Hello and welcome back to the second part on
lesson two of module 12, Supply Chain Coordination.
My name is Carlo Russo.
I am an Associate Professor of
Agricultural Economics at the University of Cassino Lazio Meridionale.
In the first part,
we discussed the implicit trade topic.
Now, we move to the next topic,
shelf allocation and the role of information.
The shelf allocation problem can be summarized in a few key points.
First of all, shelf space is limited.
This means that there is a physical limit to the size of the assortment.
Some sort of selection is needed.
The supermarket must select a product that are in the assortment.
Also the supermarket must select the supplier for each product in the assortment.
This joint choice of products and supplier is called shelf allocation.
Now the question is,
what is the most efficient contract design to achieve
the profit maximizing shelf allocation?
There are many contractual forms in the market nowadays but
for simplicity we will summarize them into three alternatives.
The first one is integration.
The supermarket performs the two tasks directly,
they select both the products and the supplier.
For example, the supermarket decides that they want
cherry tomatoes and then they contract the farmer directly.
Then we have a mixed model.
The supermarket chooses which product are placed on the shelf
but they also can't cut a middleman
who's in charge of selecting the most efficient supplier.
For example, the supermarket lists in are co-operative tomato producers.
And, finally, we have outsourcing.
In this alternative the middleman chooses the product to place on the shelf too.
In our example, the supermarket gives the shelf space to the co-operative and
the co-operative can sell the product they want in exchange for a fee or a rate in sales.
Our problem is to find out which one of these contractual designs is the most profitable?
In our problem, we have
supermarket customers who are willing to buy a set of food products.
Each product can be produced by many suppliers but the problem is that
the shelf space is limited and it cannot carry all products consumers are willing to buy.
Some sort of selection is needed.
An important factor in the selection is the purchasing price of the goods.
Cheap products can be sold for a low price and this means that, sell faster.
Choosing an efficient supply is therefore very important.
So the selection can be performed by
the supermarket or can be delegated to a middleman.If
the supermarket is in charge of our decision,
we have the integrated model.
If the supermarket select the same products and the middleman selects the supplier,
we have the mix model.
Otherwise we have the outsourcing model.
We need to find the optimal allocation which means that we want
an assortment that gives us high margins and it sells fast.
Now solving this problem requires detailed information.
We need to know what consumers want,
and especially what they are willing to pay more for,
and we need to know who are the most efficient suppliers.
A simple matrix can help plan the influence of information on the contract structure.
Consider a supermarket and
a middleman both having a set of information about consumer and suppliers.
Assume also that the information can be good,
meaning that they have enough information to make an informed decision.
Or can be bad,
meaning that they don't.
Think of the section in the Matrix determines the optimal contract choice.
For example, if the supermarket has good information about consumers and supplier,
the likely outcome is integration.
This is the case of
mature industry such that demand is stable and producers are well known.
If the supermarket has incomplete information
about suppliers while the middlemen is well-informed,
the likely outcome is the mixed model.
This is the case for example for many kinds of fruit and vegetable products.
The supermarket preferred to construct a single middleman or co-operative instead of
selecting the most efficient farmer among a large number of small potential suppliers.
If the supermarket has bad information about consumer and suppliers,
outsourcing is the likely outcome.
This is the case of innovative niche products such as vegan product for example.
Here consumers have very unique characteristics,
a specialized middleman can know them well while a large super market might lack
resources and the focus to investigate consumer belonging to a relatively small niche.
In the case that neither the supermarket or the middleman have reliable information,
the outcome is undetermined.
If they agree on a transaction,
the contract design and depends on the way they want to split the risk.
The example of shelf allocation allows us to
draw a general conclusion about information and contract design.
Efficient coordination requires that decision are taken by
the firm with the most accurate information along the modern retail supply chain.
This is true in many aspects including quality for example.
If quality of modern retail is giving
consumers what they want and they're willing to pay for,
decisions must be taken by the firm that has
the most accurate information in this regard.
Supermarket has a close contact with their customer,
enough that they have the CIC information advantage.
Nevertheless, in specific industries
specialized suppliers can know what the consumer want better than the retailers.
This principle lies on what we learned in module 11 about coordination.
The theory of design attributes postulate that a efficient coordination
requires that information are available.
Also the landowner in his example showed us that
when the landowner has little information about effort on yield,
the best option is renting,
which is asking for a fixed fee,
and let the farmer organize production.
The very same principle applies here.
The firm with the most accurate and reliable information
is the one deciding about shelf allocation.
Now the question is how can a firm obtain
good value if production decisions are taken elsewhere.
Of course, the leading firms organize activities
according to selfish profit maximization.
This leaves our firm exposed to predatory behavior.
This question leads us to the next topic.
But first let's take a break.
Hannes LangResearch Associate
Luisa MenapaceProfessor
Faical AkaichiResearch Economist
Francesco BimboResearch Economist
Montserrat Costa-FontResearch Economist
Carlo RussoAssociate Professor
Chenguang LiResearch Economist
