You own a factory in China which makes hiking shoes and you are signing a contract with Hikee Shoe company to supply them with shoes that they will market every year in the U.S. Market. Because hiking shoe demand is highly seasonal, and also the models change every year, Hikee orders every model just once and you supply the whole shipment for a shoe style all at once. Hikee then sells the shoe during the hiking season and if they have some shoes left over, they have a clearance sale. Your manufacturing cost for the shoes is $20, you sell them to Hikee for $40 and Hikee sells them for $80 during the regular season and at $15 during the clearance period. At a price of $80, Hikee expects demand to average 10,000 units with a standard deviation of 3,000. (Assume that all shoes that Hikee orders from you are sold by the end of the clearance period).
A) How many shoes do you expect Hikee would order from you?
B) Suppose that your business is doing very well and you purchase Hikee so that you are now one integrated company. How many shoes would you send to the U.S. for Hikee to sell?
C) Suppose Hikee is not willing to be bought. You realize however that the supply chain consisting of Hikee and you is losing a lot of sales because your company and Hikee are two different companies. However, you can sign a buy-back contract with Hikee, that is, if Hikee does not sell the shoes at regular season, you will buy back the shoes at price b. What buy-back price b should you offer so that Hikee will buy the amount of shoes you calculated in part (b), and thus the supply chain is acting as if it is integrated?
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