Supply Chain Close-up: The Video Vault Harvard Case Solution & Analysis

Supply Chain Close-up: The Video Vault

How Many Tapes Should Video Vault Purchase

Bill Peas lee and his partner, Angelo, are the owners of Video Vault. They need to decide that how many copies of new movie should buy in order to minimize the cost and maximize the revenue. It is expected that the price of each tape is $65. According to the forecasts of Video Vault, it is expected that as the number of tapes will increase, it will increase the expected total number of rentals.

1 tape will provide 60 number of rentals and 6 tapes will provide 139 number of between 1 and 6 different number of tapes will provide different number of rentals. It is expected that the Video Vault will charge $3 per rental. From calculations it is clear that increase in number of tapes is also increasing the number of rentals however,it is also increasing the cost of tapes. Greater number of tapes are not generating greater percentage of revenue as the average number of rentals per tape is decreasing with increase in number of tapes.

1 tape is generating 277% revenue and 6 tapes are generating 107% revenue with respect to the cost of tapes. 6 tapes are generating low percentage of revenue as compared to the 1 tape. But 1 tape is not sufficient to meet the demand of 1st week of new movie. Therefore, the suggested average numbers of tapes are 3 or 4 as it will generate higher percentage of revenue and low tape cost. It is expected that 3 or 4 tapes will also be sufficient to meet the higher expected demand in first week after the release of new movie.

What Is the Video Vault’s Supplier’s Profit

It is expected that supplier’s production, handling, and distribution cost per tape is $8 and Video Vault is paying $65 per tape therefore the Video Vault’s supplier is earning $57 per tape. If Video Vault will buy 3 or 4 tapes from its supplier then supplier’s profit will be $171 at 3 tapes and $228 for 4 tapes.
Terms Supplier Would Offer to Video Vault on a Revenue Sharing Contract

Revenue sharing contract is a contract in which supplier would offer a discounted whole sale price to Video Vault instead of 65 dollars and against this discounted whole sale price supplier will get specified percentage upon rental revenue of Video Vault. According to the Rentrak sharing terms average percentage of revenue, the average up-front fee and price per rental is calculated.
Sharing percentage, up-front fee and price per rental are different for each category; therefore average percentage is used in order to make the decision relevant. It is expected that supplier will charge 8.03 dollar per unit to Video Vault instead of 65 dollars. $8.03 average price per is unit is expected to be reasonable in suppliers point of view as the manufacturing cost of each unit is also expected to be 8 dollars.

However, against this low whole sale price the supplier will impose certain restrictions upon Video Vault in term of pre specified percentage of profit sharing and predefined inventory levels. In order to avail this low whole sale price, Video Vault should have to maintain the inventory levels more than 22 units. Average expected inventory is calculated by taking the average of minimum inventory level and maximum inventory level.

In addition to this minimum inventory level, it is expected that supplier will also share a predefined percentage of Video Vault’s revenue which is expected to be 47%. The percentage of revenue sharing is calculated by taking the average of revenue sharing of each category among Rentrak revenue sharing terms..........................

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