Sharing Risk and Reward in the Supply Chain

Sharing Risk to Grow Supply Chain Profits 

Consider a music store that sells compact discs. The supplier manufactures compact discs at 1 per unit and sells them to the music store at 5 per unit. The retailer sells each disc to the end consumer at 10. At this retail price, market demand is normally distributed, with a mean of 1,000 and a standard deviation of 300. Any leftover discs at the end of the sale period are worthless. How many discs should an independent retailer order What are the supply chain profits with an independent retailer If the manufacturer and the retailer are vertically integrated (they are a single firm), how many discs should the retailer order What are the supply chain profits when the manufacturer and retailer are a single firm  

We first consider the case of the independent retailer. The retailer has a margin of 5 per disc and can potentially lose 5 for each unsold disc. The retailer thus has a cost of overstocking = 5 and a cost of understocking C = 5. Using Eqnation 13.1, it is optimal for the retailer to aim for a service level of 5/(5 + 5) = 0.5 and order NORMINV(0.5,1000,300) = 1,000 discs. From Equation 13.3, the retailer s expected profits are 3,803, and the manufacturer makes 4,000 from selling 1,000 discs. The total supply chain profit with an independent retailer is thus 3,803 + 4,000 = 7,803. 

the vertically integrated supply chain makes 670 more than when the retailer makes 

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