5 Uncoordinated Supply Chain

Uncoordinated Supply Chain
By
Prof. M. K. Tiwari
Dept of IE&M
IIT Kharagpur
Co-ordination In Supply Chain
Coordination in Supply Chain Refer as the coordination
of information, materials and financial flow between
organizations in supply chain.

Brings many organizations as an united team with well
established communication channels and optimized
resource allocation.
Why Supply Chain Suffers?
When each member of supply chain tries to maximize
their own profit.

When each member or group of supply chain tries to
optimize individually instead of coordinating their
efforts.
Why Coordination is Important in SCM?
Communication and Coordination among members of
a supply chain enhances its effectiveness which lead
to the benefit of whole supply chain.

For success in the global marketplace requires whole
supply chains to compete against other supply chains.
Kind of coordination involve in SC
Horizontal Coordination
Coordination among entities involve at same level
of Supply Chain.
Example: Coordination between supplier to supplier or within the firm.

Vertical Coordination
Coordination among entities involve at different
levels of Supply Chain.
Example: Coordination between supplier to retailer or distributor to retailer
Problems in SCM due to Low Involvement
of coordination
1. Location Decision of Franchisees of One
Organization
2. Warehouse Decision for Organization
3. Lot sizing problem with deterministic demand
4. Demand Forecasting in Supply Chain
5. Product Pricing and Marginal cost Problem between
Suppliers and Retailers
6. Lot sizing problem with stochastic demand in a
News-vendor environment
Location Decision of Franchisees
of One Organization
Location Decision of Franchisees of One
Organization
A franchise has multiple outlet to serve customers,
spread out over a town, a city or country.
Problem for franchise is, where they have to locate
their franchisees to get maximum profit in Supply
Chain.
In two ways they can select location
Two or more Franchisees whose location are coordinated by
Franchisor.
Two or more Franchisees that control their own location.
Example: Location Decision of Franchisees
Isaacs Ice Cream had been selling ice-creams in the
city, now Isaac wanted to expand his market to reach
summertime tourist by selling his ice-creams through
small-carts along the boardwalk on 4 mile beach.

Isaac company decided to open two franchisees on
the beach in 4 mile boardwalk.

Now Isaac company has two option to establish these
franchisees;

Two Franchisees whose locations are coordinated
by Isaac company (Franchisor).

Two Franchisees that control their own locations.
Suppose that a franchisor wishes to open two ice
cream parlor along a stretch of road 4-mile long.

Potential customers cluster with mile marker [MM]
0,1,2,3 & 4 and each cluster has n number of
customer.

Customer demand is sensitive primarily to distance
traveled by customer.

MM 00
n
customer
MM 01
n
customer
MM 02
n
customer
MM 04
n
customer
MM 03
n
customer
4 Mile Beach with n customers on each clusters
1 Mile 2 Mile 3 Mile 4 Mile
Franchisee 1 Franchisee 1
Case 1: Franchisor choosing location for both Franchisees
Case 2: Two Franchisees that control their own locations
Franchisee 1
Franchisee 2
Two Franchisees whose locations are
coordinated by Franchisor
If the franchisor can locate these franchisees anywhere
on the 4-mile of the road, the franchisor will try to
maximize total demand of supply chain.

Demand for franchise will be maximized when the
franchise 1(F1) is located at MM1 and franchise 2(F2)
is located at MM3.
Total demand depends on distance traveled by customer,
hence, Demand D given as;

For Franchise 1 demand D
1

1
( 1) ( 0) ( 1)
2
Number of customer on each mile
Constant, 0
Constant, 4
na
D na b na b b
n
a a
b b
= + +
=
= >
= >
4
0
( )
i
i
D na b d
=
=
where d=distance traveled by customer

For Franchise 2 demand D
2

2
( 1) ( 0) ( 1)
2
Number of customer on each mile
Constant, 0
Constant, 4
na
D na b na b b
n
a a
b b
= + +
=
= >
= >
( 1) ( 0) ( 1) ( 0) ( 1)
(5 3)
D na b na b na b na b na b
D na b
= + + + +
=
Total demand for Supply Chain;
Two Franchisees that control their own
locations
In this case, both franchisee try to maximize their own
profit and demand, knowing that the other franchisee
exists and reacting accordingly.
In this case best location for each one is MM2 and if
both franchisees chooses MM2 then;
Total demand D;
( 2) ( 1) ( 0) ( 1) ( 2)
(5 6)
D na b na b na b na b na b
D na b
= + + + +
=
Warehouse Decision for
Organization
Warehouse Decision for Organization
The warehouse is a point in the logistics system where
a firm stores or hold raw materials, semi finished
goods or finished goods.

The firms can use distributed warehousing or
centralized warehousing for storage system.
Example: Warehouse Decision for
Organization
Isaacs Ice Cream has grown and now selling their
products over the other state through 200 retail-
outlets, which are equally distributed between these
two states.
In first state, Isaac company leased warehouse space
near each shop.
In second state, Isaac company tried storing goods for
all 100 shops in that state at a central location.
Example: Warehouse Decision for
Organization
In second state, company pays only for storage space
and ordering and receiving costs.
Firm has always carried safety stock to protect
against unusual high demand.
In centralized warehousing, two benefits are
involved;
Economies of scale in setup costs and holding costs
Risk pooling in stochastic demand environment
Economic Order Quantity Costs
Benefits of centralized warehousing in terms of
economies-of-scale given by EOQ,

For distributed warehousing;

D Annual Demand
H hoslding Costs
S Setup Costs
N Number of Clients
=
=
=
=
1 2
2 / , 2 / ................., 2 /
;
2 /
N
R R R
D
EOQ DS H EOQ DS H EOQ DS H
For N Clients
EOQ N DS H
= = =
=
Benefits of centralized warehousing in terms of
economies-of-scale given by EOQ,
For Centralized Warehousing
;
2( ) /
C
For N Clients
EOQ ND S H =

D Annual Demand
H hoslding Costs
S Stup Costs
N Number of Clients
=
=
=
=
In this condition supplier combine the whole demand
instead of single client demand.
The saving percent for centralized warehousing with
respect to distributed warehousing;

2 / 2 /
% 100
2 /
( ) 2 /
% 100
2 /
% 100
% 1 100
N DS H NDS H
Saving
N DS H
N N DS H
Saving
N DS H
N N
Saving
N
N
Saving
N
=
| |
=
|
|
\ .
EOQ of
Distributed SC
EOQ of
Coordinated SC
Numerical Example: Economic Order
Quantity Costs
With regard to EOQ costs, Saving %= [1-(N)/N]x100
Number of Clients Cost Saving %
2 29.29
3 42.26
4 50.00
5 55.28
6 59.18
7 62.20
8 64.64
9 66.67
10 68.38
Number of Clients Cost Saving %
11 69.85
12 71.13
20 77.64
25 80.00
40 84.42
50 85.86
100 90.00
1000 96.84
2500 98.00
Solving as
Saving %=(1-N/N)*100
=(1- 7/7)*100
=(1-0.3779)*100
=62.20%

Risk pooling benefits in Centralized
Warehousing: Newsvendor Environment
Suppose that i
th
firm choosing its optimal order
quantity has expected overage and underage costs
equal to K
i
.

Where
i
is firms is standard deviation of demand
And K is constant.
For distributed SC
Each client has same overage and underage cost per
unit, but with normal probability demand distribution
with mean and variance
2
;

For N client overage and underage cost = NK
Warehousing: Newsvendor Environment
For Centralized SC
If supplier combines the demands of its all clients N,
Normal probability demand distribution with mean N and
variance N
2
,

For N client overage and underage cost ,
2
&
&
% 1 100
Overage Underage Costs K N
Overage Underage Costs NK
N
Saving
N
o
o
=
=
| |
=
|
|
\ .
Warehousing: Safety Stock & Service Level
The safety stock equals to z, where z represents the
number of standard deviation over the mean to
achieve a desired cycle service level,
In distributed warehousing system,
Safety Stock Level for Supply Chain = zN
In centralized warehousing system,
Supplier combines the demand for all clients

Safety Stock Level for Supply Chain = zN
Warehousing: Safety Stock & Service Level
Saving Cost % for it coordinated SC,

Service Levels can improve in centralized warehousing system
by improving z value in centralized warehousing;

% 1 100
N
Saving
N
| |
=
|
|
\ .
old new
new old
z N z N
z Nz
o o =
=
Standard
deviation in
distributed SC
Standard
deviation in
coordinated SC
Numerical Example: Cycle Service Level Z
new

Number of
Clients
70.00%
Z
old
= 0.5244
80.00%
Z
old
=0.8416
90.00%
Z
old
=1.2816
2 77.08% 88.30% 96.50%
3 81.81% 92.75% 98.68%
4 85.29% 95.38% 99.48%
5 87.95% 97.01% 99.79%
6 90.05% 98.04% 99.92%
7 91.73% 98.70% 99.97%
8 93.10% 99.14% 99.99%
9 94.22% 99.42% 99.99%
10 95.14% 99.61% 100.00%
15 97.51% 99.94% 100.00%
25 99.56% 100.00% 100.00%
50 99.99% 100.00% 100.00%
100 100.00% 100.00% 100.00%
Service levels from Z
table

2 , at z =0.5244 ;
2 *
0.7416
At 0.7416 Service level=77.08%
old
new old
new
For clients
z z
z
=
=
Lot sizing problem with
deterministic demand
Coordinated Lot Sizes with Deterministic
Demand
Some product has an expensive setup cost and a very
fast production rate.

And it is cheapest to produce it in lot size instead of
producing small number size.

It is optimal for the suppliers lot size of production
(lot size for supplier) to be an integer multiple of the
retailers lot size.
Total annual supply chain setup cost and holding cost
are given as;
Demand
( )
1
..........(1)
2 2
s s r r
n Q
D D Q
TC S H S H
nQ Q
| | | | | |
| |
= + + +
| | | |
\ .
\ . \ . \ .
Annual demand
Supplier's setup cost
Retailer's setup cost
Supplier's holding cost
Retailer's holding cost
Retailer's order size
Supplier's integer lot-size multiplier
Supplier's lot-size
s
r
s
r
D
S
S
H
H
Q
n
nQ
=
=
=
=
=
=
=
=
the greatest integer x x = s
(

( )
Supplier's annual setup costs
1
Supplier's annual average holding costs
2
Retailer's annual setup costs
Retailer's annual average holding costs
2
s
s
r
r
D
S
nQ
n Q
H
D
S
Q
Q
H
| |
=
|
\ .
| |
=
|
\ .
| |
=
|
\ .
| |
=
|
\ .
Demand
Differentiate equation (1) of total supply chain annual
setup and holding cost TC with respect to Q;
( )
2 2
2 2
1
..........(1)
2 2
( 1)
............................(2)
2 2
(2) 0;
( 1)
0;
2
s s r r
s s r r
s s r
n Q
D D Q
TC S H S H
nQ Q
DS n H DS H TC
Q Q n Q
Putting equation equal to
DS n H DS TC
Q Q n Q
| |
| | | |
| |
= + + +
|
| | |
\ .
\ . \ .
\ .
| |
= + +
|
c
\ .
| |
|
= +
|
c
\
\ .
2 2
0
2
( 1)
2 2
r
s s r r
H
H DS DS H
n
Q n Q
|
+ =
|
.
= +
Demand

2
2
( 1) ;
2
2
s r r
r
s
r
DS DS H
n n n n
DS
H Q
H
(
(
( = +
(
(

2
2
( 1) ;
2 2
s r r
s
DS nH H
n n n
H Q
(
= +
(

2
2
2
s
s
DS
n n
H Q
=
2
2
2
0...................(3)
s
s
DS
n n
H Q
=
2
=
r
r
DS
Q
H
Demand

2
2
2
2
2
(3);
2
0.......................(3)
;
4
;
2
2 1
1 1 4 1
2
We have to maximize the lot-size;
8 1
1 1
2
s
s
s
s
s
s
From equation
DS
n n
H Q
By Formula
b b ac
x
a
DS
n
H Q
DS
n
H Q
-
-
=

=
(
= +
(

(
(
= + +
(
(
(

Suppliers
multiple
Integer for
Quantity
Demand
When the parties optimize independently, the retailer
orders Q
*
and the supplier orders (n
*
Q
*
),
where,

*
2
Q =
r
r
DS
H
2
8 1
1 1
2
s
s
DS
n
H Q
-
-
(
(
= + +
(
(
(

and
Demand
When they optimize jointly, they go through these steps;

1:
4 ( ) 1
1 1 0,
2
s r s
r s
Step
S H H
n Max
S H
-
(
(

(
( = + +
`
(
(
)

*
*
2:
and ( 1)
s
r s r
Step
S
S S H n H H
n
= + = +
*
2
S
Q D
H
=
Therefore;
Numerical Example: Coordinated Lot Sizes
with Deterministic Demand
For example, consider a product with annual demand
D=25,000 unit, S
s
=$200, S
r
=$40.50, H
s
=$2.00, and
H
r
=$2.50;

( )
*
2
*
*
1 8 25000 200
1 1
2 2 900
1
1 5.07
2
3
n
n
n
(
| |

= + +
( |
|
(
\ .

(
= +
(

=
* *
3 900
2700 Unit
s
s
Q n Q
Q
= =
=
*
2 2500 40.5
900 Unit
2.5
Q

= =
Therefore;
Hence;
Numerical Example: Coordinated Lot Sizes
with Deterministic Demand

( )
*
*
3 1 900
25000 25000 900
200 2 40.50 2.5
3 900 2 900 2
$5902
TC
TC
| |
| | | | | |
= + + +
|
| | |
\ . \ . \ .
\ .
=
If they Jointly optimize their lot-size;
| |
*
1 4 200(2.5 2)
1 1 0,
2 40.50 2
1
1 2.42 1
2
n Max
n
-
(
(

= + + (
(
`
)
( (

(
= + =
(

Numerical Example: Coordinated Lot
Sizes with Deterministic Demand

*
2 25000 240.5
2193 Unit
2.5
Q

= =
*
*
and ( 1)
200
40.50 and (1 1)2.0 2.5
1
$240.5 and $2.50
s
r s r
S
S S H n H H
n
S H
S H
= + = +
= + = +
= =
*
2
S
Q D
H
=
Retailer orders 2193 unit and so does the supplier
orders 1x2193=2193 unit and total setup and holding
cost = $5483, and its 7.1 % lower than individual
optimized order quantity holding and setup cost.

In jointly optimization retailers holding and setup
cost is increase and so it should be compensate by
supplier by giving some quantity discount to retailer.
Benefits of lot-sizing;

S
s
/S
r
Q
new
/Q
old
Cost Saving
%
1 1.41 5.72
2 1.73 13.40
3 2.00 20.00
4 2.24 25.46
5 2.45 30.01
10 3.32 44.72
15 4.00 52.94
20 4.58 58.34
50 7.14 72.53
100 10.5 80.29
( )
( )
Cost Saving
Cost Saving
1 2 1 (
1 2 1 2
)
s
s r r
r
s
s r
r
r
S S
S S S
S
S
S S
S
= +
= + +
| | (
+
+
| (
\ .
| | (
| (
\ .
Demand Forecasting in Supply
Chain
Coordinated Demand Forecasting
Demand of products varies from downstream to
upstream in supply chain due to bullwhip effect in
supply chain.

As demand of products varies in supply chain, So
forecasting of demand of product also varies from
downstream to upstream.

Due to lack of communication between retailers,
distributor, wholesaler and supplier demand
forecasting may suffer in supply chain.
Example: Coordinated Demand Forecasting
Wholesaler and Retailer work individually without sharing any information
Retailers Wholesaler
Periods Customer's Next Period Onhand Back Order Order Placed In-transit Next Period On-hand Back Orders Order In-Transit
Order(B) Forecast(C) Inventory(D) (E) (F) Inventory(G) Forecast (I) (J) Placed(K) Inventory(L)
0 5 0 0 5 (H) 5 0 0 5
1 5 5 5 0 0 0 0 10 0 0 0
2 5 5 0 0 5 5 5 5 0 0 0
3 5 5 0 0 5 5 5 0 0 5 5
4 5 5 0 0 5 5 5 0 0 5 5
5 5 5 0 0 5 5 5 0 0 5 5
6 20 20 0 15 35 5 35 0 30 65 65
7 20 20 0 30 20 50 20 15 0 5 5
8 20 20 0 0 20 20 20 0 0 20 20
9 20 20 0 0 20 20 20 0 0 20 20
10 20 20 0 0 20 20 20 0 0 20 20
11 50 50 0 30 80 20 80 0 60 140 140
12 30 30 0 40 10 70 10 70 0 0 0
13 30 30 0 0 30 30 30 40 0 0 0
14 30 30 0 0 30 30 30 10 0 20 20
15 30 30 0 0 30 30 30 0 0 30 30
16 10 10 20 0 0 0 0 30 0 0 0
17 10 10 10 0 0 0 0 30 0 0 0
18 50 50 0 40 90 30 90 0 60 150 150
19 10 10 0 20 0 60 0 90 0 0 0
20 10 10 30 0 0 0 0 90 0 0 0
Total 385 70 175 410 395 150 490
Table 1
Next period
Forecast=Current
consumers Demand
Wholesaler and Retailer sharing consumers demand information
Retailers Wholesaler
Periods Customer's Next Period Onhand Back Order Order Placed In-transit Next Period On-hand Back Orders Order In-Transit
Order(B) Forecast(C) (D) (E) (F) Inventory(G) Forecast Inventory(I) (J) Placed(K) Inventory(L)
0 5 0 0 (H) 5 0 0 5
1 5 5 0 0 5 5 5 5 0 0 0
2 5 5 0 0 5 5 5 0 0 5 5
3 5 5 0 0 5 5 5 0 0 5 5
4 5 5 0 0 5 5 5 0 0 5 5
5 5 5 0 0 5 5 5 0 0 5 5
6 20 20 0 15 35 5 20 0 30 50 50
7 20 20 0 30 20 50 20 0 0 20 20
8 20 20 0 0 20 20 20 0 0 20 20
9 20 20 0 0 20 20 20 0 0 20 20
10 20 20 0 0 20 20 20 0 0 20 20
11 50 50 0 30 80 20 50 0 60 110 110
12 30 30 0 40 10 70 30 40 0 0 0
13 30 30 0 0 30 30 30 10 0 20 20
14 30 30 0 0 30 30 30 0 0 30 30
15 30 30 0 0 30 30 30 0 0 30 30
16 10 10 20 0 0 0 10 30 0 0 0
17 10 10 10 0 0 0 10 30 0 0 0
18 50 50 0 40 90 30 50 0 60 110 110
19 10 10 0 20 0 60 10 50 0 0 0
20 10 10 30 0 0 0 10 50 0 0 0
Total 385 65 175 410 220 150 455
Table 2
Equations for Table 1;
For Retailer,
Next period forecast= Consumer current demand
C5 = B5

*
On-hand Inventory =
Max[( Previous On-hand Inventory + Previous In Transit
Inventory Previous Back order Current Consumer
demand),0]
D5= MAX(D4 + G4 E4 B5, 0)
= Max(0+5-0-5,0) = 0

*
Back Order =
Max[( Previous Backorder + Current Consumer demand
Previous On-hand Inventory Previous In Transit Inventory),
0]
E5 = MAX( E4 + B5 D4 G4, 0) = Max(0+5-0-5, 0) = 0

*
Order Placed by Retailer =
Max[( Next Period forecast (On-hand Inventory +
wholesalers Previous Backorder Retailers Previous
Backorder)), 0]
F5 = MAX ( C5 (D5 + J4 E5), 0) = Max[5-(0+0-0), 0] = 5

*
In Transit Inventory for Retailer =
Min[( Order Placed by Retailer + Wholesalers Previous
Backorder), (Wholesalers On-hand Inventory + wholesalers
In Transit Inventory)]
G5 = MIN (F5 + J4 , I4 + L4)= Min(5+0, 0+5)= 5
Equations for Table 1;
For Wholesaler;

*
Next Forecast = Order Placed by Retailer
H5 = B5

*
Wholesalers On-hand Inventory =
Max[( Previous On-hand Inventory + Previous In Transit
Inventory Previous Backorder Order Placed by Retailer ) ,
0]
I5 = MAX ( I4 + L4 J4 F5 , 0 ) = Max(0+5-0-5, 0)=0
*
Wholesalers Backorder =
Max[( Wholesalers Previous Backorder + Order Placed by
Retailer - Previous Wholesalers On-hand Inventory
Previous Wholesalers In Transit Inventory) , 0]
J5 = MAX ( J4 + F5 I4 L4 , 0 ) = Max(0+5-0-5, 0)= 0
*
Order Placed by Wholesaler =
Max[( Next Period forecast (Wholesalers Current On-hand
Inventory Current Backorder for Wholesaler) , 0]
K5 = MAX ( H5 (I5 J5) , 0 )=Max[5-(0-0), 0]= 5
For Table 2,
Everything will remain same except Next period forecast of
wholesaler.
Next Period forecast for wholesaler = Current Consumer
demand
H5 = B5
From table 1, wholesalers forecast equal to the order
received from retailer in current period.

And therefore wholesalers on-hand inventory is very
high due to low information sharing between them.

From table 2, retailer and wholesaler are sharing the
information of customer demand.
Therefore wholesalers forecasting is equal to
retailers forecasting.

When demand information is shared, the wholesalers
total on-hand inventory held over 20 periods is 42%
smaller.

In the uncoordinated case wholesaler overreacting to
the retailers catch-up order and assuming that
consumer demand will be larger in future.
= (395-230)/395 = 42%
Product Pricing and Marginal cost
Problem between Suppliers
and Retailers
Coordinated Pricing
Pricing of products is important factor for demand
and demand vary according to pricing.

The Supply Chain loses money when the firms do not
coordinate their pricing.

In traditional way, supplier first set the wholesale
price and the retailer react accordingly and set his
own price according to his marginal cost.
Coordinated Pricing
In pricing, can explain by taking two cases;
Case 1: A System with One Retailer and One Supplier
Case 2; A System with One Retailer and N-1 Supplier

Suppose
P = Retail Price of Product
Q = Quantity Sold
Retailer's Demand Curve;
900 2 .......(4) P Q =
Case 1: A System with One Retailer and
One Supplier
Let Marginal cost for supplier and retailer equal to
$90 and $10 respectively.
Total Revenue for Retailer = PxQ

Marginal Revenue for Retailer is the derivative of
total revenue (eq.1) with respect to Q;

2
900 2 ................(5) P Q Q Q =
Retailer's Marginal Revenue 900 4 .......(6) Q =
One Supplier
Taking Retailer and supplier as a one firm.
Total Marginal Cost for Supply Chain=$90+$10
=$100
Optimal quantity Q
*
given as;

Total Channel profits = Q(P-C) ..(7)
= 200[500-($90+$10)]=$80,000
Where C = Supply Chain Marginal Costs
*
900 4 100
200 Unit
900 2 200 $500
Q
Q
P
=
=
= =
One Supplier
Taking Retailer and supplier as two individual part of
Supply chain.
From eq.6, wholesaler know that Retailer will set
marginal cost according to wholesalers price charged.
So, 900-4Q=10 + W
Where W = Wholesale price charged
Therefore demand curve for Supplier;
W = 890 4Q (8)
Therefore suppliers total revenue W x Q = 890Q-4Q
2

Marginal Costs = 890 8Q (9)
From this equation;
90 = 890 8Q
(As marginal cost for supplier is $90)
Q
*
= 100 Unit
W
*
= 890 4 x 100 (From Equation 8)
W
*
= $490
Total revenue of Supplier = 100[$490 - $90] = $40,000
(From eq. 7)
One Supplier
One Supplier
Retailer also will sell same quantity as suppliers.
Retail Price P = 900 2 x 100
Retail Price P
*
= $700
(From equation (4))
Total revenue for Retailer = 100[$700-($10+$490)]
= $20,000
Total Channel Profit = $40,000 + $ 20,000
= $ 60,000
Which is 33% lesser than coordinated pricing, Cooperative
optimization produces more than independent optimization
would produce.
Case 2: A System with One Retailer and N-1
Supplier
Now in this case, One Retailer and N-1 Suppliers are
involve.
In this, supply chain consisting of one retailer, and
retailers supplier and retailers suppliers supplier and so
on.
In this case Retailers linear demand curve given as;

Where (a, b>0 )
(Retailer faces a deterministic linear demand curve of the form of P
1
)
..........(10) P a bQ =
Supplier
Now let represent the system profit under
coordination pricing and represent the system profit
under uncoordinated pricing.

Let C
i
be the marginal cost of firm i (i=1,2,3N)
and where i = 1 denotes the retailer, i = 2 denotes
the retailers supplier and i = 3 denotes the retailer's
suppliers supplier.
C
H
U
H
Supplier
denote the price charged by firm i.

is a decision variable and represent the quantity
sold to the final customer.

represent the optimal quantity for profit
maximization.
i
P
*
Q
Q
Supplier
For Coordinated Supply Chain
If there is coordination among the N firms, all the N
firms are considered as one organization,
Thus Marginal revenue;

and Marginal Cost given as;

Retail Price given as;

( ) ( )
2
2
..............(11)
P Q aQ bQ a bQ
Q Q
c c
= =
c c
arginal cost=
i
i
M C
1
P
1
( ) / 2 .......(12)
i
i
P a C = +
With the exception of firm N(the most upstream member of

supply chain), C
i
doest not include the purchase price.
Let Pi denote the pricing charge by firm i.
The decision variable Q represents the quantity sold to the final
customer and Q* represents the optimal(profit-maximizing)
quantity.
The retailer faces a deterministic linear demand curve of the form
of
P
1
=a bQ

( )
1
equatingMarginal revenue 2 with marginal cost ( ),
2
TheValueof Qputtinginequation(10)
2 2
i
i
i i
a bQ C we get
a C
Q
b
a C a C
P a bQ a b
b
=
| | +
= = =
|
|
\ .

Supplier
For Coordinated System, Value of eq. (12) putting in eq.
(10);

So, total Profit given as;

C
H
( )
( )
*
2
2
i
i
i
i
a C
a bQ
a C
bQ a
+
=
+
=
*
1
( ) .........(14)
c i
i
Q P C H =
*
1
............(13)
2
N
i
i
Q a C
b
| |
=
|
\ .
th
th
*
Marginal Cost For i Firm
Price Charged by i Firm
Quantity Sold
Optimal Quantity For Profit Maximization
i
i
C
P
Q
Q
=
=
=
=
Supplier
From equation 13 and 14;

Total profit in coordinated Supply Chain;

1
2
1
( )
2
1
2 2
1
2 2
1
4
N
c i i
i
i
N
i
i i
i
i
N
i
i
i
i
N
i
i
a C P C
b
a C
a C C
b
a C
a C
b
a C
b
| |
H =
|
\ .
| | +
| |
=
|
|
|
\ .
\ .
| |
| |
=
|
|
|
\ .
\ .
| |
=
|
\ .

2
1
1
..............(15)
4
N
c i
i
a C
b
=
| |
H =
|
\ .

Supplier (For Uncoordinated Supply Chain)
The tier 1 supplier(i=2) knows that the retailer will chose the
quantity by equating its marginal revenue with its marginal cost.
Marginal revenue= P
1
= a-2bQ
Marginal cost =C
1
+P
2
where C
1
= marginal cost of retailer

a-2bQ = C
1
+P
2
P
2
=( a-C
1
)-2bQ

C
2
= marginal cost of retailers supplier
C
3
= marginal cost of retailers suppliers supplier
Continuing in this fashion up the supply chain, we get
1
1
1
2 ...............(16)
where m=1,2,3......N and where m is m firm
m
m
m i
i
th
P a C bQ
=
| |
=
|
\ .
( ) ( )
2
2 2 1
1
2 3 2
1 3 2
3 1 2
3 1
3 1 2
Marginal revenueof 2
( ) 4
Marginal cost
( ) 4
[ ( )] 4
[ ( )] 2
P PQ a C Q bQ
Q Q
a C bQ
P P C
a C bQ P C
P a C C bQ
P a C C bQ
c c
( = =

c c
=
= +
= +
= +
= +
Supplier
Putting m=N+1;

1
1
1
1
*
1
2
0
2 0
1
.................(17)
2
N
N
N i
i
N
N
N
i
i
N
i
N
i
P a C bQ
but P
a C bQ
Q a C
b
+
=
+
=
=
| |
=
|
\ .
=
| |
=
|
\ .
| |
=
|
\ .
System contain One

Retailer and N-1
Suppliers therefore
P
N+1
=0
Supplier
The Profit of Firm m equals;

Putting all values;

*
1
( )
m
U m m m
Q P P C
+
H =
P
m+1
=
1
2
m
m
i
i
a C bQ
=
| |

|
\ .
1
* 1 * *
1 1
2 2
m
m m
m m
U i i m
i i
Q a C bQ a C bQ C
= =
(
(
| | | |
H =
(
( | |
\ . \ .

P
m
P
m+1

{ }
1
* 1 * *
1 1
2 2
m
m m
m m
U i m i
i i
Q a C C bQ a C bQ
= =
(
(
| | | |
H =
(
( | |
\ . \ .

Supplier

From above equations;

{ }
1
1 1
m m
i m i
i i
a C C a C
= =
| | | |
=
| |
\ . \ .

* 1 * *
1 1
2 2
m
m m
m m
U i i
i i
Q a C bQ a C bQ
= =
(
(
| | | |
H =
(
( | |
\ . \ .

( )
* * 1 *
2 2
m
m m
U
Q bQ bQ
H =
* 1 *
2 (2 1)
m
m
U
Q bQ
H =
( )
2
1 *
2
m
m
U
b Q
H =
Supplier
Putting Value of from equation (17);

Profit For firm m;
2
1
1
1
2
2
m
N
m
U i
N
i
b a C
b
=
| |
| |
H =
|
|
\ .
\ .
*
Q
2
1
2
1
2
2
m
m
N
U i
N
i
a C
b
=
| |
H =
|
\ .
2
2 1
1
2
...........(18)
4
m
m N
N
U i
i
a C
b
+
=
| |
H =
|
\ .
Multiplying
by 4 in
numerator &
denominator
Similarly total profit for Supply Chain;

Putting values of these profits;
1 2
..........
m
U U
H = H + H + + H
Supplier
2 2
2 2 3 2
1 1
2 2
4 2 2 1
1 1
2 2
4 4
2 2
........
4 4
.............(19)
N N
N N
U i i
i i
N m N
N N
i i
i i
a C a C
b b
a C a C
b b

= =
+
= =
| | | |
H = +
| |
\ . \ .
| | | |
+ +
| |
\ . \ .

( )
( )
2
2 2 3 2 1
1
2
2 2 0 1 2 1
1
2
1 1
2 2
1
2
2 2
1
2
2 2
1
1
2 2 ... 2
4
1
2 2 2 2 ... 2
4
1 2 1
2
4 2 1
1
2 2 1
4
1
2
4
N
N N N
U i
i
N
N N
i
i
N
N
N
i
i
N
N N
i
i
N
N N
i
i
a C
b
a C
b
a C
b
a C
b
a C
b
t

=

=
+
=
+
=
| |
( = + + +
|

\ .
| |
(
= + + + +
|

\ .
(
| | | |
=
( |
|

\ .
\ .

| |
(
=
|

\ .
| |
=
|
\ .
2 2
2
2 2 2
1
2
1
2 2
4
N
N
N N
i
i
a C
b

=
(

| |
( =
|

\ .
2 2
2 2 2
1 1
2
2 2 2
1
2 2 2
2
2 2 2
2
2
2 2
SystemProfit Ratio
1 1
2 2
4 4
1
2 2
4
4 4
1
1 2 2
2 2
4 4
2 2
2 2
2 4 2 4
4 2 4
2 2 1
2 1
C U
U
N N
N N
i i
i i
N
N N
i
i
N N
N N
N N
N N
N N
N
N N
N
a C a C
b b
a C
b

= =

=

H H
=
H
| | | |
(
| |

\ . \ .
=
| |
(
|

\ .
+
(

= = =
(

+
=

+
=

N-1 Supplier
sum series will become geometric series and after
summing this series by geometric sum;

System Profit Ratio in Coordinated SC vs. Uncoordinated
SC is

U
H
2
2 2 2
1
1
(2 2 ) ......(20)
4
N
N N
U i
i
a C
b

=
| |
H =
|
\ .
2 2
2 2 1
Profit Ratio
2 1
N N
C U
N
U
H H +
= =
H
Lot sizing problem with stochastic
demand in a News-vendor
environment
Coordinated Lot Sizing with Stochastic
Demand in Newsvendor Environment
Problem arises when a retailer must make a one-time
purchase of a single product to meet uncertain
demand.

Problem of deciding the size of a single order that
must be placed before observing demand when there
are overage and underage costs.
Let O = the overage cost per unit
U = the underage cost per unit
F(Q
*
)= U/(O+U),
where F(x) = Cumulative distribution function over random
demand X.
P
s
& P
r
be the price charged by Supplier and Retailer.
C
s
& C
r
be the manufacturing cost for supplier &
retailers cost per unit
Q
c
*
& Q
u
*
optimal quantity in coordinated and
uncoordinated system respectively.
For Uncoordinated SC
If retailer acts independently, its underage and
overage costs are;

Where V = salvage value of any unsold unit

( ) ...............(21)
u r r s
U P C P = +
.............(22)
u r s
O C P V = +
( ) | | ( )
;
( ) .....(23)
u u u r r s r
Ratio
U O U P C P P V + = +
For Coordinated SC
And if the firm coordinate in supply chain, the
systems underage and overage costs are;

( )
...........(25)
c r s
O C C V = +
( )
...........(24)
c r r s
U P C C = +
( ) | | ( )
;
( ) .....(26)
c c c r r s r
Ratio
U O U P C C P V + = +
f(x) is the density function of random demand X.
In independent optimization, total profit ;

*
( )
u
Q H
| |
*
*
*
* * * *
0
*
0
( ) ( ) ( ) ( ) ( )
( ) ( ) ........(27)
u
u
u
Q
u u u u u u s s u
Q
Q
r r s u r
Q xU Q x O f x x Q U f x x P C Q
P C C Q P V F x x
( H = c + c +

= c
} }
}

Expected profit:

f(x) = density function of random demand x

( ) ( ) ( )
0
( ) ( )
Q
Q
P Q xU Q x O f x dx QUf x dx
= +
} }
( )
( )
( )
( )
( )
0 0
(1) 2 3
0
*
0 0
*
0 0
* *
( ) ( ) ( ) ( )
0 ( ) ( )
( ) ( ) ( )
( ) ( )
( )
( )
Q Q
Q
Independent of Q
Q
Q
Q Q
Q
Q
P Q x U O f x dx OQf x dx QUf x dx
P Q
Now O f x dx Uf x dx
Q
OF Q Uf x dx Uf x dx Uf x dx
OF Q U f x dx U f x dx
P Q
OF Q U UF Q f
Q
= + +
c
= +
c
= + +
= +
c
= +
c
} } }
} }
} } }
} }
0
( ) 1 x dx
| |
=
|
\ .
}
For maximum Profit:

F(Q*) is the cumulative distribution function over random
demand x.

( )
( )
* *
*
( )
0
0 ( )
( )
P Q
Q
OF Q U UF Q
U
F Q
O U
c
=
c
= +
=
+
In case of Un Coordinated
Optimal quantity = Q
u
*
Underage cost per unit = U
u
= P
r
-C
r
-P
s
Overage cost per unit = O
u
= C
r
+ P
s
V

So

In case of Coordinated
Optimal quantity = Q
u
*
Underage cost per unit = U
c
= P
r
-C
r
-C
s
Overage cost per unit = O
u
= C
r
+ C
s
V

*
( )
u
u
u u
U
F Q
O U
=
+
*
( )
c
c
c c
U
F Q
O U
=
+
Un coordinated system:
The total profit

( )
( )
*
*
* *
*
*
* * * *
0
Supplier profit
Retiler profit
* * *
0 0
*
0
( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( )
( ) ( )
u
u
u u
u
u
Q
u u u u u u s s u
Q
Q Q
u u u u u u s s u
Q
Q
u u u
Q xU Q x O f x x Q U f x x P C Q
x U O f x x O Q f x x Q U f x x P C Q
Q U O x f x
( H = c + c +

= + c c + c +
H = + c
} }
} } }
}
*
*
* * *
0
4
1 2
3
( ) ( ) ( )
u
u
Q
u u u u s s u
Q
Part
Part Part
Part
x Q O f x x Q U f x x P C Q

c + c +
} }
Now integrating by parts

Part-1

.
du
uvdx u vdx vdx dx
dx
(
=
(

} } } }
( )
( )
( ) | |
( )
( ) ( )
*
* * *
*
*
*
*
0
0 0 0
0
0
* *
0
* *
0
( )
( ) . ( )
( ) ( )
( ) ( )
( ) ( )
u
u u u
u
u
u
u
Q
u u
Q Q Q
u u
Q
Q
u u
Q
u u u u
Q
u u u u u u
U O x f x x
x
U O x f x x f x x dx
x
U O xF x F x dx
U O Q F Q F x dx
U O Q F Q U O F x dx
+ c
(
(
c
(
= + c c (
c
(
(

= +
`

)
(
= + (
(

= + +
}
} } }
}
}
}
Part 2

Part 3

( )
*
*
0
* *
( )
u
Q
u u
u u u
O Q f x x
O Q F Q
= c
=
}
*
* *
*
*
*
*
0 0
*
0 0
* *
( )
( ) ( ) ( )
( ) ( )
1 ( )
u
u u
u
u
u u
Q
Q Q
u u
Q
Q
u u
u u u
Q U f x x
Q U f x x f x dx f x dx
Q U f x dx f x dx
Q U F Q
= c
(
= c + (
(

(
= (
(

( =

}
} } }
} }
Putting all the value, we get

( ) ( ) ( )
( )
| | ( ) ( )
( ) ( )
( ) ( )
*
*
*
*
* * * * *
0
* * *
* * * *
0
*
0
*
0
( ) ( ) ( )
1 ( )
( ) ( )
0 ( )
( )
putting the va
u
u
u
u
Q
u u u u u u u u u u
u u u s s u
Q
u u u u u u u u u u s s u
Q
u u u u s s
Q
u s s u u u
Q U O Q F Q U O F x dx O Q F Q
U Q F Q P C Q
U O U O Q F Q U O F x dx U Q P C Q
U O F x dx Q U P C
U P C Q U O F x dx
t = + +
( + +

= + + + +
= + + +
= + +
}
}
}
}
( ) | | ( )
*
u u
* *
0
lueof U andO , weget
( )
u
Q
u r r s u r
Q P C C Q P V F x dx t =
}
For coordinated:
The profit

( )
*
*
* *
*
* * *
0
* *
0 0
1 2
3
( ) ( ) ( ) ( )
( ) ( ) ( )
c
c
c c
c
Q
c c c c c c
Q
Q Q
c c c c c c
Q
Q xU Q x O f x x Q U f x x
U O xf x x Q O f x x Q U f x x
( H = c + c

= + c c + c
} }
} } }
Now integrating
Part 1

Part 2

( )
( )
( ) ( )
( ) ( ) ( )
*
* * *
*
*
0
0 0 0
* *
0
* *
0
( )
( ) ( )
( )
( )
c
c c c
c
c
Q
c c
Q Q Q
c c
Q
c c c c
Q
c c c c c c
U O xf x x
x
U O x f x x f x x dx
x
U O Q F Q F x dx
U O Q F Q U O F x dx
= + c
(
(
c
(
= + c c (
c
(
(

(
= + (
(

= + +
}
} } }
}
}
*
*
*
0
* * *
0
( )
( ) ( )
c
c
Q
c c
Q
c c c c c
Q O f x x
Q O f x x Q O F Q
= c
= c =
}
}
Part 3

* *
* *
*
*
* *
*
0 0
*
0 0
* *
( ) ( )
( ) ( ) ( )
( ) ( )
1 ( )
c c
c c
c
c
c c c c
Q Q
Q Q
c c
Q
Q
c c
c c c
Q U f x x Q U f x x
Q U f x x f x x f x x
Q U f x x f x x
Q U F Q

= c = c
(
( = c + c c
(

(
( = c c
(

( =

} }
} } }
} }
Thus the profit is

( )
( )
( )
( )
( )
( )
( )
( )
( ) ( )
*
*
*
* * * *
0
* *
*
0
* *
0
( )
1
( )
,
( )
c
c
c
Q
c c c c c c c c c
c c c
Q
c c c c
c c
Q
c r s r c r
U O Q F Q U O F x dx Q O F Q
Q U F Q
U Q U O F x dx
Putting thevalueof U and O we get
Q P C C Q P V F x dx t
= + +
+
= +
=
}
}
}
Now the profit change due to coordination:
( ) ( )
( ) ( )
| | ( )
( )( ) ( )
( ) ( ) ( )
( )( )
*
*
*
*
*
*
* *
*
0
*
0
* *
* * *
* *
( )
( )
( )
( ) . ( )
c
u
c
u
c
u
c u
Q
r s r c r
Q
r r s u r
Q
r s r c u r
Q
Q
r r c u c
Q
r r s
r c u
r
Q Q
P C C Q P V F x dx
P C C Q P V F x dx
P C C Q Q P V F x dx
Now
P V F x dx P V Q Q F Q
P C C
P V Q Q
P
t t t A =
(
( =
(

(
(
(

(
( =
(

(
(
( s

(

s
}
}
}
}
V
| |
|
\ .
( ) ( )( )
( )( ) ( )
*
*
*
*
* *
* *
1
2
( ) ( )
( ) ( )
2 1,
0
This equation proves that pr
c
u
c
u
Q
r c u r r s
Q
Q
r r s c u r
Q
Part
Part
P V F x dx Q Q P C C let eqn A
Now
P C C Q Q P V F x dx let eqn B
Here Part Part fromeqn A
thus
t
t
(
( s
(

(
( A =
(

s
A >
}
}
ofit in coordinated supply chain is always more
than profit of uncoordinated supply chain.
So the coordination always leads to a improved profit
The order size will be increased if there is
coordination between to firms because C
s
<P
s
.

The suppliers profit increase with joint
optimization, but retailers profits decrease.

Therefore some profit of supply chain should be
redistributed towards the retailer.
If demand is uniformly distributed between a and
b, the expected profit for the uniform distribution
with ordering quantity Q;

( )
1
0
for a x b
f x
b a
for other x
s s
.

( )
( )
Pr ( ) ( )
( )
1
( ) ( )
( )
Q b
a Q
Q
a
x x
a a
ofit xU Q x O f x dx QUf x dx
UQ U O F x
Now
F x f x dx dx
b a
x a
F x
b a
= + (

= +
= =
} }
}
} }
In case of Coordinated SC
( ) ( )
( )
( )
( )
( )
( )
( )
2
2 2
2
2 2
2
2
( )
2 2
Q
a
Q Q
a a
Q
a
x a
Q QU U O dx
b a
U O
QU xdx adx
b a
U O
x
QU a Q a
b a
U O
Q a
QU aQ a
b a
U O
Q a
Q QU aQ let eqn c
b a
t
t
= +
(
+
=
(
(

(
+
| |
( =
|
(
\ .

( +
| |
= +
( |
\ .

+
(
= +
(

}
} }
For optimal condition

( )
( )
( )
( )
*
*
*
*
2
*
Now putting the value of Q in equation c, we get
b-a
( ) =aU+
2 U+O
U
F Q
O U
Q a U
b a O U
U b a
Q a
O U
U
Q t
=
+
=
+
= +
+
Example: Lot Sizing with Stochastic
For Numerical example:
In this example we can use MS Excel commands
to solve this problem.

Commands involved in MS Excel for solving this
problem are;
NORMSDIST
NORMDIST
NORMINV
Derivation of formulas used in profit calculations
when doing numerical examples.
( )
( )
( )
( ) ( )
( ) ( )
( ) ( ) ( ) ( ) ( )
( ) ( ) ( ) ( )
( ) ( ) __
Q
Q
Q Q Q Q
Q
Q Q Q
Q Q
xU Q x O f x dx QUf x dx
O U xf x dx QO f x dx QU f x dx f x dx f x dx
O U xf x dx QO f x dx QU f x dx f x dx
O U xf x dx Q O U f x dx QU
t

= + (

(
= + + +
(
(

(
= + +
(
(

= + +
} }
} } } } }
} } } }
} }
_( ) let eq D
For coordinated case
Let demand density function normally distributed with mean ,
standard deviation

So

( )
2
2
2
1
( )
2
x
f x dx e

o
o t

=
let
x
z
dz dx
o
o
=
=
Now putting the value of f(x) and dx in equation D, we get
( ) ( )
( ) ( )
( )
( )
( )
* 2
* 2
* * 2 2
3
1 2
2
2
2 2
*
( ) ( )
1
1
( ) ( )
2
1
( )
2
1 1
2 2
( )
Q Q
Q z z
z z
z z z z
s
O U xf x dx Q O U f x dx QU
Part
O U xf x dx O U z e dz
O U z e dz
O U e dz z e dz
O U F z
t
o o
o t
o
t
o
t t

= + +
(
+ = + +
(
(

(
= + +
(
(

(
= + +
(
(

= + +
} }
} }
}
} }
* 2
2
1
2
z z
ze dz o
t

(
(
(

}
The
( )
* 2
2
2
2
1
2
* *
2
1
2
1
( ) ( )
z z
Q
w
s
s s
Now
ze dz
z
let w
dw zdz
Q
e dz f
SothePart
O U F z f z
o
t
o
| || |
| |
\ .\ .
=
=
| |
=
|
\ .
(
= +

}
}
* 2
2
2
( ) ( )
1
( )
2
( ). ( )
Q
z z
Part
Q O U f x dx
Q O U e dz
Q O U F z
o
o t
= +
= +
= +
}
}
Thus the total profit

( )
( )
( )
* * *
* *
*
* *
1 2 3
( ) ( ) ( ). ( )
, 0,1, 0
.
s s s
part part part
O U F z f z Q O U F z QU
Q Q
O U NORMSDIST NORDIST
Q
Q O U NORMSDIST Q U
t
o

o
o o
o
= + +
( = + + +

(
| | | |
= +
( | |
\ . \ .

| |
+ +
|
\ .
Numerical Example
Uncoordinated and coordinated supply chain:

1. Demand function is normally distributed
2. Demand function is uniformly distributed between a to b.
Example 1

Demand is normally distributed.
Mean () = 1000 units
Standard deviation() = 500 unit
Supplier manufacturing cost (Cs)= $20
Retailer supplier cost (Cr) = $20
Retailer price of product (Pr) = $100
Price charged by supplier (Ps) = $50
Product salvage value V = $10

Solution:
U
u
= Pr Cr Ps = 100-20-50 =$30
O
u
= Pr Cr Ps = 20 + 50 - 10 = $60
U
c
= Pr Cr Cs = 100 20 20 =$60
O
c
= Cr + Cs V = 20+20-10 =30

Using Excel
Q
u
*= NORMINV(1/3, 1000,500) = 784.63= 785
Using table, in cumulative std. normal , z value corresponding to
(FQ
u
*=0.333) is -0.43

*
30 1
( ) 0.333
30 60 3
u
u
u u
U
F Q
O U
= = = =
+ +
*
*
*
1000
0.43
500
785
u
u
u
Q
z
Q
Q
=
~
Now in case of uncoordinated
Retailer Profit

( )
( )
( ) ( ) ( )
( )
2
2
* * * *
u u
* *
u
( ) ( )
1
using ( )
2
Finally we will reach to the following formula
= O ( ) ( ) O
O
Q
u u u
Q
x
u s s u s u
u
xU Q x O f x dx QU f x dx
f x e
x
z
U F z f z Q U F z Q U
Q Q
U NORMSDIST NORMDIST
o
o t
o
t o

o
o o
+ (

=
=
( + + +

| | | |
= +
|
\ . \ .
} }
( )
*
* *
* *
.
Note here F = Cumulative distribution function =
u u u
Q
Q O U NORMSDIST Q U
Q Q
NORMSDIST
o

o o
(
( |

| |
+ +
|
\ .
| | | |
| |
\ . \ .
( )
2
*
*
*
2
( ) StandardNormaldistributionfunction
1
2
s
z
s
f z
Q
NORMDIST
f z e
o
t

=
| |
=
|
\ .
| |
= |
|
\ .
Now
Q* = 785

*
*
785 1000
0.43
500
Q
z

o
=
* *
* *
( ) ( ) 0.333598
( ) ( ) 0.363714
s
s
So
F z NORMSDIST z
f z NORMDIST z
= =
= =
So
U
= (30+60) [1000*0.333598 500*0.3]-
785*(60+30)*0.333598+783*30
= $13638 ( Retailer profit )

Supplier profit = (Ps - Cs)Q* = (50 - 20)*785 = 23550

Total channel profit = Retailer profit + Supplier profit
= 13638 + 23550 = $37188

For Coordinated

Using table, z value corresponding to [F(Q*)=2/3 is 0.43.
So

( )
( )
*
*
60 2
60 30 3
Using Excel
2
Q ,1000, 500 1215
3
c
U
F Q
O U
NORMINV
= = =
+ +
= =
*
*
*
1000
0.43
500
1215
Q
z
Q
Q
=
=
Similarly in case of profit formula for channel,

( )
( )
( )
( )
( )
* *
* * *
* *
* * *
*
( ) ( )
( )
For calculation in Excel
( ) ( )
( )
1215 1000
0.43
500
T c c s s
c c s c
T c c
c c c
O U F z f z
Q O U F z Q U
O U NORMSDIST z NORMDIST z
Q O U NORMSDIST z Q U
Nowz
t o
t o
(
= +

+ +
= +
+ +
= =
T
= (60+30)[1000 NORMSDIST(0.43)- NORMDIST(0.43)]
- 1215 (60+30) NORSDIST(0.43) + 1215*60

T
= $43579

Now =
c
-
U
= 43579 37188 = $6391

% Increase in profit due to coordination
= (6391/37188)*100 = 17.18%

If the demand is uniformly distributed between 5000 to 15000
unit.
Case 1: Uncoordinated
a = 5000, b= 15000
U
u
= $30 O
u
= $60

*
*
( )
30
5000 (15000 5000)
30 60
8333
u
u u
U
Q a b a
U O
Q units
= +
+
| |
= +
|
+
\ .
=
So retailer profit:

( )
( )
( )
( )
2
2
2
15000 5000 30
30 5000
2 30 60
$200000
u
u
u u
b a U
U a
U O
(
= +
(
+
(

(
= +
(
+
(

=

Supplier profit =
( Ps Cs ) * Q
u
* = (50 - 20) * 8333 = $249990

Total channel profit
= retailer profit + supplier profit = $200000 +$249990 = $449000
Case- II: Coordinated
U
c
= $60, O
c
= $30

Q* = 5000 + (15000 - 5000) * [60 / (30+60)] = 11667 units

( )
( )
( )
( )
2
2
Total profit
2
15000 5000 60
5000 60 $500000
2 60 30
c
c
c c
b a U
U a
O U

= +
+

= + =
+
So change in profit

=
c
-
u
= $500000 - $449000 = $51000

% increase (due to coordination in Supply Chain)
= ( /
u
)*100 = (51000/449000)*100 = 11.35%
Summary
In supply chain management, communication and
coordination can greatly enhance the effectiveness
of Supply Chain.

Through coordination we can improve total profit
of supply chain management, inventory control,
pricing control and demand forecasting.
In SCM, the actions of rational managers of firms
independently create natural inefficiencies.
By coordination and communication we can
reduce these inefficiencies.
As with any group of entities, when all member
effectively integrated their efforts, synergies may
emerge and SC profit also increase.

5 Uncoordinated Supply Chain

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5 Uncoordinated Supply Chain

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Uncoordinated Supply Chain

where d=distance traveled by customer

With the exception of firm N(the most upstream member of

Case 2: A System with One Retailer and N-1

System contain One

Case 2: A System with One Retailer and

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