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Revenue-sharing contract is a supply chain contract in which the retailer pays a low wholesale price than normal for each unit purchased from the manufacturer while the manufacturer also gets a percentage of the revenue the retailer generates from sales. (Revenue Sharing Contract Model, n.d). This type of contract has advantages and disadvantages to both the manufacturer and retailer and among them are,
The manufacturer and retailer benefits by increasing their profit, in that, the retailer is able to buy the required quantity that it needs, which means increasing the quantity it would have ordered making products available for their customers which will increase sales and therefore profit. The manufacturer also benefits because, although it sells at a price below the original wholesale price, increase in quantity ordered by the retailer and sharing in the retailer’s profit offset the losses and enables it to get more profit than without the revenue-sharing contract. The system creates coordination and fosters a relationship between the manufacturer and the retailer.
One disadvantage to the manufacturer is that he/she must be able to verify the retailer profit, which is a cost to the manufacturer, especially when the implementation of information and auditing system is too complex and costly and therefore reduces his/her profit. If demand is driven by the retailer’s effort, the cost of increasing demand through advertising and the like, will reduce the retailer’s profit. The manufacturer still bears some demand risk, because he/she will produce more due to the revenue sharing contract so the retailer will buy as much as he/she desires. Since the retailer is not obliged to buy all the units the manufacturer will produce, he/she may be left with unsold inventory which may be sold at a discount or would be obsolete.
Cost sharing contract is contract in which the buyer pays part of the production cost of the manufacturer to get a discount on the price. This enable s the manufacturer to produce more since he/she does not bear the production cost alone (Simchi-Levi, Kaminsky, and Simchi-Levi, 2008). This type of contract has advantages and disadvantages for both the manufacturer and retailer. Some of the advantages and disadvantages are:
The manufacturer and the retailer benefits from this contract since, the manufacturer is able to produce enough because the cost of production is shared and high production cost is no more an issue for the manufacturer. This allows the retailer to get all that the quantity that he/she needs, which leads to increase in profit for both the manufacturer and the retailer. It again helps to establish a relation between the manufacturer and the retailer and aids the retailer to improve its service level by making products available to its customers, making them happy and therefore continues to do business with the retailer. The manufacturer benefits because, the retailer commits to purchase from the manufacturer once he/she shares in the cost of production.
It increases the retailer’s cost. When sales do not go as forecast or planned, the retailer will be left with unsold stock which will affect its profit.
A revenue-sharing contract is specifically for Make-to-Order production. This is when a manufacturer sells a product at a discounted price, to a retail store for a certain amount of the retail stores’ revenue. This gives the buyer an incentive to buy more goods and an incentive to the manufacturer to make more goods. With Make-to-Order the buyer has more risk. With revenue-sharing the manufacturer takes on some of the risk. If both buyer and manufacturer are sharing production risk, then they both can make better supply chain decisions. (Kaminsky, Simchi-Levi, Simchi Levi, 2008)
Even though there are some great benefits to revenue sharing, there are also downsides for both the retailer and manufacturer. Retailers will need to be open and honest about their revenue. In addition, there could be administrative costs as well as possible IT costs associated with sharing revenue data. Some of the disadvantages for manufacturers are, if there is a lot of competition in the industry, then the retailer’s cost may depend more on the competitors’ actions which could been a loss of revenue for the manufacturer. Retailers could market the product poorly which would also be a loss of revenue for the manufacturer. A store may sell other products more effectively because they will be able to keep all of the revenue. The manufacturer would have to put a lot of trust in the retailer to be sure that they are honest with their sales and that they are actively trying to sell the product. (Supply Chain Coordination with Revenue Sharing Contracts, 2007)
Cost-sharing contracts are specifically for Make to Stock production. This is when the retailer helps with production costs and the manufacturer sells the product to the retailer at a discounted price. This contract should give the manufacturer encouragement to produce more. With Make to Stock production the manufacturer has more of the production risk. With Cost-sharing the buyer takes on some of the risk from the manufacturer. This is another great way that the retailer and the manufacturer can share risk, allowing both to make better supply chain decisions.
There are disadvantages for both the retailer and the manufacturer. If the retailer does not sell more units, then the retailer’s profit will go down because money was spent on the production. Consequently, manufacturers may not like sharing production cost data with the buyer. (Kaminsky, Simchi-Levi, Simchi Levi, 2008)
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