Question

Consider a supply chain consisting of a part supplier, a manufacturer (mfr.), the retailer, and the customer. Suppose the customer’s reservation price of the machine is $200. The retail price is $150. The wholesale price between the mfr. and the dealer is $100. The dealer’s other retail-related cost is $20. The mfr. produces the product at $30 as the production cost and pays the supplier $20 to buy the parts needed. The supplier’s production cost is $10.

Q1. Please calculate each supply chain member’s profit/surplus, and the supply chain surplus.

Q2. What is the relationship between the supply chain surplus and all members’ profit/surplus?   

Answer 1

Answer 1) Supply Chain members

• Supplier
• Manufacturer
• Retailer
• Customer

Each member's profit/surplus is calculated by subtracting the cost incurred by him from the revenue he gets.

• Supplier's Surplus = Selling price to manufacturer - Cost of producing the parts.

​​​​​​​Supplier's Surplus = $20 - $10 = $10.

• Manufacturer's Surplus = Selling price to Retailer - Cost of production - cost of buying the parts from supplier

Manufacturer's surplus = $100 - $30 - $20 = $50

• Retailer's surplus = Selling price to Customer - cost of buying from manufacturer - retail related costs

Retailer's surplus = $150 - $100 - $20 = $30

• Consumer surplus = Customer's reservation price - Price of buying the product from retailer

Consumer surplus = $200 - $150 = $50

Note: Customer's reservation price is the maximum price a Consumer wants to spend on a product and if he gets the product at a lower price than the reservation price then the Difference is his surplus.

Total Supply Chain Surplus

Total Supply chain surplus is the total surplus generated by all the members of the supply chain.

Supply chain surplus = Value for the customer - all the costs incurred in the production and delivery of the product through all stages of supply chain.

Value to the customer = Customer reservation price

All the production and delivery cost incurred by members throughout the supply chain

= Cost of production of parts by the supplier + cost of production by manufacturer + Retail related cost incurred by retailer

= $10 + $30 + $20 = $60.

Supply chain surplus = $200 - $60 = $140.

Answer 2) The relationship between Supply Chain Surplus and all member's surplus.

Supply chain surplus and all Member's surplus are related to each other. Supply Chain Surplus is the sum of all member's surplus in the supply chain. If you add up the surplus of every member , it will be equal to the total Supply Chain Surplus.

All Member's surplus sum = $10 + $50 +$30 +$50 = $140

Supply chain surplus = $140

The higher the each member's supply chain surplus, higher will be the total supply chain surplus. Supply chain surplus shows the efficiency of the supply chain. Higher the surplus more efficient the Supply chain. Each member's surplus contributes to the supply chain surplus.