Price-only contract

How does the problem change from the discussions in earlier sections where the manufacturer absorbs all risk Notice that all of the contracts we discussed earlier can now be considered for this case. As before, double marginalization will prevent the supply chain from being coordinated with a wholesale price only contract. A payback contract now becomes a returns contract, where the manufacturer takes back leftover product from the retailer with an associated payment for returns. The payback contract can coordinate the supply chain in this case. The capacity reservation contract also coordinates the supply chain in this case due to its equivalence to the returns contract, as discussed earlier. 

Lariviere, M., Porteus, E. (2001). Selling to the newsvendor An analysis of price-only contracts. Manufacturing and Service Operations Management, 3, 293-305. 

In the previous section, we demonstrated that the solutions of Models T and D are generally different from the system-optimal solution. In addition to the double marginalization effect, drop-shipping is also plagued by marketing-operations misalignment. Can we come up with a mechanism that will induce coordination As the next observation shows, a price-only contract is not sufficient. 

Observation 3. In Model T, the sole price-only contract that induces coordination has nF = c in which the retailer captures all profits, and in Model D there is no such contract... 

Not only are the price-only contracts inefficient, but also none of the other currently known contracts can coordinate the supply chain when customer acquisition expenses are considered. 

Caution Use these prices only as a rough guide to the probable price range. Actual prices at a given time will vary considerably from these values, depending on location, contract quantities, and the prevailing market forces. 

Some materials are subject to strong market-induced price fluctuations (e.g. silver, nickel, titanium etc.). The plant manufacturer can determine his or her tender price only on the basis of the current material prices. To protect him against sharp price increases it is possible to integrate a so-called price escalation clause into the contract with the operator. 

Once the volume of raw material is set. the price must be estimated. In some studies, a captive source is available with a set transfer price. In other studies, contracts for raw materials will be far enough along to establish the price. However, in some studies, contacts with vendors and the literature is the only source of raw material prices. 

It is assumed that any East Coast site would obtain styrene from Puerto Rico or foreign sources. Any site located in the Midwest would obtain its styrene from Louisiana. To compare these sites the cost of styrene from these different sources must be known, as well as import duties and the specifics of the freeport laws which might be involved. A plant of this size would probably contract to receive styrene, and what special price concessions might be obtained would need to be investigated. Since information on this was not available it will be assumed that the only difference in the price of styrene at the site is due to the cost of transportation. The cost of shipping by sea from Puerto Rico to Philadelphia (- 1700 miles) is 4.51 ton=O.230/lb. The cost of shipping styrene from Baton Rouge, La. to Cincinnati, Ohio (-900 miles) is 1.7O/ton=O.O90/lb (see Fig. 2-5).29... 

Most uranium, however, is bought on long-term contracts, and between 2000 and 2006 medium- and long-term uranium prices under existing contracts only increased by 20%-45% (WEC, 2007). 

A price calculation is relatively easy for a product with a track record of a regular industrial-scale production. On the other hand, it is difficult, if only a laboratory procedure exists and a calculation has to be made based on the virtual scaleup to industrial-scale production. The ability to perform this desk exercise in a quick and reliable fashion is an important competence criterion of a fine-chemical manufacturer. When setting a price, a separation of tasks must be made between the controller, who calculates the manufacturing cost, and the sales manager, who determines the sales price. If mistakes have been made and prices have to be changed, you will need facts to support your request. If a pivotal product is supplied, a supply contract is concluded. 

In custom manufacturing, supply contracts are product-based (unit price in /kg), whereas in contract research agreements they are service-based (FTEs in /scientist-year). The two types of contract are discussed in more detail below Agreeing on the price for a fine chemical is only one, albeit essential, element of a custom manufacturing deal between the supplier (fine-chemical company) and the customer (specialty-chemical company). The supply... 

After the development and successful explosion of the atomic bomb toward the end of World War II, an urgent search for workable uranium deposits was set in motion all over the world, The only high-grade deposits known to the western world were those in the countries just named as radium sources, but in view of the limited demand previously, serious exploration for uranium had never been undertaken, However, die offer of contracts by die U.S. Atomic Energy Commission, for fixed quantities at stated prices stimulated exploration for this hitherto largely ignored material. 

In some marketplaces and under many contract bid situations, there is an unfortunate tendency by some buyers to purchase water treatment programs based solely on the chemical product unit price, or to select only the lowest priced vendor, without consideration of any other factors. This practice is undertaken for various reasons. It may be, perhaps, because of cultural differences in negotiating practice, or because of simple ignorance of the value of the service supplied, or the belief that all chemical formulations are the same, or, alternatively, a failure to comprehend the concept of matching an overall and comprehensive service program specifically to a customer s needs. 

When buyers wish to see only the chemical unit price, or if they accept ultralow bids, or force contract prices downward too much, they are misleading themselves and their companies, when they believe they are doing a good job. If the contract price offered or demanded is too low or fails to allow for adequate services, both the vendor and the buyer (especially the buyer) will inevitably be plagued with problems. 

Two clauses seen occasionally in pharmacy contracts are the most favored nation clause and the allproducts clause. The most favored nation clause requires pharmacies to extend their lowest price or reimbursement rate to that third party. It is customary for third parties to require that the pharmacy charge the third party its U C price if it is lower than the third party s reimbursement formula price. However, having to give the third party the lowest reimbursement rate of all the other third-party rates is not customary The allproducts clause requires pharmacies to participate in all the third party s plans if it wants to participate in one plan. A pharmacy may want to choose only some of a third party s plans depending on the reimbursement rate and number of customers affected. Some states prohibit all-products clauses. These clauses became especially problematic with the advent of discount cards and more recently with the implementation of Medicare Part D. Discount cards are given or sold to people who do not have insurance coverage for prescription drugs. People who have a discount card pay a price that is determined by a reimbursement formula rather than the U C pharmacy price. As noted earlier, the reimbursement price usually is less than the pharmacy s U C price, so pharmacies receive less revenue. Some of the discount cards are administered by PBMs and other third parties, and pharmacies may prefer not to accept a third party s discount card even if they accept patients with insurance from that third party. Pharmacies... 

First, the only new coal mines which are going to be developed will have to be financed on the basis of take-or-pay contracts with prices sufficiently high to attract the capital needed for the investment. Profits as high as 10 per ton are required to finance new deep coal mines today. 

Until now, prices offered by local utilities were not considered attractive by producers (around US 28/MWh, 2000 US, for long term contracts and US 6,5/MWh for short-term contracts). There is not yet legislation to improve biomass-origin electricity generation. The purchase of this energy by the utilities is not mandatory and special discounts (up to 100%) on wheeling tariffs are available only for electricity from small hydro. 

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