overcome the obstacles and achieve coordination in the supply chain. The following managerial actions inaease total supply chain profits and moderate information distortion ... 

Managers can improve coordination within the supply chain by aligning goals and incentives so every participant in supply chain activities works to maximize total supply chain profits. 

Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance. Supply chain coordination requires all stages to take actions that maximize total supply chain profits. A lack of coordination results if different stages focus on optimizing their local objectives or if information is distorted as it moves across the supply chain. The phenomenon that fluctuation in orders increases as one moves up the supply chain from retailers to wholesalers to manufacturers to suppliers is referred to as the bullwhip effect. This effect results in an increase in all costs in the supply chain and a decrease in customer service levels. The bullwhip effect moves all parties in the supply chain away from the efficient frontier and results in a decrease of both customer satisfaction and profitability within the supply chain. 

Improved coordination to increase total supply chain profits... 

COORDINATION TO INCREASE TOTAL SUPPLY CHAIN PROFITS A supply chain is coordinated if the decisions the retailer and supplier make maximize total supply chain profits. In reality, each stage in a supply chain may have a separate owner and thus attempt to maximize its own profits. For example, each stage of a supply chain is likely to make lot-sizing decisions with an objective of minimizing its own overall costs. The result of this independent decision making can be a lack of coordination in a supply chain because actions that maximize retailer profits may not maximize supply chain profits. In this section, we discuss how a manufacturer may use appropriate quantity discounts to ensure that total supply chain profits are maximized even if the retailer is acting to maximize its own profits. 

The supply chain profit is lower if each stage of the supply chain makes its pricing decisions independently, with the objective of maximizing its own profit. A coordinated solution results in higher profit. 

Given that independent pricing decisions lower supply chain profits, it is important to consider pricing schemes that may help recover some of these profits even when each stage of the supply chain continues to act independently. We propose two pricing schemes that the manufacturer may use to achieve the coordinated solution and maximize supply chain profits even though DO acts in a way that maximizes its own profit. 

Several such pricing schemes can be designed. One such schane is for the manufacturer to charge a wholesale price of Q = 4 per bottle (this is the same wholesale price that is optimal when the two stages are not coordinated) for annual sales below =120,000 units, and to charge Cr = 3.50 (any value between 3.00 and 3.50 will work) if sales reach 120,(X)0 or more (see worksheet Volume Discount). It is then optimal for DO to order 120,000 units in the year and price them at p = 4 per bottle to the customers (to ensure that they are all sold). The total profit earned by DO (360,000 — 60,000p) X (p — Cg) = 60,000. The total profit earned by the manufacturer is 120,000 "X (Cr — 2) = 180,000 when Cr = 3.50. The total supply chain profit is 240,000, which is higher than the 180,000 that the supply chain earned when actions were not coordinated. 

At this stage, we have seen that even in the absence of inventory-related costs, quantity discounts play a role in snpply chain coordination and improved supply chain profits. Unless the manufacturer has large fixed costs associated with each lot, the discount schemes that are optimal are volume based and not lot-size based. It can be shown that even in the presence of large fixed costs for the manufacturer, a two-part tariff or volume-based discount, with the manufacturer passing on some of the fixed cost to the retailer, optimally coordinates the supply chain and maximizes profits given the assumption that customer demand decreases when the retailer increases price. 

For products for which the firm has market power, two-part tariffs or volume-based quantity discoimts can be used to achieve coordination in the supply chain and maximize supply chain profits. 

Devise appropriate discounting schemes for a supply chain. Quantity discounts are justified to increase total supply chain profits when independent lot-sizing decisions in a supply chain lead to suboptimal solutions from an overall supply chain perspective. If suppliers have large fixed costs, suitable lot-size-based quantity discounts can be justified because they help coordinate the supply chain. Volume-based discounts are more effective than lot-size-based discounts in increasing supply chain profits without increasing lot size and cycle inventory. 

Pyke DF, Johnson ME (2005) Real-Time Profit Optimization Coordinating Demand and Supply Chain. URL http //www2.cio.com/higher/report3489.html, Date 31.03.2005... 

Competitiveness is the fourth C in our list of concepts. Managing the competitiveness of a supply chain requires two sets of choices—the choice of the metrics of competition as well as responses to competitors choices. Typical metrics used include lead time, cost, profit, product variety, consistency, service level, fill rate, and others. For a monopolist, it is important to identify appropriate metrics to coordinate optimal choices across the supply chain. However, competition has an impact on the feasible... 

Coordinating agreements can be implemented between a shipper and a transport provider to improve performance. Consider a supply chain consisting of suppliers, manufacturing plants, and customer locations. In the original system, suppose each plant runs as an independent profit center, choosing its own transportation. To create scale economies as well as increase the fraction of line and backhaul routes, an alternate system can be implemented to coordinate across locations and with a transport company. Consider the potential impact on the system as it transitions from independent transport choices to a corporate load control center that enables performance improvement. 

The main difference under consignment inventory is that the manufacturer continues to own the retail consignment inventory until the product is sold to the customer. Thus, consignment inventory is equivalent to the manufacturer purchasing store shelf space and choosing inventory levels to maximize his profits. Coordination is achieved because the supply chain decisions are made by one decision maker. Such an approach is common in the provision of spices the spice racks in many retail stores are managed by the supplier. 

Muchofthe re search has assumedthateach agent in a supply chain is risk-neutral and his objective is to maximize (minimize) the expected profit (cost). Under this assumption, a supply chain is said to be coordinated when the summation of individual expectedprofits (costs) are maximized (minimized). A number of contractual forms have been studied recently under the risk-neutral assumption. These include the three popular contracts wholesale price (WP) contracts (Lariviere Porteus, 2001 Corbett et al., 2004), buy back (BB) contracts (Pasternack, 1985), and quantity flexibility (QF) contracts (Tsay, 1999 Cachon, 2003). 

To the best of our knowledge, there have been few studies that deal with supply chain coordination where all agents involved adopt the satisficing objectives. This chapter attempts to fill this gap. The contractual forms we consider include WP, BB, and QF contracts. We focus these three contractual forms for three reasons. Firstly, they are popular contracts in business practice (Tayur, Ganeshan, Magazine, 1999). Secondly, they have been extensively studied in the supply chain literature, mostly in the framework of expected profit maximization (Cachon, 2003). Thirdly, WP, BB, and QF contracts have one, two, and three contract parameters, respectively. Hence, our research will answer the question if increased degrees of freedom in contractual forms will be beneficial to coordination of supply chains with the satisficing objectives. 

Let t and be the profit targets for the supplier and the retailer, respectively. If both of them adopt the satisficing objective, the supply chain is coordinated if and only if ... 

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