Consider a supply chain consisting of a heavy machine mfr., its part supplier, i
ID: 414659 • Letter: C
Question
Consider a supply chain consisting of a heavy machine mfr., its part supplier, its dealer, and the customer. The mfr. produces customized machine and uses the dealer to sell to the customer. Suppose the customer's reservation price of the machine is $300,000. The retail price is $250,000. The wholesale price between the mfr. and the dealer is $200,000. The dealer's other retail related cost is $20,000. To produce the machine, the mfr. spends $50,000 as the production cost and pays the supplier $40,000 to buy the parts needed. The parts are not customized and the supplier's production cost is $10,000. What is the supply chain surplus and what is the mfr.'s objective?
Explanation / Answer
Supply chain surplus is measured as the value addition through the entire supply chain. It is calculated by the following formula:
Supply chain surplus = Revenue generated from sale to customer - Total supply chain cost incurred to produce and deliver the product to the customer.
= Retail price - (dealer's retail related cost + mfr production cost + cost paid to buy the parts)
= $ 250,000 - (20,000 + 50,000 + 40,000)
= $ 250,000 - 110,000
= $ 140,000
Mfr's objective = Wholesale price - (mfr production cost + cost paid to buy the parts)
= $ 200,000 - (50,000 + 40,000)
= $ 110,000