The cost for a supplier to manufacture and ship the product to the distributor is $20/unit and the cost for the distributor to handle and ship to the customer is $30/unit. Market demand/week changes by 0.5 units for every $1 change in price and is anticipated to be zero once price reaches $175 per unit. Assuming that the distributor is able to set his selling price to maximize his profit, and knowing this, the manufacturer maximizes her profit by charging the distributor $45/unit. At a purchase price of $45/unit, the distributor maximizes his profit by selling 40 units per week at $95/unit.
(a) What are the profits for each party and the total supply chain profit for the current independent manufacturer and distributor system?
(b) What if the manufacturer and the distributor integrated through a contract so that independent interests align with overall supply chain performance? Is the effort to integrate the supply chain beneficial to both parties? If yes,what is the optimal price that maximizes the integrated supply chain surplus? And show how each party would share the profits. If the expected sales volume under the optimal price is non-integer number, round it to the nearest whole number.
Read the article “Turning the supply chain into a revenue chain,” and answer the following two questions.
- What conditions are required for generating the benefits of supply chain coordination?
- Does the scenario in problem 1 above meet those conditions?Discuss.
Group discussion questions (Examples of Supply Chains)