Jump to content
The Wifcon Forums and Blogs
  • entries
    45
  • comments
    276
  • views
    328,659

Problem of the Day--Pricing Delivery Incentives

Sign in to follow this  
Don Mansfield

510 views

Pricing Delivery Incentives  

11 members have voted

  1. 1. Considering only the total amount the Government would expect to pay, which quote do you think is best?

    • Supplier A
      0
    • Supplier B
      7
    • Supplier C
      4

Assume you are soliciting quotes for an item of supply. Suppliers A, B, and C each sell the item for about $100/unit. However, the probability of late delivery is different for each supplier. Supplier A has a 31% chance of delivering late, Supplier B has a 21% chance of delivering late, and Supplier C has a 4% chance of delivering late. There’s a 100% chance that all suppliers will deliver no later than one week after the delivery date and any damages due to late delivery will be negligible.

Your solicitation requests that vendors quote both a unit price and a per-unit delivery incentive. The supplier can only earn the delivery incentive if delivery is on time. Otherwise, the Government only pays the unit price.

Supplier A quotes a per-unit price of $71 and a $41/unit delivery incentive.

Supplier B quotes a per-unit price of $65 and a $41/unit delivery incentive.

Supplier C quotes a per-unit price of $59 and a $41/unit delivery incentive.

Considering only the total amount the Government would expect to pay, which quote do you think is best?

Sign in to follow this  


7 Comments


Recommended Comments

Here's my initial understanding of the problem--

  • Supplier A = $112/ea for on-time delivery, or $71/ea for late delivery, with about a 1-in-3 chance of late delivery;
  • Supplier B = $106/ea for on-time delivery, or $65/ea for late delivery, with about a 1-in-5 chance of late delivery; and
  • Supplier C = $100/ea for on-time delivery, or $59/ea for late delivery, with about a 1-in-25 chance of late delivery.

Am I understanding correctly?

Or does the quoted price include the delivery incentive?--

  • Supplier A = $71/ea for on-time delivery, or $30 for late delivery, with about a 1-in-3 chance of late delivery;
  • Supplier B = $65/ea for on-time delivery, or $24 for late delivery,  with about a 1-in-5 chance of late delivery; and
  • Supplier C = $59/ea for on-time delivery, or $18 for late delivery, with about a 1-in-25 chance of late delivery.

Share this comment


Link to comment
16 minutes ago, ji20874 said:

Here's my initial understanding of the problem--

  • Supplier A = $112/ea for on-time delivery, or $71/ea for late delivery, with about a 1-in-3 chance of late delivery;
  • Supplier B = $106/ea for on-time delivery, or $65/ea for late delivery, with about a 1-in-5 chance of late delivery; and
  • Supplier C = $100/ea for on-time delivery, or $59/ea for late delivery, with about a 1-in-25 chance of late delivery.

Am I understanding correctly?

Yes.

Share this comment


Link to comment

I presume that we can make our own assumptions with regards to orders vs units (i.e. 1 order for a 100 units or 100 orders for 1 unit each) and for the number of customers placing orders (i.e. 1 customer with 100 orders or 100 customers with 1 order each) and that on-time probability applies to the entire order and not to an individual unit within an order; and that what is best for the government means what is best for any one individual customer’s cost or budget.

Share this comment


Link to comment
2 hours ago, Whynot said:

I presume that we can make our own assumptions with regards to orders vs units (i.e. 1 order for a 100 units or 100 orders for 1 unit each) and for the number of customers placing orders (i.e. 1 customer with 100 orders or 100 customers with 1 order each) and that on-time probability applies to the entire order and not to an individual unit within an order; and that what is best for the government means what is best for any one individual customer’s cost or budget.

You may be making things too complicated. I suggest you just work out the problem for 1 unit.

Share this comment


Link to comment

I said B, too. 

Expected Price of A = $71 + (.69)($41) = $99.29

Expected Price of B = $65 + (.79)($41) = $97.39

Expected Price of C = $59 + (.96)($41) = $98.36

Share this comment


Link to comment

All suppliers have the same delivery incentive, so the $41 is a wash.

All suppliers will deliver no later than 1 week, so the delivery schedule is a wash.

This leaves the price per unit the only consideration, and Supplier C has the best price, $59.

Share this comment


Link to comment
Guest
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

×
×
  • Create New...