Quantity flexibilty contract

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Reference no: EM131231383

Discussed several strategies that allow the manufacturer and retailer to share risk. Consider one that is widely used in the electronics and high tech industries: „Quantity Flexibilty Contract“. Under this type of contract, the retailer pre-orders Q units, but is allowed to change the delivery quantity to any value between L and U closer to the selling season, L<=Q<=U. Typically, L and U are set as percentages of Q; for example, L may equal 0,9Q and U may equal1,2Q. In general L=a* and U=b*Q, for same multipliers a<=1, and b>=1. To provide this quantity, the manufacturer charges the retailer a higher wholesale price.

Let C_Normal denote the wholasale price that the manufacturer charges for a „normal“ contact and C_Flexible denote the wholesale price that the manufacturer charges for a „quantity flexibility“ contract.

List three factors that you will use as the manufacturer to decide how much higher C_Flexible should be in relation to C_Normal. (A qualitative discussion will suffice.)

Reference no: EM131231383

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