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Supply chain management & contractual flexibility

Topic: Supply chain management & contractual flexibility

Please provide DETAILED explanation of the following:

* What is the value of contractual flexibility in managing outsourced supply chains?

* How does contractual flexibility factor in when a company changes an order in response to new demand information for the company's product?

* Are there any simple approaches to attempt to evaluate this contractual flexibility?

* How much more might a company be willing to pay for a supplier that will offer contractual flexibility?

Solution Preview

What is the value of contractual flexibility in managing outsourced supply chains? * How does contractual flexibility factor in when a company changes an order in response to new demand information for the company's product?

There is a very high value for contractual flexibility in managing outsourced supply chains. The thought processes and technologies required to optimize a given enterprise's supply chain have also changed. Increasingly, companies are developing tighter relationships with their suppliers, including the sharing of information once thought of as being "sensitive." There has also been an enhanced reliance on technology hardware and software. Two further complexities arising in the early part of the 21st century are cross ownership integration and the internationalization of the supply chain. From an operational perspective, this has resulted in new thinking and greater contractual flexibility regarding commercial relationships.

* Are there any simple approaches to attempt to evaluate this contractual flexibility?

In today's competitive business world the buyer must reduce unit procurement cost for a given demand risk. In other words, she must offload the risk onto the provider. Some measure of flexibility in capacity has to be introduced. That same general problem is treated: Q, the minimum commitment per period is given and there are both fixed and proportional penalties for adjustments, over an infinite horizon. The fixed delivery contract with penalties serves as a risk sharing mechanism.

Another simple approach to evaluate contractual flexibility is to model a capacity constrained logistics provider and a buyer of such service engage in transactions using three different transaction forms: spot procurement, minimum purchase commitment and quantity flexibility contracts. The spot market transport or logistic service price and received demand are exogenous stochastic processes (which may be dependent or independent). Complete analytical results as to the optimal contract structure for both the supplier and buyer in a reiterated one period game and for multi period settings can be offered. If buyer and seller are offered the choice of transactional form, the parameters of the chosen contract have to be set under tighter conditions than envisaged in normal supply chains.

Let us take another approach. The first step is to look at the supply chain of each new or existing product line or category and determine the area's most ...

Solution Summary

The 1500 word solution presents comprehesive discussions about each question. There are adequate references and examples to compliment the information.

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