Wholesale price contract

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. 

The chapter studies a supply chain consisting of one supplier and one retailer with satisficing objectives for each player. The authors examine the supply chain under three types of contracts wholesale price, buy back, and quantity flexibility contracts. They show that under the satisficing objectives, wholesale price contracts can coordinate the supply chain, whereas buy back contracts cannot. In addition, quantity flexibility contracts must degenerate into wholesale price contracts to coordinate the supply chain. The authors also discuss possible extensions to their model. 

Marcie Hawkins, a pharmacist who was promoted recently to pharmacy manager at Good Service Pharmacy, opens her mail and sees that Better Health Insurance has sent a new contract. Better Health is the insurer for about 20 percent of the patients at Good Service Pharmacy, so Marcie is anxious to see what the new reimbursement rates will be. As Marcie reads the new contract, she is dismayed to find that the new Better Health rates are average wholesaler price (AWP)... 

Anecdotally, there have been reports of pharmacy closings, late payments, increased administrative burden, and loss of patients. One survey of 22 rural pharmacy owners recently summarized their experiences. Among these pharmacy owners, four had accepted all PDP contracts, but others were more selective in which contracts they signed. The pharmacy owners expressed concern about the low reimbursements by some plans and that signing such contracts would risk financial viability. For example, the best reimbursement rate reported by these pharmacy owners was average wholesale price (AWP) less 10 percent to a low of AWP less 30 percent. Dispensing fees ranged from 1.00 to 4.00 with a median of 1.75 (Radford et al., 2007). 

Repricing audits measure adherence to the contract s financial terms. They require limited data and use an independent source to confirm average wholesale price on the date of service. Discounts are recalculated and compared with the contracted rates, and dispensing fees and copayments are verified on a sample set of claims. Compliance with plan design may also be included in the scope of the audit. 

Leases are generally made to commercial parties. Under the lease contract, the lessee makes small monthly payments to the lessor and at the end of the term holds an option to purchase the vehicle for the stated RV. This option is likely to be exercised if the RV is equal to or below the retail value of the car, otherwise the lessee is likely to return the car to the dealer, which can then decide whether or not to take the car. If the dealer also decides not to purchase the car, the lessor takes possession and sells it at its wholesale price. Because of the uncertainty about the realisation of the RV, which can be large relative to the lessee s lease payments, it is important for investors to know if the pool of receivables that backs the transaction comprises only the rental component of the lease contracts or if it also includes the RV component. For example, the five transactions issued under the VCL programme are backed solely by the rental component of the lease contracts. 

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. 

But what if there were two suppliers, each competing to win the contract. Suppose the two suppliers have produaion costs of r, and s, with a> 2> s. Consider a system in which the suppliers first compete on wholesale price, and the buyer chooses the appropriate retail price and quantity. F the two suppliers participated in an auction, then the wholesale price charged to the buyer would be Si- This wholesale price is always smaller than the best that can... 

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). 

A WP contract is Pareto optimal if the wholesale price w = w. The associatedPareto-optimal order quantity and maximal probabilities of achieving the targets are given by ... 

The answer to the above example is summarized in Table 1. Under a WP contract with a wholesale price w, q (w) and P/(w) denote, respectively, the associated Pareto-optimal order quantity and the retailer s maximal probability of achieving her profit target. The Pareto-optimal wholesale price is given by vP = 22. Note that under a feasible WP contract with a wholesale price w, the supplier s profit is deterministic and F (w) = 1 always holds. 

Table 1. The associated Pareto-optimal order quantity and the retailer s maximal probability of achieving her target profit under a WP contract with wholesale price w...

Table 2. The probabilities of achieving the target profits for the supplier and the retailer with different combinations of wholesale price and order quantity under WP contracts...

Next we consider the BB contracts with wholesale price w Pareto-optimal order quantity. The associated probability functions of achieving the supplier s and the retailer s profit targets are, respectively ... 

Notice that wholesale price w in aBB contract plays m important role for the contract to be Pareto optimal. When c upper bound w in order for the BB contraet to be Pareto optimal. On the other hand, when wlower bound w - c-v) m order for the BB eontractto be Pareto optimal. When w = iD, the BB contract is Pareto optimal regardless of the buy back price b, as long as the general requirement of w - (c - v) < b < w holds. 

With a QF contract, the supplier charges the retailer a constant unit wholesale price w but offers the retailer the flexibility of adjusting the initial order quantity. Suppose the retailer places an initial order quantity of q. Depending on demand from customers, the retailer can adjust the initial quantity q to be anywhere within [dq, uq] without extra finaneial eharge, where 0 < c/ < 1 and m > 1 represent the downward and upward adjustment parameters, respectively. Therefore, the retailer s aetual order quantity will be dq, D, and uq if the realized demand is D< dq, dq uq, respectively. The supplier is responsible to supply up to quantity uq for the supply chain. 

Obviously the Pareto-optimal WP contract (see Theorem 1) can coordinate the supply chain with satisficing objectives, which results in the probability pair [1,1-F((r + t) r - c))]. However, the Pareto-optimal BB contracts (see Table 3) cannot coordinate the supply chain with satisficing objectives. This is because all three resulted probability pairs are dominated by either [1,1-F((t + /( -< ))] or [ -F t + t) r - c)), 1]. As for Pareto-optimal QF contracts (see Table 4), the probability pair from qXQFI is dominatedby [ -F Jt + t)l r-cJ), 1]. Therefore, the Pareto-optimal QF contracts in set QFl cannot coordinate such a supply chain. However, the Pareto-optimal QF contract in set QF2, which is a WP contract with wholesale price w, coordinates the supply chain. Hence, for a QF contract to coordinate the supply chain under the satisficing objective, it has to degenerate into a WP contract. 

Given a WP contract with wholesale price w, the retailer will order q=F r-w)/ r-v)) to maximize her expected profit. For the supplier, his PC is q tj(w—c)=q given his target profit level E Once the PC is satisfied, the probability to achieve his target profit will always be 1, and thus is maximized. Here we also assume H /2 [Pg.245]

Observe that, in our example, under the coordinating contract, the retailer always makes more profit than without the coordinating contract. This is not true in general under the low unit-revenue and high variability the retailer may be better off without the contract for high wholesale prices. The wholesaler, however, might be better off without coordination for low wholesale prices. Thus, Pareto optimality of the coordinating contract depends on the problem parameters. 

We find simple contracts that achieve coordination in both the traditional supply chain and the supply chain with drop-shipping. According to these contracts, in the traditional channel the wholesaler subsidizes a portion of customer acquisition expenses as well as compensates the retailer for inventory carried over. In the case of drop-shipping inventory compensation goes from the retailer to the wholesaler. If the wholesaler can choose the wholesale price, the proportion of the customer acquisition expenses to subsidize, and the inventory compensation, an arbitrary split of profits can be achieved. In any case, the proportion of profits that the wholesaler captures coincides with the proportion of customer acquisition costs she subsidizes. Therefore, the higher the subsidy, the higher the wholesale price and the higher the wholesaler s profits. 

In a volatile market, contracts must reflect the uncertainties in the marketplace. This can be included in a contract in multiple ways. For example, the buyer can incorporate a delivery window instead of a fixed delivery time permit a small variation in the quantity delivered permit the wholesale price to vary within some botmds and buy insurance or financial hedges to insulate against market volatility. Examples of creative risk sharing contracts would be, capacity reservation, build-operate-transfer, forming supplier consortium, and forecast revision. 

For emergency relief, contracts must reflect the uncertainties of disasters. This can be achieved in multiple ways. Instead of a fixed delivery time, the buyer can require supplies to be delivered at a time (to be specified by buyer) within a time window. The buyer may also insist that they should be able to change the order quantity, if needed and vary the wholesale price within some botmd. Buyer can buy insurance or financial options to hedge against demand volatility. Buy back contracts, where unsold items can be returned by the supplier at a discounted price, leads to sharing of demand risk by both buyer and supplier. 

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. 

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... 

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. 

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