Supply Chain Performance

In the Video Vault case, we analyzed the effect that different contracts can have on overall supply chain performance. A related numerical example is attached listed as: “Video Vault - example.” is attached.

a. A video store can purchase DVDs for $8 each. They can sell them for $19 each, and the DVDs have a salvage value of $5. (A discount store will buy all units in bulk for $5.) Assume that they have only one chance to buy and sell. (This covers several days of course, but they cannot easily reorder during that period.) Using the newsvendor model, how many units should they buy of a DVD that has demand that is uniformly distributed between 1 and 10? Show the calculations. If the manufacturer (supplier) can make the units for $5, how much expected profit will the retailer make, given the decision chosen by the retailer?



b. The manufacturer can make DVDs for $5. Suppose the two supply chain partners share profits (all revenues and costs, 65% to retailer), and try to optimize the entire supply chain. (DVDs are sold to the retailer for $5, and the salvage value is $5.) How many units will the retailer order? What will expected profit be for the retailer and for the manufacturer (supplier)? Verify that both parties are better off than before.

Attached file(s):

VideoVault-example.xls  View File