Wholesale Price Agreement

Consider the case when the manufacturer and retailer are separate companies, each optimizing their profits. Because the manufacturer has to choose capacity to optimize his profits, he will consider the wholesale margin w — c — associated with a sale as against the loss associated with wasted capacity of c. The manufacturer will thus choose capacity to offer 

Consider the supply chain example discussed earlier, but for this decentralized supply chain decision-making environment. Using the numerical example from the earlier section, the manufacturers optimal service level is - = 0.643. Using the probabilities in Table 5.1, this 

Demand Prob CumProb Revenue CapCommit Execution Profit X Probability 

The manufacturer s expected profit is obtained by adding the entries in the last column to yield manufacturer s expected profit of 11.1. The impact of the manufacturer s choice on the retailer s expected profit is calculated in Table 5.4. 

Again the retailer s profit is the sum of the entries in the last column and is equal to 28. Notice that the supply chain profit is lower than the maximum supply chain profit possible of 40.32. Note that for any wholesale price such that c + q w r, then Kq K, if the service levels are greater than 50%. Thus the supply chain profits are not maximized, and the supply chain is termed uncoordinated. Notice that this remains the case even when the wholesale price varies from the current level. In general, 

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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. 

Table 5.10 Retailer expected profit calculations for wholesale price agreement when the retailer absorbs risk r = 4, w = 2, c/, = 0.5, c = 0.6, K = 15, optimal service level = 0.5...

How would permitting the retailer to order at affect manufacturer and retailer profits compared to the values under the wholesale price agreement in the earlier section If all costs remain the same as in the previous sections, the retailer would continue to choose an order, given the demand level, that generates a service level of 0.5. Thus, if the demand level is low, the retailer orders 10 units if medium, the retailer orders 15 units and if high, the retailer orders 20 units. 

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. 

At present, cost estimates for electricity production are even higher. For example, in Turkey, the discussion with Rosatom focusses on a fixed price Power Purchase Agreement for 15 years under a Build-Own-Operate scheme the weighted average cost is US 123.5/MWh and the quantity of electricity is fixed. In the UK, EDF has been offered an investment contract for Hinkley Point C (ie, the construction of UK s first nuclear plant in 28 years) with a strike price for its electricity output of GBP 92.50 (ie, 125 in 2012 prices) per MWh, which will be adjusted (linked to inflation) during the construction period and over the subsequent 35-year tariff period this strike price for electricity from Hinkley Point C is roughly twice the current wholesale price of power. 

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