Supplier's Profit Research Articles

Managing Use of Local Content in Upstream Oil and Gas

This article, written by Senior Technology Editor Dennis Denney, contains highlights of paper SPE 140870, ’Managing Use of Local Content in Upstream Oil and Gas,’ by Jessica M. Marshall and Mark A. Serwinowski, SPE, MetaVu, prepared for the 2011 SPE European Health, Safety, and Environmental Conference in Oil and Gas Exploration and Production, Vienna, Austria, 22-24 February. The paper has not been peer reviewed. As new markets develop and host countries develop local-content policies and performance expectations, oil and gas development companies face increasing complexities in supply-chain integration of local content. In many instances, performance assurance with local-content-performance expectations is becoming a threshold for obtaining and/or maintaining a company’s social license to operate. This paper chronicles one company’s approach to leverage local content as part of their supply-chain-management strategy to grow capacity while managing and fulfilling stakeholder expectations. Introduction Supply-chain management is becoming increasingly vital for ongoing operations in the upstream oil and gas sector. How individual organizations manage and train their suppliers can result in dramatic differences in performance. Given that, on average, upstream operators more-heavily leverage their suppliers, who these individuals are, what screening criteria they must meet, how they are managed, and how their performance is tracked are critically important questions. In certain circumstances, use of local content to fulfill demanding schedules is not only encouraged from a social-responsibility perspective, but is a requirement for meeting deadlines. However, use of local content should be managed with a very specific engagement strategy to ensure that health, safety, and environmental performance expectations are not compromised. Background The use of local content (i.e., indigenous companies that conduct manufacturing or production services in the oil business), while required in cases of remote operations, can have positive benefits for the organization and for the host country/region. Effective use and training can result in transfer of knowledge, economic diversification, and long-term viability for the host region. But benefits also can be realized by the company. While there are tangible benefits for the host country/region and for the organization, the use of local content should be managed proactively and be part of an overall supply-chain-management strategy. Five criteria have been established as key success factors. Policy expectations and targets must be realistic and go hand in hand with capacity building Content development must be based on global competitiveness, rather than preference Contracting strategies are critical channels of content transfer and development Content development must involve risk assessment regarding health, safety, and environmental standards, and regarding business risks including supply capacity, quality, delivery schedule, cost effectiveness, and profit generation

Available-to-promise based bidding decision by fuzzy mathematical programming and genetic algorithm

The present study attempts to integrate bidding decisions with order promising and production planning to enhance supplier profitability and service level. This study formulates the bid price and production plan as a mixed integer programming model with fuzzy constraints. The fuzzy constraints represent the decision-maker’s subjective judgment regarding the customer’s price tolerance. The proposed model combines the advanced available-to-promise (AATP) concept to find optimum resource allocation and enable accurate estimations of production costs and delivery dates. The proposed solution procedure determines the optimum bid price by striking a compromise between profitability and the possibility to win the contract. This study develops a genetic algorithm to solve this problem, and provides computer simulated experiments to evaluate the performance of the proposed approach.

Effect of Supplier Profit Rate, Procedure Cost Reduce, and Component Commonality on the Supply Chain Performance under Stochastic and Price-Dependent Demand

Manufacturers add product variants in one product family to meet customers’ different preferences. Components could be shared and reused to reduce costs. Demand and demand variance change with different sale prices under the stochastic and price-sensitive demand environment. Demand uncertainty has significant effects on costs and profits of the supply chain. With a numerical example involving a product family of cordless drills, a model is used to investigate the effect of supplier profit rate, procedure cost reduce, and component commonality on the supply chain performance. Results show that saving in upstream suppliers due to component commonality could be passed to the manufacturer, retailer, and customers with appropriate coordination models such as quantity discount. With reduced procedure cost, a Win-Win pricing strategy for one supplier is to increase its profit at a rate while sell its products at a cheaper sale price based on the cost markup method considering the demand uncertainty from buyers or downstream suppliers in the supply chain.

Contract Complexity and Performance Under Asymmetric Demand Information: An Experimental Evaluation

Exploring the tension between theory and practice regarding complexity and performance in contract design is especially relevant. The goal of this paper is to understand why simpler contracts may commonly be preferred in practice despite being theoretically suboptimal. We study a two-tier supply chain with a single supplier and a single buyer to characterize the impact of contract complexity and asymmetric information on performance and to compare theoretical predictions to actual behavior in human subject experiments. In the experiments, the computerized buyer faces a newsvendor setting and has better information on end-consumer demand than the human supplier. The supplier offers either a quantity discount contract (with two or three price blocks) or a price-only contract, contracts that are commonplace in practice, yet different in complexity. Results show that, contrary to theoretical predictions, quantity discounts do not necessarily increase the supplier's profits. We also observe a more equitable distribution of profits between the supplier and the buyer than what theory predicts. These observations can be described with three decision biases (the probabilistic choice bias, the reinforcement bias, and the memory bias) and can be modeled using the experience-weighted attraction learning model. Our results demonstrate that simpler contracts, such as a price-only contract or a quantity discount contract with a low number of price blocks, are sufficient for a supplier designing contracts under asymmetric demand information.This paper was accepted by Christian Terwiesch, operations and supply chain management.

Management Insights

Management Insights

Cost-sharing contracts and efficiency in a two-stage supply chain

This paper proposes an efficiency-enhancing contract mechanism in a two-stage supply chain. The model includes a buyer (the Original Equipment Manufacturer or OEM) who relies on a seller (the supplier) for key components. The self-interested supplier creates a level of capacity before demand is realised, but this level may not be optimal for the supply chain. Furthermore, the self-interested OEM may choose a suboptimal output price. The firms thus create a contract stipulating three factors: the OEM's output price, a fraction of the supplier's capacity costs to be paid by the OEM, and a fixed rebate paid from the supplier to the OEM. These factors can be chosen so that the efficient level of capacity is created, and both the supplier's and OEM's profits increase. Sensitivity analysis is then conducted to indicate the industry characteristics that make this type of contract most effective.

Effect of supplier profit rate, cost reduction, and component commonality on the supply chain performance under stochastic and price-dependent demand

Manufacturers add product variants in one product family to meet customers’ different preferences. Components could be shared and reused to reduce costs. Demand and demand variance change with different sale prices under the stochastic and price-sensitive demand environment. Demand uncertainty has significant effects on costs and profits of the supply chain. With a numerical example involving a product family of cordless drills, a model is used to investigate the effect of supplier profit rate, cost reduction, and component commonality on the supply chain performance. Results show that saving in upstream suppliers due to component commonality could be passed to the manufacturer, retailer, and customers with appropriate coordination models such as quantity discount. With reduced procedure cost, a win-win pricing strategy for one supplier is to increase its profit at a rate while sell its products at a cheaper sale price based on the cost mark-up method considering the demand uncertainty from buyers or downstream suppliers in the supply chain.

A VMI Model in Supplier-Driven Supply Chain and Its Performance Simulation

This research builds a VMI inventory decision model of supplier-driver supply chain to analyze the effects of VMI on a supply chain performance and announce the important function of VMI in promoting supply chain coordination, reducing costs and increasing profits. According to this model, VMI is found always to reduce the system's(buyer and supplier together) and the buyer's inventory related costs in the short-term, but the supplier's inventory related costs varies. Under certain cost conditions between buyer and supplier, VMI can increase the system's and the buyer's profits. And the supplier's profits can be increased under other conditions. Using the corresponding MATLAB program, obtains some calculation results. And through computer simulation, analyzes the effects of VMI on supply chain performance, and announces the important function of VMI in promoting supply chain coordination, reducing costs and increasing profits.

Value creation, competition, and performance in buyer‐supplier relationships

AbstractThe value‐based approach to strategy argues that a firm's ability to capture value depends on the extent of its added value. In this paper, I empirically test the link between added value and value capture using a longitudinal dataset of United Kingdom law firm performance, capabilities, and client relationships. In this setting, competitors relevant for defining a firm's added value are those that share a client with the firm. Further, within a client relationship, value creation, and hence added value, can be decomposed in two parts: product‐line capability and client‐specific scope economies. I find that added value, measured at the level of each buyer‐supplier relationship, is a driver of relationship stability and supplier profitability. This suggests that suppliers with similar capabilities might enjoy different economic returns depending on the composition of their set of relevant competitors. These findings shed light on the conditions under which firms can appropriate returns from their capabilities. They indicate that concepts from cooperative games can be fruitfully applied to empirical studies of firm performance and to the elaboration of insights from the resource‐based view of the firm. Copyright © 2010 John Wiley & Sons, Ltd.

Market-share contracts as facilitating practices

This article investigates how the use of contracts that condition discounts on the share a supplier receives of a retailer's total purchases (market-share contracts) may affect market outcomes. The case of a dominant supplier that distributes its product through retailers that also sell substitute products is considered. It is found that when the supplier's contracts can only depend on how much a retailer purchases of its product (own-supplier contracts), intra- and interbrand competition cannot simultaneously be dampened. However, competition on all goods can simultaneously be dampened when market-share contracts are feasible. Compared to own-supplier contracts, the use of market-share contracts increases the dominant supplier's profit and, if demand is linear, lowers consumer surplus and welfare.

Managing production and procurement through option contracts in supply chains with random yield

We study the management problems of production and procurement in a decentralized supply chain consisting of one supplier (providing key component) and one manufacturer. The supplier's production yield is random, and the manufacturer's demand is stochastic. The manufacturer may purchase option contracts from the supplier before the demand is realized (called an option order), or order after the demand is realized (called an instant order), which is subject to random pricing and uncertain availability. We show that the supplier's profit function is piece-wise concave and explore structural properties for the manufacturer. Finally, we provide sensitivity analysis on different parameters.

A strategy-oriented operation module for recommender systems in E-commerce

Electronic commerce (EC) has become an important support for business and is regarded as an efficient system that connects suppliers with online users. Among the applications of EC, a recommender system (RS) is undoubtedly a popular issue to make the best recommendation to the users. Even if many approaches have been proposed to perfect the recommendation, a comprehensive module comprising of essential sub-modules of input profiles, a recommendation scheme, and an output interface of recommendations in the RS is still lacking. Besides, the fundamental issue of profit consideration for an EC company is not stressed in general terms. Therefore, this study aims to construct an RS with a strategy-oriented operation module regarding the above aspects; and with this module, an approach named clique-effects collaborative filtering ( CECF) for predicting the consumer's purchase behavior was proposed. Finally, we applied our proposed module to a 3C retailer in Taiwan, and promising results were obtained. Scope and Purpose This study aims to construct a comprehensive module for the recommender systems. The proposed strategy-oriented operation module comprises the essential parts of a recommender system. By utilizing the proposed module with marketing strategies and an effective on-line interface scheme, the recommender system could emphasize not only the customer's satisfaction as conventional recommender system suggested, but also the supplier's profit which shall be an important issue to an E-commerce company. Thus, a better recommendation environment could be displayed.

Supplier and Producer Profit Sharing Models Based on Inspection Sampling Policy

This research presents three profit sharing models of a key item in a two-echelon supply chain production. The first model maximizes the supplier’s profit while allowing the producer to take his own optimal inspection sampling policy. The second model is developed exclusively to the supplier’s advantage. The last model adopts a collaborative strategy that permits both parties to negotiate an inspection policy, and aims to maximize total profit. In this two-echelon supply chain, the supplier determines the item quality by selecting a quality level of process setup, as well as the cycle time to reset this quality level. There is a tradeoff between total setup cost and the resulting quality of the key items. The interrupted geometric distribution is used to describe the item manufacturing quality for various cycle time setups. Furthermore, it is assumed that the inspection will not be perfect. The supplier must bear the loss from its downstream producer’s type I inspection error, and the producer will in turn undertake the risk of selling flawed products to customers. The application of the proposed models is illustrated via an example with interrupted geometric distributions.

Coordination contracts in the presence of positive inventory financing costs

Numerous studies have offered diverse contractual forms of alliance, in which the supply chain partners coordinate their decisions for greater joint performance in an entirely self-interested way. Prior literature implicitly assumes free inventory financing. However, this assumption is questionable in the real marketplace. Firms frequently finance their working capital from a variety of credit sources, such as banks, and incur positive costs of the funds for inventory. Surprisingly, the impact of inventory financing costs on supply chain coordination has not been sufficiently investigated by supply chain academics. We address this issue by explicitly assuming capital-constrained agents and positive inventory financing costs. Specifically, we consider four extensively discussed coordination mechanisms for investigation: (i) all-unit quantity discount, (ii) buybacks, (iii) two-part tariff, and (iv) revenue-sharing. We show that, under the assumption of positive inventory financing costs, these contracts fail to achieve joint profit maximization if each agent relies on direct financing from a financial institution. Positive financing costs call for trade-credit in order to subsidize the retailer's costs of inventory financing. Using trade-credit in addition to the contracts, the supplier fully coordinates the supply chain for the largest joint profits. Moreover, positive inventory financing costs make revenue-sharing less profitable than the other three contracts. We present three different schemes for coordination in a decentralized supply chain, using buybacks, quantity discount, and two-part tariff, respectively. We also derive the optimal trade-credit rate not only for the supplier's profit, but also for joint supply chain profit.

Competition and cooperation in a single-retailer two-supplier supply chain with supply disruption

Many retailers diversify their supply disruption risk by sourcing from multiple suppliers. While a retailer's sourcing strategy impacts the profit of the supply chain, the pricing strategies of suppliers influence all aspects of the supply chain. In this paper we investigate the sourcing strategy of a retailer and the pricing strategies of two suppliers in a supply chain under an environment of supply disruption. We characterize the sourcing strategies of the retailer in a centralized and a decentralized system. We derive a sufficient condition for the existence of an equilibrium price in the decentralized system when the suppliers are competitive. Based on the assumption of a uniform demand distribution, we obtain an explicit form of the solutions when the suppliers are competitive. Finally we devise a coordination mechanism to maximize the profits of both suppliers.

Coordination of Supply Chain with Trade Credit under Bilateral Information Asymmetry

Abstract This article explores the function of trade credit in coordinating supply chain under both symmetric and bilateral asymmetric information. The financing function and positive externality of trade credit are also illustrated in this article. In a supply chain composed of a manufacturer and a budget constraint retailer, the manufacturer can use trade credit to finance the retailer and thus increases the retailer's order size up to the supply chain's optimal lot size. The benefit of coordination is allocated randomly among the parties by setting the length of the trade credit. When the retailer sells multiple products, trade credit's positive externality, that is one supplier's trade credit can increase the other supplier's profit, is demonstrated. When both the retailer and the manufacturer have private information, we use double auction model to derive the length of the credit. Numerical example is conducted to demonstrate the theoretical results.

An efficient replenishment model of deteriorating items for a supplier–buyer partnership in hi-tech industry

Due to rapid technological innovation and global competitiveness, the selling price of products in hi-tech industries usually declines significantly with time. This study develops a deteriorating inventory model for the product experiencing continuous decrease in unit price. This inventory model, from the perspective of supplier, proposes an efficient replenishment policy for a single-supplier-and-single-buyer supply chain in which the buyer conducts JIT through a realisation of multiple deliveries and the supplier performs one-time production. The objective of this model is, on the basis of the buyer's economic ordering decisions, to maximise the supplier's profit during a finite planning horizon and then to determine the optimal production cycle and product life cycle. A simple heuristic algorithm is developed to derive the optimal solution for the model. Numerical examples and sensitivity analyses confirm the performances of the proposed model and reveal some interesting managerial implications.

Pricing, service level and lot size decisions of a supply chain with risk-averse retailers: implications to practitioners

This article develops a game theoretic model of a supply chain with one supplier and two risk-averse retailers competing in price, service and lot size, where the Economic Order Quantity (EOQ) production-inventory policy is adopted. After studying the existence of EOQ equilibrium, we investigate how to adjust their decisions when the economic environment changes. We find that one retailer will decrease its optimal lot size, retail price and service level when it becomes more risk averse or its service investment efficiency decreases. When the supplier's capacity increases, the retailers will reduce retail price and increase service level, which in turn results in a higher lot size. The effect of the risk sensitivity of one retailer on the rival retailer's decisions depends on the relative service cost efficiency of the retailer. When the absolute risk aversion and service investment efficiency of one retailer increase, the supplier's profitability will increase due to a higher total expected demand. We further give the managerial insights for practitioners, which helps managers to make right decisions in an uncertain environment.

A Study on the IT Infrastructure of Korean Apparel Industry

Abstract The purpose of this study is to analyze IT infrastructure of Korean apparel industry in order to enhance business effectiveness and customer's satisfaction in information society with global networks. For this study, the question-naires were distributed to 57 apparel industries in Korea. The data were analyzed by factor analysis, descriptive statistics, Cronbach's alpha coefficient, multi regression analysis. The results of this study are as follow: First, Considering the apparel industry, construction of information system is essential for assistance of information policy and utilization of information. Understanding of e-business policy affects profits of suppliers. Second, Apparel industry with higher information policy has higher productivity with flexibility. Third, Apparel industry which has close relationship with suppliers has better customer support. Flexible scheduling and production line are important factors for quick response of customer's order and need.

Analysis of order timing tradeoffs in multi-retailer supply systems

We analyse the implications of order timing decisions in multi-retailer supply systems in a single period, newsvendor setting. Specifically, we investigate a supply chain with multiple retailers and a single supplier where one of the retailers is considered a preferred or primary customer of the supplier. In the base model (delayed commitment), customers order after observing demand and the supplier rations its production quantity to retailers according to a generalised uniform allocation rule. In the early-commitment model, the primary retailer commits to an order quantity prior to the selling season and receives her order in full. We compare the expected supplier and retailer profits under each of these strategies and specify conditions under which a particular commitment scheme benefits the supplier, the primary retailer, and the entire system. Our findings indicate that the supplier prefers early commitment under mild conditions, whereas the primary retailer's preference depends on the tradeoff between the supply risk and demand risk. We also compare our findings with a single-retailer system, and observe that both the supplier and the primary retailer benefit from the existence of additional customers under delayed-commitment in many contexts.