A supply chain consists of three partners: the focal OEM with significant bargaining power and two smaller partners, an upstream supplier and a downstream retailer. Each supply chain layer holds some inventories, which are currently managed by the respec-tive partner. The value per unit, average number of units held, as well as the WACC for each supply chain partner are given in the below table:

The OEM as the focal firm is concerned about the high cost of inventory and considers two alternative moves:

(a) Forcing the supplier to accept a vendor-managed inventory (VMI) scheme, where the supplier would retain ownership of inventory until its actual use in production by the OEM. This would effectively shift inventory cost from the OEM to the supplier—possibly in return for a slightly increased sales price per unit supplied.

(b) Pressing both partners to increase forecast transparency and improve order handling efficiency. The OEM expects inventories to decrease to 60,000 (sup-plier), 30,000 (OEM), and 10,000 (retailer), respectively. But these efficiency gains would be possible only after one-time efforts expected to amount to a minimum of 10,000 euros.

Estimate the potential financial effect of these two alternatives for the supply chain and discuss their usefulness.

Transcribed Image Text:

Starting scenario Supplier OEM Retailer Value/unit 5 8 12 Avg. no. of units in inventory 80,000 35,000 10,000 WACC (%) 8 7 8