SUPPLY CONTRACTS AND RISK POOLING

By-Prof.P.K.Shah

STRATEGIC COMPONENTS- SUPPLY CONTRACT

Pricing and volume discounts

Minimum and maximum purchase quantities
Delivery lead times
Product or material quality
Product return policies

By-Prof.P.K.Shah

2- STAGE SEQUENTIAL SUPPLY CHAIN

A buyer and a supplier
Buyers activities
Generating a forecast
Determining units to order from supplier
Placing the order
Purchase
Suppliers activity
Reacting to the order placed by the buyer
Make-to-order policy

By-Prof.P.K.Shah

EXAMPLE CONTRACT FARMING

Contract farming is an institutional arrangement widely
adopted in agricultural production. Contract farming
represents an agreement between farmers and contractors
(mostly processing and/or marketing firms) for the production
and supply of agricultural products.

By-Prof.P.K.Shah

T YPES OF SUPPLY CONTRACTS

Buy-back contracts- The seller agrees to buy back unsold goods
from the buyer from some agreed upon price higher than the
salvage value

Manufacturer offers to buy unsold units from the retailer by

providing marginal profits thus increases the salvage value to
the retailers. Motivation to the retailer to order more than
average demand.
By-Prof.P.K.Shah

T YPES OF SUPPLY CONTRACTS

Revenue sharing contracts- The buyer shares some of its
revenue with the seller ,in return for a discount on the
wholesale price
The manufacturer charges retailer low wholesale price and
shares fraction of revenue generated by the retailer
No return is allowed. Thus low wholesale prices decreases
cost of retailer on unsold units
Manufacturer does not have to bear the inventory cost due to
no return

By-Prof.P.K.Shah

T YPES OF SUPPLY CONTRACTS

Quantity flexibility contracts Manufacturer allows retailer to
alter the quantity after observing demand.
The manufacturer bears the cost of excess inventor y
In some cases like over fluctuating demand -Supplier provides
full refund for returned (unsold) items as long as the number of
returns is no larger than a certain quantity

By-Prof.P.K.Shah

T YPES OF SUPPLY CONTRACTS

Sales rebate contracts It provides a direct incentive to the
retailer to increase sales by means of rebate paid by the
supplier for any item sold above a certain quantity
Incentives meeting target sales

By-Prof.P.K.Shah

T YPES OF SUPPLY CONTRACTS

Global optimization unbiased contract by providing
incentives for supply chain partners to replace traditional
strategies in which partner optimizes its own profit

By-Prof.P.K.Shah

CONTRACTS FOR
MAKE TO STOCK / MAKE TO - ORDER
Risk association supplier/buyer
Make-to-stock
Make-to-buy
Pay-back contracts-The buyer agrees to pay some agreed upon
prices for any unit produced by the manufacturer but not
purchased by the distributor
Cost sharing contract-distributors shares some of the
production cost. Risk of distributor if unable to sell those
units

By-Prof.P.K.Shah

EXAMPLE RELIANCE RETAIL

SUPPLY CONTRACT

By-Prof.P.K.Shah

RISK POOLING
Risk pooling suggests that demand variability is reduced if
one aggregates demand across locations
It is true , as demand gets aggregated across different
locations, it becomes more likely that high demand from
customer will be offset by low demand from another
This reduction allows decrease in safety stock and there for
average inventor y
Measure of variability in demand through standard deviation
and co-efficient of variation
By-Prof.P.K.Shah