Abstract

Fixed costs are a fundamental component in the economy of industrial organizations, which can be a central factor to instability, as has been painfully learned during the crises of 2008-9 and COVID-19, but in normal times, too. Yet, fixed costs are totally absent in the extensive literature on the subject of pricing in supply chains management (SCM).

A crucial distinction is the difference between the fixed costs which are referred to in this presentation and the ordering/set-up costs in lot sizing models of production-inventory systems. The fixed costs considered here are those of break even analyses – the cost which are associated with the establishment and the survival of production and service systems: return of capital investment plus financing costs, mortgages or rental, insurance, certain taxes, etc. Accordingly, the ordering/set-up costs are, most often, negligible compared to the fixed costs. Consequently, not lot or batch sizes of production-inventory models are considered here, but the total volume of the activity.

The fixed costs may turn a profit to loss and have already done so more than once. In addition, the disregard of the fixed costs in the literature on pricing in SCM resulted in a false impression that the profit of the supplier, manufacturers in particular, is guaranteed, while in reality it is not. Therefore, the fixed costs constitute a critical issue and taking them into consideration is not only significant but compulsory. Moreover, the fixed costs add conflicts between members of supply chains. Risks and conflicts which are induced by the fixed costs in supply chains are demonstrated and discussed in this presentation. Fortunately, there is a solution: partnering by retrospective sharing of the actual outcome. This idea is also discussed in the presentation.