A key to effective SCM is fair compensation for services provided.
The underlying principle of fair compensation is that all high performance supply chain partners are entitled to earn an acceptable return for the value added services that they provide.
Customers pay some final price to acquire a product based on how they value the perceived benefits that the product delivers.
The price paid can be thought of as the sum of the accumulated costs (e.g. basic inputs like parts and materials, and the cost of value added services), the aggregate profits earned (at each step of the supply chain), and the actual value added (reflecting how much customers benefit from the product).
The difference between the price and the accumulated costs is the aggregate profit to be shared by supply chain partners.
Assuming that aggregate profits are generally fair, the question is how to apportion the pool, and whether the result is specifically fair to each supply chain participant.
At all levels, partners expect (and are entitled to) fair profits. These profits are most appropriately evaluated relative to the corresponding level of investment, i.e. the ROI earned.
If all performing partners (high quality, low cost) earn an acceptable return (based on their goals), the system is in equilibrium. If partners are undercompensated (again, based on their expectations), they are likely to opt out of the system or compromise the quality level of services provided.
For example, consider the soft drink industry's economic profile:
(a) Concentrate producers (Coke, Pepsi) earn high ROIs, driven by very high margins on syrup, a relatively low investment in physical assets, and high spending on brand-building promotion;
(b) Bottlers, who generally have less aggressive ROI targets than the CPs, have substantial investments in assets (bottling plants, trucks), earn modest margins from retailers and restaurants, and earn very high margins on vending machines;
(c) Retailers (like grocery chains) earn high ROIs despite low percentage margins, because they get substantial promotional support from concentrate producers and bottlers that accelerates inventory turnover to very high levels;
(d) Restaurants earn high ROIs from very high margins on beverage sales that complement their lower margin food sales.
The bottom line is that all channel partners in the soft drink supply chain earn acceptable returns (albeit in very different ways, and based on their idiosyncratic internal goals) and the system is, more or less, in equilibrium.