A make-to-order supply chain assumes that in a sequential supply chain all the risk involved in the process is transferable to the buyer. The management puts in place mechanisms to transfer some of the risks to the supplier. On the other hand, suppliers bear all the risks in a make-to-stock supply chain. This relationship normally happens when a buyer has a network of suppliers (Blecker, 2006). Again, in a make-to-order supply chain, manufacturers’ produces more than customer demand and hence makes increased profits. On the other hand, in a make-to-stock, the supplier manufactures less than expected customer demand. Thus, the supplier may probably make a loss because production is on demand forecasts, since the buyer might not buy everything produced. In comparison, the two systems contain elements of risk (Blecker, 2006).
Various supply chains enable sharing of risk between the supplier and the distributor. This encourages producers to increase production, hence, increasing profits to both the distributor and the supplier (Blecker, 2006).
Reasons for choice of contract
Risk is a factor influencing the choice of contract in each system. For instance, in payback contracts, the buyer chooses to pay some price for any unit manufactured by the supplier but not bought by the distributor. Evidently, the supplier is motivated to produce more items, because of decrease in associated risk.
Pay- back contracts Advantages
Reduces the suppliers’ risk of production, therefore he can produce more units.
Most of the risk is transferable to the buyer
In this contract, the supplier buys back unsold products for some price. The buyer orders more items since the associated risk is reduced (Blecker, 2006).
Decreases the risk associated with orders, thus the buyer can order for more units (Blecker, 2006).
- There is increased supplier risk (Blecker, 2006).
- Leads to increased logistics costs
Cost- sharing Contracts
One of the main reasons why manufacturers do not produce more units is because of the increased production cost. The supplier will use a system that is less costly. This is achievable through cost- sharing products, where the supplier shares some production cost to the buyer. The buyer will also use the system that is less costly (Blecker, 2006).
The suppliers production cost is reduced
- It requires that the supplier share information about production cost to the buyer (Blecker, 2006).
- The buyer, thereby saving the supplier some production costs, incurs some costs.
Sales revenue is another factor that influences the choice of contract by the system. When the seller decreases the wholesale price, then the buyer can order more items (Blecker, 2006).
- The seller shares some revenue from the buyer (Blecker, 2006).
- The buyer obtains discount on the wholesale price which leads to increased profits
- There is an increase in administrative costs due to strict monitoring of the buyer’s revenue
- Decreased revenue for the buyer due to sharing some part of it with the seller
Type of contract to choose
Personally, I would choose a revenue-sharing contract. This is due to the harmonization of the retailers’ average profit to that of the manufacturers. This is because the supplier assents to decreasing the wholesale price, which receives compensation from the product revenue arising from retailer sales (Blecker, 2006).
In summary, the paper has discussed the contrast between make-to-order and make-to-stock supply chains. The buyer and the seller should know where, when and why to use the contracts in the systems, in order to maximize revenue, reduce production cost and minimize risk.
Blecker, T. (2006). Customer interaction and customer integration. Berlin: Gito.