 Welcome back to this session the NPTEL course on supply chain digitization in which we will be looking at this particular topic which is channel structures of the supply chain. We have already had a brief introduction to this idea and how we want to connect this to the concept of platform economy. This was discussed in the last lecture and we had also seen an overview of the kinds of channel structures in supply chains namely the decentralized and centralized channel structures. In this session we are going to continue on the thought process of decentralized versus centralized channel structures and how they can be implemented or how they can be considered when we are looking at making decisions within the supply chain. So, what we will currently do is look at the idea of an example for decentralized and centralized decision making in a news vendor problem. We will look at two types of settings, one is what we call as a deterministic setting and one is what we call as a probabilistic setting. This will set the background or the foundation for understanding the role of coordination which needs to be carried out within supply chains. The kinds of challenges that we can observe when we are trying to coordinate supply chains and this is the idea that we will further connect to the platform economy concept as we go through the various sessions. So, I am going to take only one type of an example and try to extend it in the deterministic setting and probabilistic setting, but there could be a variety of settings and types of channel structures that are possible which we shall also look at when we are considering few examples in relation to the platform economy. So, the example that I am going to pick up right now is not connected directly to the platform economy concept, but it is a very standard case of a news vendor problem. Now, in this particular case going back to what we had discussed earlier supply chain coordination would be related to how do we carry out decision making within the supply chain and there are variety of decisions this is just a list which is not exhaustive there could be many decisions that can be taken up in a supply chain or in a supply network and accordingly these decisions can be centralized or decentralized. For the purpose of this specific session or this lecture I would be considering one of the types of decisions which is namely how much should be ordered. This type of a decision making is actually very common in supply chains namely what should be the lot size that one should order within a supply chain and frequently there can be some kinds of difficulties in deciding upon the right kind of lot size. There is a large amount of literature which talks about how we come across the economic order quantity when it comes to managing our inventory holding costs, inventory carrying costs versus our setup costs or ordering costs or batching costs and how we can come across the economic order quantity. This particular setting does not apply to the kind of example that we are going to right now discuss which is namely the new Spender model. However, the ideas are very similar as we are going to discuss. So, considering this is the type of decision that we are going to look at we shall be analyzing this particular decision making problem within the context of a news vendors decision making problem. Now the example that we have picked is that of a news vendor who is going to supply newspapers to the local market and who has to procure newspapers from a regional supplier who prints these newspapers or distributes these newspapers and carries out various upstream tasks related to this. As you can see it is not necessary that we have just one supplier or one news vendor there could be many, but for the context that we are considering right now and for demonstrating the ideas of centralization and decentralization we are going to consider the presence of one news vendor and one regional supplier. So, what is the scenario? The scenario that we see here is that there is a news vendor who observes market demand for newspapers and then takes decisions on procuring from the regional supplier for selling in the immediate future period. So, the news vendor has observed market demand made an assessment and then takes decisions as to how much should be procured from the regional supplier. So, the question that we were talking about which is how much to order is present over here which is taking decisions on procuring from the regional supplier. And in this particular case what should the news vendor do? In order to operationalize this further we can see that this decision can be denoted as the decision where the news vendor decides the number of units that should be made available to the market basis his or her potential profits. So, that decision that is being taken up by the news vendor is going to be based upon a profit objective. Now, this is not necessary that this is always the case it could be cost based objectives, profit based objectives or the you know the particular supply chain player could also be looking at emission based objectives what could be the kind of decision that lowers emissions to a certain extent so on and so forth. However, for this particular case that we are considering we are going to be looking at just the potential profits as the objective. So, in other words for the news vendor the news vendor would like to decide upon the order quantity that has to be purchased from the regional supplier and make it available in the market with the objective of maximizing their potential profits. For the supplier if we were to look at this as the decision making process being staged chronologically we would see that first the news vendor is deciding how much to order and places this order to the regional supplier so this is the first step which happens. Now the supplier gets to know what is the order that the news vendor wants this is the second step and here the supplier actually can take a decision whether they accept this order and supply to the news vendor so basis this the supplier can actually choose whether to supply to the news vendor or not and again the decision making for the supplier would be based upon their profits or their costs and we are going to see how these costs and profits are going to be calculated and impact the decision making. Now if we were to look at this particular case this is an example of a single period decision making which means this is a one time order that the news vendor is actually placing that is why this is a very popular problem if the news vendor has to take a decision for one particular instance then what would that decision be is the question that we are trying to address over here and what would be the impact of this decision on the entire supply chain that is what we are trying to analyze over here and we will consider both the decentralized setting as well as the centralized setting. So in order to do this the first and foremost thing that we need to look at is the news vendors problem because the news vendor is trying to place the order to the regional supplier. So what do we do over here the first thing that we need to know is what are the revenues and costs for the news vendor. So they could be marginal revenues they could be marginal cost or fixed cost whatever it is we need to understand what are the various payoffs as well as cost that the news vendor is actually going to incur and whether it is worthwhile being in this particular business setting. So for that purpose I am just taking a simple example let us say that for the news vendor the news vendor is aware that if the newspaper is sold in the market there is an earning of gross earning as we can say of 30 rupees per unit that is sold that is for every newspaper the price which is there in the market we can also call this as the retail price this is going to be 30 rupees. In order to do this the news vendor might actually incur a cost for distribution let us say this cost relates to the number of times that the newspaper boy is sent out to various houses or it could be related to the cost associated with transportation whatever efforts related to managing the distribution this is also considered to be as a variable cost over here. Now remember this is just an example it is not necessary that we have such costs always but it is quite possible that we have cost associated with distribution. So the cost associated with distribution we take as 10 rupees per unit. So the net you know payoff that the news vendor gets just by selling and distributing the newspaper would be 20 rupees per unit but at the same time the newspaper has to be procured by the news vendor from the supplier so it does not come for free. So he is also paying or she is also paying 10 rupees per unit to the supplier. Now this is where things get a bit interesting. One of the observation that we can make is that the news vendor actually makes a marginal profit of 10 rupees per unit provided the number of newspapers that are being sold and the number of newspapers that are purchased is one and the same. So let us say you have procured from the supplier 100 newspapers and the demand in the market was also 100 then your marginal profit for selling newspapers would be 10 rupees per unit but this is not always the case if the demand and supply are not matching and this is what we are going to also examine shortly. So what is important over here the knowledge of what is market demand is actually required to determine how much should be purchased given that the news vendor would like to improve their profits right. So this is ultimately the most important piece of information given that we know what are our costs, what are our unit costs, what are our unit revenues that we are going to incur whether it is through our own activities of let us say distribution or through the procurement process that is from the supplier and the kind of revenues that we can earn which is a retail price. So given this information and given the fact that you want to maximize your profit you would also need to know whether the demand is enough for you or not and accordingly you can actually take a decision as to how much should be purchased. Now let us consider this same problem and look at the perspective of the regional supply. So here we examine the regional suppliers problem the supplier we consider has knowledge of his or her marginal revenues and costs which would look like this. We have already seen that there is a wholesale cost that is incurred by the news vendor this would nothing be the wholesale price that the regional supplier is actually charging for this paper in the market. Now you can observe over here the retail price of the product is actually 30 rupees but the wholesale price is 10 rupees there is a difference of nearly 20 rupees between the retail price and the wholesale price and you can also observe that this is happening because there is an absorption of costs that is occurring within the supply chain namely the distribution cost for the news vendor and for the regional supplier there are also other costs that are incurred namely the manufacturing and operating costs which we can see are also marginal in nature that is variable in nature which is rupees 5 per unit. So if I were to consider the regional suppliers net payoffs it would be 5 rupees per rate 10 minus 5 if there were no other costs which were going to be present within the system. But if we observe over here the regional supplier is also facing some additional costs which is fixed costs for the facility where the manufacturing is being carried out and in the case of the supplier we can say that this is where the printing has been carried out but it could you know like I mentioned earlier we could have more tiers above the regional supplier as well which could be printing and then the regional supplier could be packaging. Right now in this particular case I am assuming that the manufacturing starts at the regional suppliers end and ends over there. So what we observe here there is some amount of fixed costs which are going to be operated. Now these fixed costs as you can see these are not going to be related to the number of units that we are manufacturing or printing and one of the assumptions that we are making over here is that we can print as many newspapers as possible. Of course this is not realistic there would be limitations on that as well. There could also be a requirement that there should be some minimum amount of printing that is carried out and there would be a limitation as to the maximum amount of printing that could be carried out which is essentially what we call as a capacity limitation. But for the requirement of this problem I am keeping this quite simple and assuming that we can print as much as possible and we can obviously add all of those constraints and limitations in order to have a better understanding of this problem. So if we were to consider this setting for the regional supplier if we were to observe the regional supplier actually has a break even point of 30,000 newspapers to be printed. Why is that so? The reason is that the regional supplier has to recover the fixed cost for the facility that has to be operated irrespective of how many newspapers are to be printed in that one particular batch. Remember this is a single period setting. So in that single period we are assuming that fixed cost is going to be 150,000. So this single period could be a year in which things are going to be procured but as you can think in the case of a news vendor the you know the single period could be as small as one day. So naturally over here if the regional supplier actually has to be profitable at least a minimum of 30,000 newspapers have to be printed. So you can observe that we did not have to give a minimum threshold that minimum threshold is being calculated basis the kind of revenues that can be generated by the supplier from the news vendor and also the cost being incurred in terms of variable cost as well as fixed cost. So the minimum threshold we have already calculated to be 30,000 newspapers. Another observation that we can make is once you have started printing more than 30,000 newspapers the regional supplier is going to earn a marginal profit of 5 rupees per unit. So what would be the regional suppliers intentions in order to function within this particular value chain? Definitely the regional supplier would not want to print less than 30,000 newspapers if possible because then it would not be profitable. So there is definitely a threshold for the regional supplier. So we can see that the regional supplier actually has motives to not print as well and if you recall in the initial discussion I was mentioning that the supplier can actually choose not to function within this business partnership. So the news vendor might order let us say 1000 newspapers. Now the regional supplier is going to look at their fixed cost, operating cost and the wholesale price and decide that this is not viable. So the regional supplier might actually want that the news vendor orders more than 30,000 and since we do not have any upper limit on how much manufacturing can be carried out at the supplier side this can go to as much as possible which is over here 30,000 units or more. So if we were to decide what is the decision of the regional supplier this would be related to the knowledge of the order size placed by the news vendor. So now let us try to understand this particular case in the context of a deterministic setting. Now what do we mean by deterministic setting? A deterministic setting is one where we are able to gauge the value of the variable with complete confidence and in some cases we can also say that the value of the variable can be determined maybe through a formula which is a function of other parameters so on and so forth. Typically in supply chain management problems or problems related to demand analysis within supply chain when we speak about deterministic settings for demand as the variable of interest for us. In such cases the demand we can characterize either as a constant value that would be deterministic because we know what is the value or we can say that the demand is going to be a function of another parameter. Let us say the demand is going to be a function of price a very popular way of connecting demand and price is to show demand as a decreasing function of price that is as the price increases the demand is going to reduce from the entire market potential. So the first setting that I am going to consider is a purely deterministic setting in which we know what is going to be the demand for sure right. Now this is ideally the case that Newswender would want to know they would like to know for sure what is going to be the demand whether it is realistic or not is something that we are going to discuss but that is the first basic setting that we are going to consider and then we will move to a setting in which the nature of demand is actually going to be probabilistic and these two settings will have their own differences as we are going to observe. So I am considering like I said a deterministic setting in which we are saying that we know the demand with certainty. So in this case I am looking at a deterministic demand scenario. So what have I done over here? Let me first explain the left hand side column first before we move to what is the right hand side over here and before we go to the summary of all the analysis that is presented over here. The idea of this slide is to actually provoke some kind of a thought process among the viewers as to what kind of possibilities could occur within a supply chain. Many a times we forget that we are functioning within a supply chain and the actions of a specific entity may be completely at odds with the incentives or the objectives of another entity. So this causes issues and sometimes the supply chain may not function properly because of that and that is what I have tried to demonstrate over here considering a deterministic demand setting in which the demand is known. So let us say we have the first scenario. In this scenario we observe the demand. So the news vendor knows for sure that there is going to be no demand for the newspapers. A little bit unrealistic but you know considering the kind of technology advancements that are happening nowadays it is quite probable that in some regions or some localities there would be no market demand for the newspaper that is the physical editions of newspapers. So in this case if we were to look at the idea and look at the fact that the news vendor has certain profits as well as costs associated with their decisions we have to look at what could be the decision taken by the news vendor. So what would be the decision taken by the news vendor? Let us look at it this way. So we know that let us say the demand is going to be shown as D and let us say the order size is going to be S correct. So if the news vendor has to define what should be the amount to be ordered the news vendor has to look at what is the demand and accordingly what should be the order that is placed. So the demand over here is actually 0 that is there is no demand at all and the order size that is being placed by the news vendor is 2000 units. Now let us see how does this figure out if I were to procure 2000 units I will procure these 2000 units as a news vendor from the regional supplier. So let us see what kind of benefits and cost does the news vendor incur. So if I were to look at what will be my revenues as a news vendor the revenues would be whatever was demanded in the market or whatever is available on hand and whichever is the minimum among the two right. So the demand is 0 and I have procured 2000 units I cannot sell 2000 units I would be able to sell only 0 units. So the revenue that I am going to get is my demand 0 into how much ever I am going to incur in terms of my revenues which is as we have seen earlier that is going to be a retail price of 30 rupees per unit. But at the same time if I were to sell I would also be incurring a distribution cost so that is 0 into 10. So this is going to be 0 so no revenues to be earned when my demand is going to be 0. But let us see what is happening on the other side. The other side is I have purchased 2000 units. So the net profit that we get also needs to consider the procurement cost. So if I were to consider procurement cost I would be incurring 2000 into the fact that I have actually paid 10 rupees to the supplier in wholesale which is 20000 rupees right. So you can observe over here my net revenues after distribution is 0 and my procurement cost is 20000. So if I were to look at my profit my profit let me denote as pi this is going to be 0 minus 20000 rupees which you can see over here is going to be the new spenders profit. Since I have ordered 2000 units from the supplier we can look at what is the suppliers profit. The suppliers profit is actually going to be dependent upon how much ever was ordered. It is not going to be dependent upon demand it is dependent upon how much was ordered and the supplier can choose not to function that is a decision that we see later. But we can observe over here what is going to be the suppliers profit. So the suppliers profit would be how much ever was ordered which was 2000. So on 2000 they will earn wholesale price of 10 rupees and they have carried out printing for 5 rupees per unit. This is the revenues net revenues marginal revenues but they will also incur a fixed cost of 150000 rupees. So if I were to consider this this would be 10000 minus 150000 which comes out to be negative 140000. So in other words if we were to consider the first scenario neither of the parties but is news vendor or the regional supplier is actually profitable. So similarly in the second case the demand is 2000 the news vendor has placed in order of 40000. In this case obviously we can see that the procurement cost is going to increase like anything and the demand is only going to generate a revenue of 20 rupees per unit on 2000 your 20 rupees per unit on 2000 units. But the procurement cost is going to be quite high 40000 into 10. So this is going to result in a cost of 360000 for the news vendor. However if you think about the supplier for the supplier the marginal revenue that is going to be earned will be 40000 units into 5 rupees less 150000 which comes to 50000. In this case the supplier is being profitable. Now let us take a same kind of scenario which is scenario 3 2000 units and 2000 units is the market demand news vendor places an order for 1500 that is less than 2000 units and here the news vendor is still profitable in the similar way if we calculate the supplier however since this order quantity is very small the supplier is not going to break even because it is not more than 30000 units and it is going to incur a cost. In this case only the news vendor is profitable. Now in these 3 cases we can observe that either none of them are profitable or one of them is going to be profitable ultimately this is going to be based upon the decision taken by the news vendor. Now let us look at scenario 4 scenario 4 we are again considering 2000 units and as the market demand and the news vendor places an order for 2000 units the news vendor actually makes a profit of 20000 units however the regional supplier does not make a profit. This is because the break even is 30000 units and the order placed is only 2000. However we can see that in this particular case the news vendors profit is 20000 which is more than 15000 if the news vendor were to order 1500. So if I were to consider between scenario 3 and scenario 4 the news vendor would actually choose to order 2000 units instead of 1500 or 40000 units when the demand is 2000 units that is exactly matching the market demand and however even if this is done the news vendor only is profitable and not the supplier. Now let us look at scenario 5. In scenario 5 we see that the market demand is actually 30000 units the break even point and we can observe that the news vendor has now decided to order exactly the same as the market demand in which case a profit is being made and we can observe that in this case the supplier does not make a profit in fact it is just break even. So we can conclude that only the news vendor is profitable. In scenario 6 and 7 we can observe the market demand has increased since the market demand has increased and the news vendor is matching the demand. The profit also increases from 3 lakhs to 4 lakhs and for the supplier also the profit is actually positive in nature which is 50000 rupees and in scenario 7 when we further increase the market demand using the same kind of decision making we can see the news vendors profit increases and the suppliers profit also increases. In these two last cases we can observe that both are profitable. So if there was a choice between these two scenarios obviously the news vendor would go for scenario 7 because it is the most profitable and even the supplier regional supplier would go for scenario 7. In summary if we were to consider this particular deterministic setting if we looked at a decentralized decision making by the news vendor in the case where the demand is known with certainty if we were to look at the decision making when demand is known with certainty and particularly we considered decentralized decision making where the news vendor takes a decision and that decision is trying to improve the profit of the news vendor. So it is not improving the profit of the supply chain but improving the profit of the news vendor. So the news vendor obviously is going to see to that the order size which is placed is going to be greater than the demand but not exceeding twice the demand and it is also observed that the news vendor is most profitable when the demand and order size are matched and it does not matter how much is the demand actually as long as the demand is increasing the news vendor is going to try and match the demand. On the other side if we consider the impact of the decisions of the news vendor on the supplier we can observe if the news vendor faces a demand less than 30,000 units and decides to order exactly what is the demand the supplier would not be profitable. So we have seen those scenarios over here right. So this is the scenario less than 30,000 units the news vendor is profitable but not the supplier. Let us say the news vendor faces a demand less than 30,000 but orders more than 30,000 units which is this scenario scenario 2 we can observe that the supplier is profitable but not the news vendor and if the news vendor faces demand which is more than 30,000 which is these scenarios and orders exactly as the demand the supplier would also be profitable. So in such cases we can see that in there is possibility where both the players within the supply chain are at odds with each other when it comes to their profits due to decentralized decision making if we were to consider a centralized decision making scenario instead. We would come to a final conclusion that we have to find a scenario where both players are going to be profitable and in such a case this would apply to any scenario which is of the nature of 6 or 7 right that is more than 30,000 units. So first and foremost the demand that has to be observed in the market has to be more than 30,000 units. Secondly the news vendor will match the demand and if this is satisfied then both the supplier as well as the news vendor will agree to work with each other and will be profitable as well. So we can see the impact of decentralized decision making is going to be quite poor when we are finding that the news vendor either does not follow the demand properly or the market demand is very low and this causes issues for both the players. Now one interesting attribute that we can observe that scenarios 1, 2, 3 will not occur at all and the reason being that there are better options available for the news vendor in comparison with this scenario which means if the market demand is 0 the news vendor will not order 2,000 units the news vendor will not order anything if the market demand is 2,000 the news vendor will not order 40,000 units and will not even order 1,500 units because the news vendor knows that the maximum demand that is most profitability occurs when the demand matches the order size. So these scenarios actually do not occur because a better alternative would be present for the same demand which is going to be present. However in these scenarios we can observe that perhaps the supplier is going to be profitable but they do not occur at all. So we can observe that the news vendor is actually taking a lot of power within this particular supply chain by being the player who places the order and who is going to determine what will be the profits that are earned by each of the players as well as the entire supply chain. So we are going to discuss a little more on this particular example and further continue it in a probabilistic setting in the next lecture. The basic summary that I want to provide on this particular example in the deterministic setting is the idea that the supply chain players may not necessarily take the best decisions if left on their own. So the supply chain player might actually try to accept for example in this case the news vendor might actually accept scenario such as scenario 4 which is not at all profitable for the other player and which might hence hamper the process of delivery of products to the market. So in such cases what should be done because the supplier is not going to give you 2000 units. So what should be done in such a case? Similarly for larger amounts of orders to be placed by the news vendor the news vendor is going to incur costs if the order size is going to be more than the market demand. But this is going to be very much profitable for the supplier as seen in scenario 2. So how do we make the news vendor actually make 40,000 units when the demand is 2000 is it even possible? These are the kinds of ideas that are going to be addressed when we are going to see how we can coordinate the decision making between the two players. So in the next session I am going to look at the same kind of a scenario but in a probabilistic setting and we are again going to observe these kinds of problems that are going to arise. We will summarize the challenges and then we will see how can we coordinate the supply chain. And in such a case using this as a setting we are then going to link this with concepts in platform economy. Thank you everyone. I hope this session was useful and informative.