Supply Chain Essay

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1. When is a buy-back contract appropriate? When is a payback appropriate? What about an option contract? How are they related? Argue that buy-back and pay-back contracts are special types of options contracts?

In my opinion, I see that both contracts (buy-back or pay-back) are playing an important role to achieve the global optimization for the supplier and buyer profits. However, each contract has its unique features, and I will mention the features of each contract for the supplier and buyer. Buy-back contract is more appropriate for the buyer than the seller because of the following terms: the contract allows a retailer to return unsold inventory up to a specified amount at an agreed upon price. It also increases the optimal order quantity for the retailer or buyer, resulting in higher product availability and higher retailer and supplier. In addition to that, the cons of this contract result in that surplus inventory for the supplier must be disposed of which increases supply chain costs. Here, the supplier risks clearly increase, but the buyer will be safer and the products with low variable cost will be effective such as music, software, books, and magazine so that the supplier can keep the surplus. On the other hand, the pay-back contract is more appropriate for the seller or manufacturer because of the following features: the buyer agrees to pay some agreed upon price for any unit produced by the manufacturer, but not purchased. Another good thing that the seller is going to produce more units based on buyer needs. However, the buyer's risk will be increased if the production quantity increases. About option contract, the option contract is a flexible contract in which the buyer prepay a relatively small fraction of the product price upfront, in return for a commitment from the supplier to reserve capacity up to a certain level. It is beneficial for the buyer to exercise the option because the initial payment will be lost. I see that the option contract...

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