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Contracts-Types and Features


Buy-back Contracts

v Features
Ø  A buy-back or return clause in the contract allows retailer to return unsold inventory up to a specified amount, at a agree-upon price.
Ø  Common in book industry
Ø  In auto-industry, manufacturer provides holding-cost subsidies where manufacturer gives certain amount to retailer for every unit held in the inventory over a period.
v Advantages
Ø  Increases the supply chain profit
Ø  More order from retailers to the manufacturer
v Disadvantages
Ø  Buy-back is not attractive with more cost of return
Ø  Retailer may exert less effort to sell
Ø  Information distortion at the retailer level

Revenue sharing Contracts

v Features
Ø  Manufacturer charges low whole sale price to retailer and shares a fraction of retailer’s revenue.
Ø  Applicable in blockbuster movie rentals and movie studios for videos.
v Advantages
Ø  Best suited where cost of return is very high
Ø  Disadvantages
Ø  Retailer may exert less effort to sell
Ø  Information distortion at the retailer level as point of sale (POS) data required to calculate the revenue.
v Disadvantages
Ø  Retailer may exert less effort to sell
Ø  Information distortion at the retailer level as point of sale (POS) data required to calculate the revenue.

Quantity flexibility Contracts

v Features
Ø  Manufacturer allows retailers to change the order(within limits) after observing the demand.
Ø  Common practice in electronics and computer industry.
Ø  Preferred for products with high marginal costs
v Advantages
Ø  Increase supply Chain surplus
Ø  Less information distortion compared to other contract types.

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