Chopra/Meindl 4/e 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# and total 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$er purchase price (% increasin) co#petition throu)h the use o& auctions! 4! "hat &actors lead "al'Mart to o$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 $ould cede control to the carrier! 8! Ho$ can a supplier $ith a lo$er price end up costin) the (u%er #ore than a supplier $ith a hi)her price* 5o$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 lose custo#er/supplier contact that causes the# to #iss opportunities that #a% ha+e (een reco)ni6ed $ith a #ore direct relationship!

Chopra/Meindl 4/e 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$er sales e&&ort (ecause the% are paid less on a per unit (asis to sell ite#s under a re+enue sharin) contract than under a (u%(ac3 or a classic retail contract! The #anu&acturer and retailer a)ree to share a &raction o& the retailer,s re+enue a&ter a)reein) on a lo$ $holesale price! The lo$ $holesale price tri))ers a lar)er order &ro# the retailer/ and this can increase suppl% chain surplus 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! <! For a #anu&acturer that sells to #an% retailers/ $h% does a 9uantit% &le;i(ilit% contract result in less in&or#ation distortion than a (u%'(ac3 contract* A (u%'(ac3 contract allo$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 $ill recei+e! A (u%'(ac3 contract pro+ides an incenti+e &or the retailer to place a lar)er order and #a3e product #ore a+aila(le and can increase total suppl% chain surplus! A do$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 actual custo#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% &le;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 no returns are re9uired! "ith a 9uantit% &le;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 can increase 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

Chopra/Meindl 4/e period 4/ 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 $ee3sA (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 $hile o&&ice supplies are indirect #aterials 1)oods used to support the operation o& a &ir#2! The procure#ent process &or direct #aterials should (e desi)ned to ensure that co#ponents are a+aila(le in the ri)ht place/ in the ri)ht 9uantit%/ and at the ri)ht ti#e! =ources should (e care&ull% selected to ensure that 9ualit% and responsi+eness are accepta(le and that a lon)'ter# relationship is possi(le! The pri#ar% )oal o& the procure#ent process should (e to #a3e production plans and current le+els o& co#ponent in+entor% at the #anu&acturer +isi(le to the supplier and should ha+e alerts (uilt into it i& #is#atches (et$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$ in co#parison $ith direct #aterials so sourcin) decisions are not as critical! C! Ho$ can desi)n colla(oration $ith suppliers help a PC #anu&acturer i#pro+e per&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 <D and BD percent o& the spendin) at a #anu&acturer is throu)h procure#ent! Costs can (e reduced (% desi)nin) the product &or postpone#ent and #ass custo#i6ation! 7& the product,s desi)n per#its the use o& standardi6ed parts or #odules/ the #anu&acturer can sa+e on in+entor% holdin) costs and trainin) &or asse#(l% and repair la(or! Costs are also reduced (% increasin) attention to desi)n &or #anu&actura(ilit%! Qualit% is increased (% appl%in) ro(ust desi)n techni9ues/ certi&%in) suppliers/ and conductin) &ailure #odes and e&&ects anal%sis! =uppliers that are specialists in a re9uired co#ponent can (rin) to (ear the desi)n s3ills that $ill i#pro+e &inished )oods 9ualit%!

Chopra/Meindl 4/e 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!