Supply Chain Q/a

Q1. When is a buy-back contract appropriate? When is a payback appropriate? What about an option contract? How are they related? Argue that buy-back and pay-back contracts are special types of options contracts?

Buy-back contract is appropriate when the supplier wants to increase the order quantity places by the buyer, and hence decrease the likelihood of out of stock. Pay-back contract is appropriate when wanting to give the manufacturer incentive to manufacture more since the risk with associated with unused capacity is decreased. An option-contract is appropriate when wanting to reduce the inventory risks.

All the given contracts are to some extent are option contracts, where the option is either buy-back or pay-back and in both the risk is distributes among the parties and the party with the highest risk will have the highest revenue assuming that the contract goes perfect.

Q2. Discuss how each of the following helps to alleviate the bullwhip effect:

 E-commerce and the Internet allow upstream parties, e.g., suppliers, to have access to more accurate demand information. It mitigates the bullwhip effect by preventing distortion and miscommunication of demand information, and reducing the lead time in order processing.

 Express delivery reduces lead times, and the associated demand variance. Note that in the formulas in Sections 4.2.1 and 4.2.2, the variability of demand is proportional to the lead times in the system.

 Collaborative forecasts help all stakeholders in the supply chain to arrive at a common, agreed-upon forecast of end-customer demand and reduce the bullwhip effect.

 Periodic promotions create artificial demand peaks and bottoms and increase the variance in customer demand which amplifies the bullwhip effect. By everyday low pricing, these demand can be prevented, alleviating the bullwhip effect partly.

 Vendor-managed inventory allows the supplier to monitor downstream demand and to make a well-informed decision about how...