Scenario 1: Coordination Revisit the setting depicted in the note Channel Coordination Using Contracts. Recall that we have a Retail Price is $1.00, Production Cost of $0.45, and Salvage Value of $0.05. To simplify the problem assume that demand is equally likely to be exactly 1, 2, 3, 4, or 5 units and use the excel model. 1. State terms for a contract with a fixed fee that coordinates the chain and leaves an expected profit level of $10 for the retailer. 2. Find two different sets of terms for a Buy-back contract that coordinates the chain, and specify the profit levels for the Manufacturer and Retailer in each case. 3. Find terms for a Revenue Sharing contract that coordinates the supply chain and leaves $10 as expected profit for the Manufacturer. 4. Find terms for a Revenue Sharing contract that coordinates the supply chain and leaves $10 as expected profit for the Retailer.

45 55 100 5 0 0 10% Cost Wholesale Price Salvage Fixed Fee Buy Back Rev Share Order Size Prob 0.2 Cum 0.2 Demand 1 Two-Part Tarriff (Fixed Fee & Wholesale) Order Size 3 Units Sold 1 Revenue 100 Direct Cost 165 Fixed Fee 0 Leftovers 2 Salvage Profit Order Size Units Sold Revenue Direct Cost Fixed Fee Leftovers Salvage 10 Profit 30 Chain Profit -25 Buy Back Contract (BuyBack & Wholesale) Order Size 3 Units Sold 1 Revenue 100 Direct Cost 165 Fixed Fee 0 Leftovers 2 Salvage 10 Buy Back 0 Profit -65 3 Retailer Co Cu Cu/(Cu+Co) Order Size 10 -55 165 135 0 2 0.2 0.4 2 2 200 165 0 1 5 40 2 165 135 0 1 5 30 70 2 200 165 0 1 5 0 35 50 45 47.37% 3 0.2 0.6 3 3 300 165 0 0 0 135 3 165 135 0 0 0 30 165 3 300 165 0 0 0 0 135 0.2 0.8 4 3 300 165 0 0 0 135 3 165 135 0 0 0 30 165 3 300 165 0 0 0 0 135 Manufacturer Co Cu Cu/(Cu+Co) Order Size 0.2 1 5 3 300 165 0 0 0 135 3 300 165 0 0 0 0 135 40 55 57.89% 3 Exp Value 3 165 135 0 0 0 30 165 $ 2.4 240 165 0 0.6 3 78 Exp Value 2.4 165 135 0 0.6 3 30 108.00 Exp Value 2.4 240 165 0 0.6 3 0 75 Order Size Units Sold Revenue Direct Cost Fixed Fee Leftovers Salvage 10 Buy Back 0 Profit 40 Chain Profit -25 Revenue Sharing (Share & Wholesale) Order Size 3 Units Sold 1 Revenue 90 Direct Cost 165 Fixed Fee 0 Leftovers 2 Salvage 10 Profit -65 Order Size Units Sold 1 Revenue 175 Direct Cost 135 Fixed Fee 0 Leftovers 2 Salvage 10 Profit 40 Chain Profit -25 3 3 1 165 135 0 2 2 165 135 0 1 5 0 35 70 2 180 165 0 1 5 20 2 185 135 0 1 5 50 70 3 165 135 0 0 0 0 30 165 3 270 165 0 0 0 105 3 195 135 0 0 0 60 165 3 165 135 0 0 0 0 30 165 3 270 165 0 0 0 105 3 195 135 0 0 0 60 165 Exp Value 3 165 135 0 0 0 0 30 165 $ 3 270 165 0 0 0 105 2.4 165 135 0 0.6 3 0 33 108.00 Exp Value 3 195 135 0 0 0 60 165 $ 2.4 216 165 0 0.6 3 54 Exp Value 2.4 189 135 0 0.6 3 54 108.00 45 55 100 5 0 0 10% Cost Wholesale Price Salvage Fixed Fee Buy Back Rev Share Order Size Prob 0.2 Cum 0.2 Demand 1 Two-Part Tarriff (Fixed Fee & Wholesale) Order Size 3 Units Sold 1 Revenue 100 Direct Cost 165 Fixed Fee 0 Leftovers 2 Salvage Profit Order Size Units Sold Revenue Direct Cost Fixed Fee Leftovers Salvage 10 Profit 30 Chain Profit -25 Buy Back Contract (BuyBack & Wholesale) Order Size 3 Units Sold 1 Revenue 100 Direct Cost 165 Fixed Fee 0 Leftovers 2 Salvage 10 Buy Back 0 Profit -65 3 Retailer Co Cu Cu/(Cu+Co) Order Size 10 -55 165 135 0 2 0.2 0.4 2 2 200 165 0 1 5 40 2 165 135 0 1 5 30 70 2 200 165 0 1 5 0 35 50 45 47.37% 3 0.2 0.6 3 3 300 165 0 0 0 135 3 165 135 0 0 0 30 165 3 300 165 0 0 0 0 135 0.2 0.8 4 3 300 165 0 0 0 135 3 165 135 0 0 0 30 165 3 300 165 0 0 0 0 135 Manufacturer Co Cu Cu/(Cu+Co) Order Size 0.2 1 5 3 300 165 0 0 0 135 3 300 165 0 0 0 0 135 40 55 57.89% 3 Exp Value 3 165 135 0 0 0 30 165 $ 2.4 240 165 0 0.6 3 78 Exp Value 2.4 165 135 0 0.6 3 30 108.00 Exp Value 2.4 240 165 0 0.6 3 0 75 Order Size Units Sold Revenue Direct Cost Fixed Fee Leftovers Salvage 10 Buy Back 0 Profit 40 Chain Profit -25 Revenue Sharing (Share & Wholesale) Order Size 3 Units Sold 1 Revenue 90 Direct Cost 165 Fixed Fee 0 Leftovers 2 Salvage 10 Profit -65 Order Size Units Sold 1 Revenue 175 Direct Cost 135 Fixed Fee 0 Leftovers 2 Salvage 10 Profit 40 Chain Profit -25 3 3 1 165 135 0 2 2 165 135 0 1 5 0 35 70 2 180 165 0 1 5 20 2 185 135 0 1 5 50 70 3 165 135 0 0 0 0 30 165 3 270 165 0 0 0 105 3 195 135 0 0 0 60 165 3 165 135 0 0 0 0 30 165 3 270 165 0 0 0 105 3 195 135 0 0 0 60 165 Exp Value 3 165 135 0 0 0 0 30 165 $ 3 270 165 0 0 0 105 2.4 165 135 0 0.6 3 0 33 108.00 Exp Value 3 195 135 0 0 0 60 165 $ 2.4 216 165 0 0.6 3 54 Exp Value 2.4 189 135 0 0.6 3 54 108.00