Supply Chain Management Chapter 15: Sourcing Decisions in a Supply Chain

The following three approaches to risk sharing increase overall supply chain profits: Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 450). Pearson Education. Kindle Edition.

1. Buybacks or returns 2. Revenue sharing 3. Quantity flexibility Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 450). Pearson Education. Kindle Edition.

We discuss the performance of each approach in terms of the following three questions. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 450). Pearson Education. Kindle Edition.

1. How will risk sharing affect the firm's profits and total supply chain profits? 2. Will risk sharing introduce any information distortion? 3. How will risk sharing influence supplier performance along key performance measures? Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 450). Pearson Education. Kindle Edition.

We address the outsourcing of supply chain activities by a firm based on the following three questions: Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 434). Pearson Education. Kindle Edition.

1. Will the third party increase the supply chain surplus relative to performing the activity in-house? 2. To what extent do risks grow upon outsourcing? 3. Are there strategic reasons to outsource? Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 434). Pearson Education. Kindle Edition.

4. Build long-term relationships with key suppliers. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 464). Pearson Education. Kindle Edition.

A basic principle of good sourcing is that a buyer and supplier working together can generate more opportunities for savings than the two parties working independently. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 464). Pearson Education. Kindle Edition.

Risk sharing though 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 $sM for any units that the retailer returns. The manufacturer has a cost of v per unit produced. The retail price is p. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 450). Pearson Education. Kindle Edition.

2. Underestimation of the cost of coordination. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

A common mistake when outsourcing is to underestimate the effort required to coordinate activities across multiple entities performing supply chain tasks. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

KEY POINT

A firm gains the most by outsourcing to a third party if its needs are small, highly uncertain, and shared by other firms sourcing from the same third party. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 439). Pearson Education. Kindle Edition.

4. Loss of internal capability and growth in third-party power. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

A firm may choose to keep a supply chain function in-house if outsourcing will significantly increase the third party's power. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

3. Reduced customer/supplier contact. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

A firm may lose customer/supplier contact by introducing an intermediary. The loss of customer contact is particularly significant for firms that sell directly to consumers but decide to use a third party to either collect incoming orders or deliver outgoing product. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

1. Use multifunctional teams. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 463). Pearson Education. Kindle Edition.

A strategy developed with the collaboration of purchasing, manufacturing, engineering, and planning is much more likely to identify the correct drivers of total cost. The collaboration must be continued beyond strategy formulation to the procurement phase, because that is where manufacturing and engineering are most likely to realize the full benefits of good sourcing strategy. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 464). Pearson Education. Kindle Edition.

1. Capacity aggregation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 435). Pearson Education. Kindle Edition.

A third party can increase the supply chain surplus by aggregating demand across multiple firms and gaining production economies of scale that no single firm can on its own. This is the most common reason for outsourcing production in a supply chain. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 435). Pearson Education. Kindle Edition.

2. Inventory aggregation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 435). Pearson Education. Kindle Edition.

A third party can increase the supply chain surplus by aggregating inventories across a large number of customers. Aggregation allows them to significantly lower overall uncertainty and improve economies of scale in purchasing and transportation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 435). Pearson Education. Kindle Edition. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 435). Pearson Education. Kindle Edition.

10. Lower costs and higher quality. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 438). Pearson Education. Kindle Edition.

A third party can increase the supply chain surplus if it provides lower cost or higher quality relative to the firm. If these benefits come from specialization and learning, they are likely to be sustainable over the longer term. A specialized third party that is further along the learning curve for some supply chain activity is likely to maintain its advantage over the long term. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 438). Pearson Education. Kindle Edition.

6. Procurement aggregation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 437). Pearson Education. Kindle Edition.

A third party increases the supply chain surplus if it aggregates procurement for many small players and facilitates economies of scale in ordering, production, and inbound transportation. Procurement aggregation is most effective across many small buyers. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 437). Pearson Education. Kindle Edition.

KEY POINT

A third party may be able to provide a sustainable growth of the surplus by aggregating to a higher level than the firm itself. The growth in surplus comes from aggregating capacity, inventory, inbound or outbound transportation, warehousing, procurement, information, receivables, or relationships to a level that the firm cannot achieve on its own. A growth in surplus may also occur if the third party has lower costs or higher quality because of specialization or learning. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 438). Pearson Education. Kindle Edition.

5. Warehousing aggregation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 437). Pearson Education. Kindle Edition.

A third party may increase the supply chain surplus by aggregating warehousing needs over several firms. The growth in surplus is achieved in terms of lower real estate costs and lower processing costs within the warehouse. Savings through warehousing aggregation arise if a firm's warehousing needs are small or if its needs fluctuate over time. In either case, the intermediary with the warehouse can exploit economies of scale in warehouse construction and operation by aggregating across multiple customers. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 437). Pearson Education. Kindle Edition.

8. Receivables aggregation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 437). Pearson Education. Kindle Edition.

A third party may increase the supply chain surplus if it can aggregate the receivables risk to a higher level than the firm or it has a lower collection cost than the firm. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 437). Pearson Education. Kindle Edition.

7. Information aggregation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 437). Pearson Education. Kindle Edition.

A third party may increase the surplus by aggregating information to a higher level than can be achieved by a firm performing the function in-house. All retailers aggregate information on products from many manufacturers in a single location. This information aggregation reduces search costs for customers. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 437). Pearson Education. Kindle Edition.

3. Transportation aggregation by transportation intermediaries. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 436). Pearson Education. Kindle Edition.

A third party may increase the surplus by aggregating the transportation function to a higher level than any shipper can on its own. UPS, FedEx, and a host of LTL carriers are examples of transportation intermediaries that increase the supply chain surplus by aggregating transportation across a variety of shippers. The value provided in each case is driven by the inherent economies of scale in transportation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 436). Pearson Education. Kindle Edition.

4. Transportation aggregation by storage intermediaries. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 436). Pearson Education. Kindle Edition.

A third party that stores inventory can also increase the supply chain surplus by aggregating inbound and outbound transportation. Storage intermediaries such as W.W. Grainger and McMaster-Carr stock products from more than a thousand manufacturers each and sell to hundreds of thousands of customers. On the inbound side, they are able to aggregate shipments from several manufacturers onto a single truck. This results in a lower transportation cost than could be achieved by each manufacturer independently. On the outbound side, they aggregate packages for customers at a common destination, resulting in a significantly lower transportation cost than can be achieved if each supplier shipped to each customer separately. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 436). Pearson Education. Kindle Edition.

3. Always evaluate the total cost of ownership. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 464). Pearson Education. Kindle Edition.

All factors that influence the total cost of ownership should be identified and used in selecting suppliers. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 464). Pearson Education. Kindle Edition.

9. Relationship aggregation. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 438). Pearson Education. Kindle Edition.

An intermediary can increase the supply chain surplus by decreasing the number of relationships required between multiple buyers and sellers. Without an intermediary, connecting a thousand sellers to a million buyers requires a billion relationships. The presence of an intermediary lowers the number of relationships required to just over a million. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 438). Pearson Education. Kindle Edition.

6. Ineffective contracts. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

Contracts with performance metrics that distort the third party's incentives often significantly reduce any gains from outsourcing. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

2. Ensure appropriate coordination across regions and business units. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 464). Pearson Education. Kindle Edition.

Coordination of purchasing across all regions and business units allows a firm to maximize economies of scale in purchasing and also to reduce transaction costs. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 464). Pearson Education. Kindle Edition.

KEY POINT

Firms must consider a tailored sourcing strategy that couples responsive onshore or near-shore sources with low-cost offshore sources. The responsive onshore sources should focus on high-value products with high demand volatility, whereas the low-cost, offshore sources should focus on lower-value, highvolume products with high labor content. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 462). Pearson Education. Kindle Edition.

1. Support the business strategy. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 441). Pearson Education. Kindle Edition.

Harley-Davidson illustrates the importance of linking business strategy to the make or buy decision. To maintain its strong "Made in America" brand image, the company manufactures mostly in the United States even though cheaper components may be found overseas. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 441). Pearson Education. Kindle Edition.

8. Negative reputational impact. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 441). Pearson Education. Kindle Edition.

In many instances, actions regarding labor or the environment taken by the third party can have a significant negative impact on the reputation of the firm. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 441). Pearson Education. Kindle Edition.

2. Improve firm focus. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 441). Pearson Education. Kindle Edition.

In today's complex world, it is impossible for a firm to do everything. A lack of focus because a firm is doing everything in-house can be a major problem. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 441). Pearson Education. Kindle Edition.

7. Loss of supply chain visibility. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 441). Pearson Education. Kindle Edition.

Introducing third parties reduces the visibility of supply chain operations, making it harder for the firm to respond quickly to local customer and market demands. This loss of visibility can be particularly harmful for long supply chains. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 441). Pearson Education. Kindle Edition.

KEY POINT

Risk sharing in a supply chain increases profits for both the supplier and the retailer. Risk sharing mechanisms include buybacks, revenue sharing, and quantity flexibility. Quantity flexibility contracts result in lower information distortion than buyback or revenue-sharing contracts when a supplier sells to multiple buyers or the supplier has excess, flexible capacity. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 458). Pearson Education. Kindle Edition.

KEY POINT

Sharing the rewards from improvements can induce performance improvement from a supplier along dimensions, such as lead time, for which the benefit of improvement accrues primarily to the buyer but the effort for improvement comes primarily from the supplier. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 459). Pearson Education. Kindle Edition.

KEY POINT

Supplier performance should be compared based on the impact on total cost of ownership. In addition to acquisition costs, ownership and post-ownership costs should also be considered. In many instances, a higher acquisition cost is more than compensated for by lower ownership and post-ownership costs.

KEY POINT

Supply chain incentives can have unintended consequences when the third party's information and actions are hard to observe. It is important to understand and address the negative consequences of these incentives. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 460). Pearson Education. Kindle Edition.

total cost of ownership (TCO) Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 443). Pearson Education. Kindle Edition.

TCO includes all supply chain costs of sourcing a good or service from a particular supplier and can be considered in three "buckets"—acquisition costs, ownership costs, and post-ownership costs. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 443). Pearson Education. Kindle Edition.

KEY POINT

The absence of risk sharing in a supply chain results in locally optimal decisions that decrease the total supply chain profits. In the absence of risk sharing, retailers aim for a lower level of product availability than would be required to maximize supply chain profits. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 450). Pearson Education. Kindle Edition.

1. The process is broken. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 439). Pearson Education. Kindle Edition.

The biggest problems arise when a firm outsources supply chain functions simply because it has lost control of the process. Keep in mind that introducing a third party into a broken supply chain process only makes it worse and harder to control. The first step should be to get the process under control, then do a cost-benefit analysis, and only then decide on outsourcing. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 439). Pearson Education. Kindle Edition.

bargaining surplus. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 447). Pearson Education. Kindle Edition.

The difference between the values of the buyer and seller is referred to as the bargaining surplus. The goal of each negotiating party is to ideally create a situation in which the surplus grows, thus increasing the size of the pie they have to share. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 447). Pearson Education. Kindle Edition.

Hockey stick Phenomenon

This pattern, in which sales peak close to the end of the evaluation period, is referred to as the hockey stick phenomenon. This information distortion arises because the incentive is offered over a fixed time period, making the last few weeks of each quarter a period of intense activity for all sales staff. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 460). Pearson Education. Kindle Edition.

Shared-Savings Contract

To induce the supplier to reduce lead time, the buyer can use a shared-savings contract, with the supplier getting a fraction of the savings that result from reducing lead time. As long as the supplier's share of the savings compensates for any effort it has to put in, its incentive will be aligned with that of the buyer, resulting in an outcome that benefits both parties. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 458). Pearson Education. Kindle Edition.

5. Leakage of sensitive data and information. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

Using a third party requires a firm to share demand information and, in some cases, intellectual property. If the third party also serves competitors, leakage is always a danger. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 440). Pearson Education. Kindle Edition.

Direct Materials

are components used to make finished goods. For example, the processor is a direct material for a smartphone manufacturer. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 462). Pearson Education. Kindle Edition.

Indirect Materials

goods used to support the operations of a firm. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 462). Pearson Education. Kindle Edition.

Acquisition Costs

include all costs associated with the purchase of material from a supplier until it reaches the buyer and is ready for use. These costs include the supplier price, supplier terms affecting financing costs, taxes and duties, delivery costs, and incoming quality costs. Acquisition costs should also include the overhead of managing the relationship and planning the purchases. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 443). Pearson Education. Kindle Edition.

Ownership Costs

include all costs associated with the purchased part from when it arrives from the supplier to when the finished product is sold to the customer. These costs include inventory costs, warehousing costs, manufacturing or conversion costs, production quality costs, and production cycle time costs. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 443). Pearson Education. Kindle Edition.

Post-ownership costs

include all costs incurred by the firm after the finished product has reached the end customer. These costs include warranty costs, environmental costs, product liability costs, and reputational costs. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 443). Pearson Education. Kindle Edition.

The selection of suppliers is done using a variety of mechanisms, Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 446). Pearson Education. Kindle Edition.

including offline competitive bids, reverse auctions, or direct negotiations. No matter what mechanism is used, supplier selection should be based on the total cost of using a supplier and not just the purchase price. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 446). Pearson Education. Kindle Edition.

Sourcing

is the entire set of business processes required to purchase goods and services. For any supply chain function, the most significant decision is whether to outsource the function or perform it in-house. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 433). Pearson Education. Kindle Edition.

With holding-cost subsidies, Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 452). Pearson Education. Kindle Edition.

manufacturers pay retailers a certain amount for every unit held in inventory over a given period. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 452). Pearson Education. Kindle Edition.

price support Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 452). Pearson Education. Kindle Edition.

manufacturers share the risk of product becoming obsolete by providing price support to retailers. Many manufacturers guarantee that in the event that they drop prices, they will also lower prices for all inventories that the retailer is currently carrying and compensate the retailer accordingly. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 452). Pearson Education. Kindle Edition.

Offshoring

refers to producing the product at a low-cost location that may be far from the market. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 461). Pearson Education. Kindle Edition.

Near-shoring

refers to producing the product at a lower-cost location near the market. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 461). Pearson Education. Kindle Edition.

Onshoring

refers to producing the product in the market where it is sold, even when it is a high-cost location. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 461). Pearson Education. Kindle Edition.

Outsourcing

results in the supply chain function being performed by a third party. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 433). Pearson Education. Kindle Edition.

Three important factors affect the increase in surplus that a third party provides: Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 438). Pearson Education. Kindle Edition.

scale, uncertainty, and the specificity of assets. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 438). Pearson Education. Kindle Edition.

Before selecting suppliers, a firm must decide whether to use Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 446). Pearson Education. Kindle Edition.

single sourcing or multiple suppliers. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 446). Pearson Education. Kindle Edition.

Quantity Flexibility Contracts

the manufacturer allows the retailer to change the quantity ordered (within limits) after observing demand. If a retailer orders O units, the manufacturer commits to providing up to Q = 11 + a2O units, whereas the retailer is committed to buying at least q = 11 - b2O units. Both a and b are between 0 and 1. The retailer can purchase anywhere between q and Q units, depending on the demand it observes. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 455). Pearson Education. Kindle Edition.

Revenue-sharing contracts

the manufacturer charges the retailer a lower wholesale price c (compared with the case without risk sharing), but shares a fraction f of the retailer's revenue. In this case, the manufacturer is sharing risk because the retailer's cost is lower (than without risk sharing) if demand is low. Even if no returns are allowed, the lower wholesale price decreases the cost to the retailer in case of an overstock. The retailer thus increases the level of product availability, resulting in higher profits for both the manufacturer and the retailer when revenue sharing is suitably designed. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 453). Pearson Education. Kindle Edition.

Purchasing, or procurement

the process by which companies acquire raw materials, components, products, services, or other resources from suppliers to execute their operations. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 433). Pearson Education. Kindle Edition.

The following are some of the benefits from effective sourcing decisions: Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 434). Pearson Education. Kindle Edition.

• Identifying the right source can result in an activity performed at higher quality and lower cost. • Better economies of scale can be achieved if orders within a firm are aggregated. • More efficient procurement transactions can significantly reduce the overall cost of purchasing. This is most important for items for which a large number of low-value transactions occur. • Design collaboration can result in products that are easier to manufacture and distribute, resulting in lower overall costs. This factor is most important for components that contribute a significant amount to product cost and value. • Good procurement processes can facilitate coordination with the supplier and improve forecasting and planning. Better coordination lowers inventories and improves the matching of supply and demand. • Appropriate sharing of risk and benefits can result in higher profits for both the supplier and the buyer. • Firms can achieve a lower purchase price by increasing competition through the use of auctions. Chopra, Sunil; Meindl, Peter. Supply Chain Management: Strategy, Planning, and Operation (Page 434). Pearson Education. Kindle Edition.