When negotiating with a supplier for strategic components that have high demand variability, which of the following types of contracts would be the best for the buyer to minimize stockouts and unused inventory?
The best contract type for a buyer to minimize stockouts and unused inventory when negotiating with a supplier for strategic components with high demand variability is B. Buy-back.
Explanation:
A buy-back contract allows the buyer to return unsold inventory to the supplier at a predetermined price, essentially transferring the risk of demand uncertainty to the supplier. This incentivizes the supplier to optimize production and delivery based on the buyer's actual demand, minimizing the buyer's need to hold excessive inventory.
Firm-fixed price:
This contract type offers a fixed price that is not subject to adjustments based on the supplier's costs. While this provides price certainty for the buyer, it also leaves the supplier with the risk of bearing the costs associated with demand fluctuations. If demand is lower than expected, the supplier may incur losses, which could potentially lead to higher prices for the buyer in future negotiations.
A buy-back contract allows the buyer to return unsold inventory up to a certain percentage and receive a refund or credit. This type of agreement reduces the risk of holding excess inventory, particularly in situations where demand is unpredictable.
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