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CHAPTER FOURTEEN

Discussion Questions

! "hat are so#e $a%s that a &ir# such as "al'Mart (ene&its &ro# )ood sourcin)decisions*

The (otto# line is that )ood sourcin) decisions i#pro+e pro&its &or the &ir# andtotal suppl% chain surplus! The authors, list o& (ene&its deri+ed &ro# e&&ecti+e

sourcin) decisions includes-

.etter econo#ies o& scale can (e achie+ed i& orders $ithin a &ir# are

a))re)ated!

More e&&icient procure#ent transactions can si)ni&icantl% reduce the

o+erall cost o& purchasin)!

Desi)n colla(oration can result in products that are easier to #anu&acture

and distri(ute resultin) in lo$er o+erall costs! 0ood procure#ent processes can &acilitate coordination $ith the supplier

and i#pro+e &orecastin) and plannin) 1lo$erin) in+entories and

i#pro+in) the #atch o& suppl% and de#and2!

Appropriate supplier contracts can allo$ &or the sharin) o& ris3 resultin)

in hi)her pro&its &or (oth the supplier and the (u%er!

Fir#s can achie+e a lo$er purchase price (% increasin) co#petition

throu)h the use o& auctions!

! "hat &actors lead "al'Mart to o$n its truc3s althou)h #an% retailers outsource

all their transportation*

"al'Mart is a(le to run its o$n &leet o& truc3s (ecause it can ship T5 throu)hout

its suppl% chain! "al'Mart,s ship#ent si6es are lar)e and the co#pan% achie+es

a))re)ation across the #an% retail stores it o$ns! 7& "al'Mart elected to )o $ith a

carrier the% #i)ht (e a(le to #atch "al'Mart,s costs (ut "al'Mart $ould cedecontrol to the carrier!

8! Ho$ can a supplier $ith a lo$er price end up costin) the (u%er #ore than asupplier $ith a hi)her price*

5o$er price can (e achie+ed (% sacri&icin) product 9ualit% product relia(ilit%

and process control $hich ulti#atel% $ill cost the outsourcer #ore than the total+aria(le cost sa+ed! The cost o& coordination is o&ten underesti#ated: the

outsourcer o&&loads relati+el% lo$'s3illed la(or (ut increases the (urden on #id

and upper #ana)e#ent in controllin) the production! A &ir# #a% also losecusto#er/supplier contact that causes the# to #iss opportunities that #a% ha+e

(een reco)ni6ed $ith a #ore direct relationship!

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4! E;plain $h% &or the sa#e in+entor% le+el a re+enue'sharin) contract results in

lo$er sales e&&ort &ro# the retailer than i& the retailer has paid &or the product and

is responsi(le &or all re#ainin) in+entor%!

The retailer puts &orth a lo$er sales e&&ort (ecause the% are paid less on a per unit

(asis to sell ite#s under a re+enue sharin) contract than under a (u%(ac3 or aclassic retail contract! The #anu&acturer and retailer a)ree to share a &raction o&

the retailer,s re+enue a&ter a)reein) on a lo$ $holesale price! The lo$ $holesale

price tri))ers a lar)er order &ro# the retailer and this can increase suppl% chainsurplus i& all product is sold! "hat happens in practice is that the retailer has a

s#aller upside under the re+enue sharin) arran)e#ent and loses the incenti+e to

push #erchandise!

contract result in less in&or#ation distortion than a (u%'(ac3 contract*

A (u%'(ac3 contract allo$s a retailer to return unsold in+entor% to the supplier:the contract $ill stipulate the #a;i#u# a#ount returna(le and the rei#(urse#ent

a#ount the retailer $ill recei+e! A (u%'(ac3 contract pro+ides an incenti+e &or theretailer to place a lar)er order and #a3e product #ore a+aila(le and can increase

total suppl% chain surplus! A do$nside o& (u%'(ac3 contracts is in&or#ation

distortion i!e! the suppl% chain is a$are o& the retailers, orders and not the actualcusto#er de#and until the sales period has ended! This pro(le# is e;acer(ated (%

a situation in+ol+in) #ultiple retailers each o& $hich holds in+entor%!

A 9uantit% i(ilit% contract per#its the retailer to chan)e the 9uantit% ordered

a&ter o(ser+in) de#and: the contracts are si#ilar to (u%'(ac3 contracts e;cept noreturns are re9uired! "ith a 9uantit% i(ilit% contract retailers speci&% onl% the

ran)e $ithin $hich the% $ill purchase $ell (e&ore actual de#and arises! The

supplier can a))re)ate in+entor% across all retailers and (uild a lo$er le+el o&surplus in+entor%! =ince retailers order closer to the point o& sale $hen de#and is

#ore +isi(le and less uncertain: the uncertaint% is a))re)ated (% a supplier that

en>o%s lo$er in&or#ation distortion!

?! Most &ir#s o&&er their sales &orce #onetar% incenti+es (ased on e;ceedin) a

speci&ied tar)et! "hat are so#e pros and cons o& this approach* Ho$ $ould %ou

#odi&% these contracts to recti&% so#e o& the pro(le#s*

T$o incenti+e oriented contracts discussed in the chapter are the t$o'part tari&&

and the threshold contract! The t$o'part tari&& increases sales a)ent e&&ort (%allo$in) the retailer to ac9uire product at cost and lettin) the dealer,s #ar)in (e

the suppl% chain #ar)in! Threshold contracts esta(lish )reater re$ards &or the

retailer as total sales reach successi+el% hi)her (rac3ets! These incenti+es canincrease suppl% chain pro&its (ut can also (e )a#ed to #a;i#i6e retailer/a)ent

(onuses $ithout (ene&itin) the #anu&acturer! =ales can (e postponed &ro# one

sales period to the ne;t (% slo$'pla%in) custo#ers post'datin) paper$or3 and

#ini#i6in) e&&orts! The sales that $ould ha+e occurred in period are dela%ed to

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period durin) $hich sales e&&orts are #a;i#i6ed: &or the sa#e le+el o& sales the

a)ent has an increased co##ission (ut the #anu&acturer reali6es a lo$er pro&it!

This )a#es#anship also causes in&or#ation distortion at the producer!These pro(le#s can (e a+oided (% #odi&%in) the contracts $ith a rollin) hori6on!

Rather than creatin) a hi)h (onus period o+er a &i;ed period o& ti#e reduced

(onuses can (e o&&ered continuousl% o+er a shorter ti#e period! The rollin)periods ha+e #an% @last $ee3s (uilt in and lead to a #ore constant le+el o& e&&ort

&ro# the retail sites!

B! An auto #anu&acturer sources (oth o&&ice supplies and su(s%ste#s such as seats!

"hat i& an% di&&erence in sourcin) strate)% $ould %ou reco##end &or the t$o

t%pes o& products*

For an auto #anu&acturer seats are considered direct #aterials 1co#ponents used

to #a3e &inished )oods2 $hile o&&ice supplies are indirect #aterials 1)oods used to

support the operation o& a &ir#2! The procure#ent process &or direct #aterials

should (e desi)ned to ensure that co#ponents are a+aila(le in the ri)ht place inthe ri)ht 9uantit% and at the ri)ht ti#e! =ources should (e care&ull% selected to

ensure that 9ualit% and responsi+eness are accepta(le and that a lon)'ter#relationship is possi(le! The pri#ar% )oal o& the procure#ent process should (e to

#a3e production plans and current le+els o& co#ponent in+entor% at the

#anu&acturer +isi(le to the supplier and should ha+e alerts (uilt into it iis#atches (et$een suppl% and de#and are detected!

The procure#ent process &or indirect #aterials should (e on reducin) the

transaction cost o& each order! These ite#s are not critical and can (e purchased in

(ul3 $ith an e%e to$ards a))re)ation and cost sa+in)s! =toc3out costs are lo$ inco#parison $ith direct #aterials so sourcin) decisions are not as critical!

! Ho$ can desi)n colla(oration $ith suppliers help a PC #anu&acturer i#pro+eper&or#ance*

Desi)n colla(oration $ith suppliers can help a &ir# reduce cost i#pro+e 9ualit%and decrease ti#e to #ar3et! These per&or#ance #etrics are increasin)l%

in&luenced (% suppliers since (et$een

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Ti#e to #ar3et can (e decreased (% (rin)in) suppliers into the desi)n tea# &ro#

the earl% sta)es o& product desi)n! An en)ineerin) dra$in) re&erence data(ase can

eli#inate the necessit% &or desi)nin) ne$ parts $hich reduces o+erall desi)n ti#e!