Large corporations such as Sears and Walmart enter into contracts with manufacturers to ensure that they have a secure supply of products. The manufacturers in turn try to secure large contracts by offering bulk discounts. How can corporations compare these bulk discount schemes? Suppose that vendor A promises the first 100,000 units at $1, the next 200,000 units at $0.8, and the units after that at $0.7. Vendor B promises the first 200,000 units at $1.1, the next 300,000 units at $0.7 and the units after that at $0.6. The contract is as follows. The corporation observes the demand, and then orders the units from the vendor. The vendor manufacturers these units and ships them off. At the time when the corporation must decide on the vendor, the demand is unknown, but this demand can be modeled with a Normal distribution with mean of (500,000) units with a standard deviation of 140,000. Which vendor should the corporation choose? Why? Please discuss considerations of expected cost as well as risk.
Large corporations such as Sears and Walmart enter into contracts with manufacturers to ensure that they have a secure supply of products. The manufacturers in turn try to secure large contracts by offering bulk discounts. How can corporations compare these bulk discount schemes? Suppose that vendor A promises the first 100,000 units at $1, the next 200,000 units at $0.8, and the units after that at $0.7. Vendor B promises the first 200,000 units at $1.1, the next 300,000 units at $0.7 and the units after that at $0.6. The contract is as follows. The corporation observes the demand, and then orders the units from the vendor. The vendor manufacturers these units and ships them off. At the time when the corporation must decide on the vendor, the demand is unknown, but this demand can be modeled with a
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