Scenario Analysis of Profitability through Simulation of Different Business Contract Models

Abstract

Many American manufacturing companies have faced supply chain distruption, and inflation on sourced goods, freight, and labor. Coupled with the growth of online retail and direct-to-consumer shipping trends, many businesses have had to rethink strategic partnerships and distribution models. These factors have incentivized the adult incontinence manufacturer "IncoMan" to seek out strategic partnerships with other businesses to reduce costs. The reimbursed healthcare market specifically has seen a decline in profitability. State-mandated reimbursement rates for products are inconsistent across the country, but have been consistently declining. Insurance agencies acting in the middle have further eroded margins. To continue to provide these necessary medical products, this incontinence manufacturer and distributor explores contract options with other business partners to leverage both companies’ strengths and maximize profitability in this market. This specific application of financial modeling and scenario analysis helps quantify the risk between two different possible contract models, a distributor model and a service model. Furthermore, it takes into account the uncertainty in demand parameters via a quasi-Monte Carlo simulator. The result is a set of visualizations that can be used to analyze both models under both deterministic and stochastic scenarios. The most influential factors in profitability stem from the state-mandated reimbursement price and the insurance agency contracts. Further, customer revenue-per-order and labor cost-to-serve each customer highly impacts profitability in both models. Of the two contract models simulated, the distributor model is more risky than the service model, but the service model lacks growth potential. The simulator can be reused and customized to different ranges of data and inputs, depending on the customer engagement. Ultimately, the goal is provide business leaders with a snapshot the first-order factors in any new contract agreement.