Coordination in the Supply

Chain
(Chopra and Kalra- Chapter 10)
Session 14
Supply chain coordination
Supply chain coordination – all stages of the chain take actions that are
aligned and increase total supply chain surplus
Requires that each stage share information and take into account the
effects of its actions on the other stages
Lack of coordination results when:
◦ Objectives of different stages conflict
◦ Information moving between stages is delayed or distorted
Bullwhip Effect

3
Bullwhip Effect
Fluctuations in orders increase as they move up the supply chain from
retailers to wholesalers to manufacturers to suppliers
Distorts demand information within the supply chain
Each stage have different estimate of what demand looks like.
Results from a loss of supply chain coordination
Bullwhip Effect

Table: Demand Fluctuation at Different Stages of a Supply Chain

Real Life Example

P&G observed the bullwhip effect in the supply chain of Pampers diapers.
Found that raw material order to suppliers fluctuated significantly over time.
But at the retail store, the fluctuation though present, were small.
High fluctuation in raw material order resulted in high cost and difficult to match supply and demand.
 Real Life Example

Hewlett Packard (HP) found that fluctuation in orders increased significantly as they moved up in the supply
chain from reseller to printer division to integrated division.

Product demand showed low variability, but order placed with the integrated circuit division were much more
variable.

Difficult for HP to fulfil order on time and increased the cost of doing.
Supply chain coordination
Manufacturing cost
• In order to respond to high variability, build excess capacity which increases the
manufacturing cost per unit.
Inventory cost
• High level of inventory requires more warehousing space thus increases warehousing
cost.
Replenishment lead time
• Variability makes scheduling at P&G and supplier pants much more difficult as
compared to stable demand.
• Sometimes, the available capacity and inventory can not supply the order coming in
increase replenishment lead time.
Supply chain coordination
Transportation cost
• Transportation requirements fluctuate over time due to variability.
• Surplus transportation capacity is required to cover high demand periods.
Labor cost for shipping and receiving
 Excess labor capacity or varying labor capacity is required to deal with the fluctuation
in orders.
Level of product availability
• Large fluctuation in order make it difficult for the manufacturer to supply all
distributors and retailer order on time.
• The possibility of out-of-stock for the retailers or distributors increases.
Lack of Coordination
Performance Measure Impact of the Lack of Coordination
Manufacturing cost Increases
Inventory cost Increases
Replenishment lead time Increases
Transportation cost Increases
Shipping and receiving cost Increases
Level of product availability Decreases
Profitability Decreases

Table: Impact of the Lack of Coordination on Supply Chain Performance

Obstacles to Coordination in a Supply Chain
Incentive Obstacles
Information Processing Obstacles
Operational Obstacles
Pricing Obstacles
Behavioral Obstacles
Obstacles to Coordination in a Supply Chain
Incentive Obstacles
 Occur when incentives offered to different stages or participants in a supply chain led
to actions that increase variability and reduce total supply chain profits.
 For Example:
• The compensation of a transportation manager at a firm is linked to the average
transportation cost per unit, the manager is likely to take actions that lower
transportation costs even if they increase inventory costs or hurt customer service.
• To maximize their bonuses, the sales force urged distributors to buy more toward the
end of the evaluation period, even if distributors were not selling as much to
retailers. The sales force offered discounts they controlled to spur end-of-period
sales. This increased variability in the order pattern.
Obstacles to Coordination in a Supply Chain
Information Processing Obstacles
 When demand information is distorted as it moves between different stages of the
supply chain, leading to increased variability in orders within the supply chain.
 For Example:
• In supply chains where the fundamental means of communication among different
stages are the orders that are placed, information is distorted as it moves up the
supply chain.
• If the manufacturer is not aware of the planned promotion, it may interpret the larger
order as a permanent increase in demand and place orders with suppliers
accordingly.
Obstacles to Coordination in a Supply Chain
Operational Obstacles
 Occur when placing and filling orders lead to an increase in variability
 For Example:
• Suppose a retailer has misinterpreted a random increase in demand as a growth trend.
If the retailer faces a lead time of two weeks, it will incorporate the anticipated
growth over two weeks when placing the order. If lead time is five weeks, incorporate
the anticipated growth for five weeks.
• Rationing and Shortage Gaming: Under this rationing scheme, if the supply of high
demand product available is 75 percent of the total orders received, each retailer
receives 75 percent of its order. The retailers try to increase the size of their orders to
increase the amount supplied to them. A retailer needing 75 units orders 100 units in
the hope of getting 75.
Obstacles to Coordination in a Supply Chain
Operational Obstacles

Figure Demand and Order Stream with Orders Every Five Weeks
Obstacles to Coordination in a Supply Chain
Pricing Obstacles
 When pricing policies for a product lead to an increase in variability of orders placed.
 For Example:
• Lot-size–based quantity discounts increase the lot size of orders placed within the
supply chain because lower prices are offered for larger lots.
• Trade promotions and other short-term discounts offered by a manufacturer result in
forward buying, by which a wholesaler or retailer purchases large lots during the
discounting period to cover demand during future periods.
Obstacles to Coordination in a Supply Chain
Behavioral Obstacles
• Each stage of the supply chain views its actions locally and is unable to see the
impact of its actions on other stages
• Different stages of the supply chain react to the current local situation rather
than trying to identify the root causes
• Different stages of the supply chain blame one another for the fluctuations
• No stage of the supply chain learns from its actions over time
• A lack of trust among supply chain partners causes them to be opportunistic at
the expense of overall supply chain performance
Managerial Levers to Achieve Coordination
• Aligning goals and incentives
• Improving information accuracy
• Improving operational performance
• Designing pricing strategies to stabilize orders
• Building strategic partnerships and trust
Managerial Levers to Achieve Coordination
• Aligning goals and incentives
• Coordination requires every stage of the supply chain to focus on the supply chain
surplus or the total size of the pie rather than just its individual share.
• For Example: Walmart pays Hewlett-Packard (HP) for each printer sold and gives
HP the power to make replenishment decisions while limiting the amount of
printer inventory that can be held at a store.
• Manufacturers should link incentives for the sales staff to sell-through by the retailer
rather than sell-in to the retailer.
Managerial Levers to Achieve Coordination
• Improving information accuracy
• If retailers share demand data with other supply chain stages, all stages can forecast
future demand based on customer demand. Sharing of demand data helps reduce
information distortion because all stages now respond to the same change in
customer demand.
• The manufacturer must be aware of the retailer’s promotion plans to achieve
coordination.
• Walmart typically assigns one of its suppliers as a leader for each major product
category to manage store-level replenishment. This gives suppliers visibility into
sales and a single decision maker for replenishment decisions.
Managerial Levers to Achieve Coordination
• Improving operational performance
• By reducing the replenishment lead time, managers can decrease the uncertainty of
demand during the lead time.
• Managers can also reduce lot sizes by using milk runs that combine shipments for
several retailers on a single truck.
• To diminish information distortion, managers can design rationing schemes that
discourage retailers from artificially inflating their orders in case of a shortage.
Tying allocation to past sales removes any incentive a retailer may have to inflate
orders.
Managerial Levers to Achieve Coordination
• Designing pricing strategies to stabilize orders
• Offering volume-based quantity discounts eliminates the incentive to increase
the size of a single lot because volume-based discounts consider the total
purchases during a specified period (say, a year) rather than purchases in a single
lot.
• Managers can dampen the bullwhip effect by eliminating promotions and using
everyday low pricing (EDLP). The elimination of promotions removes forward
buying by retailers.