Coordination in a Supply

Chain
Learning Objectives
• After reading this chapter, you will be able to
1. Describe supply chain coordination and the bullwhip effect, and
their impact on supply chain performance.
2. Identify obstacles to coordination in a supply chain.
3. Discuss managerial levers that help achieve coordination in a supply
chain.
4. Understand the different forms of collaborative planning,
forecasting, and replenishment possible in a supply chain.
LACK OF SUPPLY CHAIN
COORDINATION AND THE BULLWHIP
EFFECT
• Supply chain coordination improves if all stages of the chain take actions that are aligned and
increase total supply chain surplus. Supply chain coordination requires each stage of the
supply chain to share information and take into account the impact its actions have on other
stages.
• A lack of coordination occurs either because different stages of the supply chain have
objectives that conflict or because information moving between stages is delayed and
distorted.
• Different stages of a supply chain may have conflicting objectives if each stage has a different
owner. As a result, each stage tries to maximize its own profits, resulting in actions that often
diminish total supply chain profits.
• Bullwhip Effect.
• One outcome of the lack of supply chain coordination is the bullwhip effect, in which fluctuations in
orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to
suppliers.
THE EFFECT ON PERFORMANCE OF
LACK OF COORDINATION
• Lack of coordination in supply chain may effect the following
performance measures:
• Manufacturing Cost
• Inventory Cost
• Replenishment Lead Time
• Transportation Cost
• Labor Cost for Shipping and Receiving
• Level of Product Availability
• Relationships Across the Supply Chain
OBSTACLES TO COORDINATION IN A
SUPPLY CHAIN
• Incentive obstacles
• LOCAL OPTIMIZATION WITHIN FUNCTIONS OR STAGES OF A SUPPLY CHAIN
• SALES FORCE INCENTIVES
• Information-processing obstacles
• FORECASTING BASED ON ORDERS AND NOT CUSTOMER DEMAND
• LACK OF INFORMATION SHARING
• Operational obstacles
• ORDERING IN LARGE LOTS
• LARGE REPLENISHMENT LEAD TIMES
• RATIONING AND SHORTAGE GAMING
• Pricing obstacles
• LOT SIZE–BASED QUANTITY DISCOUNTS
• PRICE FLUCTUATIONS
• Behavioral obstacles
MANAGERIAL LEVERS TO ACHIEVE
COORDINATION
• Aligning of Goals and Incentives
• ALIGNING GOALS ACROSS THE SUPPLY CHAIN
• ALIGNING INCENTIVES ACROSS FUNCTIONS
• PRICING FOR COORDINATION
• ALTERING SALES FORCE INCENTIVES FROM SELL-IN TO SELL-THROUGH
• Improving Information Visibility and Accuracy
• SHARING POINT-OF-SALE DATA
• IMPLEMENTING COLLABORATIVE FORECASTING AND PLANNING
• DESIGNING SINGLE-STAGE CONTROL OF REPLENISHMENT
• Improving Operational Performance
• REDUCING REPLENISHMENT LEAD TIME
• REDUCING LOT SIZES
• RATIONING BASED ON PAST SALES AND SHARING INFORMATION TO LIMIT GAMING
• Designing Pricing Strategies to Stabilize Orders
• MOVING FROM LOT SIZE–BASED TO VOLUME-BASED QUANTITY DISCOUNTS
• STABILIZING PRICING
• Building Strategic Partnerships and Trust
CONTINUOUS REPLENISHMENT AND
VENDOR-MANAGED INVENTORIES
• Information distortion can be dampened by practices that assign
replenishment responsibility across the supply chain to a single entity.
• A single point of replenishment decisions ensures visibility and a common
forecast that drives orders across the supply chain.
• Two common industry practices that assign a single point of responsibility are
continuous replenishment programs and vendor-managed inventories.
• In continuous replenishment programs (CRP), the wholesaler or manufacturer
replenishes a retailer regularly based on POS data. CRP may be supplier, distributor, or
third-party managed.
• With vendor-managed inventory (VMI), the manufacturer or supplier is responsible for
all decisions regarding product inventories at the retailer. As a result, the control of the
replenishment decision moves to the manufacturer instead of the retailer.
COLLABORATIVE PLANNING,
FORECASTING,
AND REPLENISHMENT (CPFR)
• The Voluntary Interindustry Commerce Standards (VICS) Association has defined
CPFR as “a business practice that combines the intelligence of multiple partners in
the planning and fulfillment of customer demand.”
• Sellers and buyers in a supply chain may collaborate along any or all of the
following four supply chain activities:
• Strategy and planning: The partners determine the scope of the collaboration and assign
roles, responsibilities, and clear checkpoints
• Demand and supply management: A collaborative sales forecast projects the partners’
best estimate of consumer demand at the point of sale.
• Execution: As forecasts become firm, they are converted to actual orders. The fulfillment of
these orders then involves production, shipping, receiving, and stocking of products.
• Analysis: The key analysis tasks focus on identifying exceptions and evaluating metrics that
are used to assess performance or identify trends.
ACHIEVING COORDINATION IN
PRACTICE
• Quantify the bullwhip effect
• Managers should start by comparing the variability in the orders they receive
from their customers with the variability in orders they place with their
suppliers. This helps a firm quantify its own contribution to the bullwhip effect.
Once its contribution is visible, it becomes easier for a firm to accept the fact
that all stages in the supply chain contribute to the bullwhip effect, leading to a
significant loss in profits.
• Get top management commitment for coordination
• Coordination requires managers at all stages of the supply chain to subordinate
their local interests to the greater interest of the firm and even the supply chain.
Coordination often requires the resolution of trade-offs in a way that requires
many functions in the supply chain to change their traditional practices.
ACHIEVING COORDINATION IN
PRACTICE Cont…
• Devote resources to coordination
• Coordination cannot be achieved without all parties involved devoting
significant managerial resources to this effort. Companies often do not devote
resources to coordination because they either assume that lack of
coordination is something they have to live with or they hope that
coordination will occur on its own.
• Focus on communication with other stages
• Good communication with other stages of a supply chain often creates
situations that highlight the value of coordination for both sides. Companies
often do not communicate with other stages of the supply chain and are
unwilling to share information.
ACHIEVING COORDINATION IN
PRACTICE Cont..
• Try to achieve coordination in the entire supply chain network
• The full benefit of coordination is achieved only when the entire supply chain
network is coordinated. It is not enough for two stages in a supply chain to
coordinate.

• Use technology to improve connectivity in the supply chain

• The Internet and a variety of software systems can be used to increase the
visibility of information throughout the supply chain. Until now, most IT
implementations have achieved visibility of information only within a firm.
Visibility across the supply chain still requires additional effort in most cases.
ACHIEVING COORDINATION IN
PRACTICE cont..
• Share the benefits of coordination equitably
• The greatest hurdle to coordination in the supply chain is the belief on the
part of any stage that the benefits of coordination are not being shared
equitably. Managers from the stronger party in the supply chain relationship
must be sensitive to this fact and ensure that all parties perceive that the way
benefits are shared is fair.