Coordination in Supply Chain

16-2 Lack of SC Coordination

and the Bullwhip Effect
 Supply chain coordination – all stages in the supply chain take actions together
(usually results in greater total supply chain profits)
 SC coordination requires that each stage take into account the effects of its
actions on the other stages
 Lack of coordination results when:
 Objectives of different stages conflict or
 Information moving between stages is distorted
 Bullwhip Effect
 Fluctuations in orders increase as they move up the supply chain from
16-3 retailers to wholesalers to manufacturers to suppliers.
 Distorts demand information within the supply chain, where different
stages have very different estimates of what demand looks like
 Results in a loss of supply chain coordination
 The Effect of Lack of
16-4
Coordination on Performance
 Manufacturing cost (increases) : additional capacity or inventory is needed to support
increased variability
 Inventory cost (increases)
 Replenishment lead time (increases): variability makes scheduling difficult
 Transportation cost (increases): truck requirements may fluctuate, fixed cost needs to
absorbed during low demand period
 Labor cost for shipping and receiving (increases): labour requirements may fluctuate, labour
may be idle during low demand period
 Level of product availability (decreases): increased fluctuation may result in all distributors
not getting serviced on time
 Relationships across the supply chain (worsens): blame game

The bullwhip effect reduces supply chain profitability by making it more expensive to provide a
given level of product availability
16-5 Obstacles to Coordination
in a Supply Chain
 Incentive Obstacles
 Information Processing Obstacles
 Operational Obstacles
 Pricing Obstacles
 Behavioral Obstacles
16-6 Incentive Obstacles

 When incentives offered to different stages or participants in a supply chain

lead to actions that increase variability and reduce total supply chain profits
– misalignment of total supply chain objectives and individual objectives

 Local optimization within functions or stages of a supply chain

 E.g. Transportation manager’s KPI of lowering cost per unit vs

Marketing manager’s KPI of capturing market share in remote
locations

 Sales force incentives

 Leads to skewed sales across the month.

 Information Processing Obstacles
16-7
 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

 Forecasting based on orders, not customer demand

 Forecasting demand based on orders magnifies demand fluctuations moving up

the supply chain from retailer to manufacturer. Each stage views its demand as

the stream of orders received and produces a forecast based on this information

 Lack of information sharing

 E.g.: If D’mart were to not share its discount scheme……..

16-8 Operational Obstacles

 Actions taken in the course of placing and filling orders that lead to an
increase in variability
 Ordering in large lots (much larger than dictated by demand): to get qty
discount / optimize truck loads.

 Large replenishment lead times: if retailer has misinterpreted a random spike

in demand, upstream stage will consider this as “growth” and cover stock as
per lead time.

 Rationing and shortage gaming (common in the computer industry because of

periodic cycles of component shortages and surpluses): depending on the
mechanism of rationing, retailer may try to inflate orders to receive more
stock of low supply SKU.
16-9 Pricing Obstacles

 When pricing policies for a product lead to an increase in

variability of orders placed
 Lot-size based quantity decisions

 Price fluctuations (resulting in forward buying)

 Behavioral Obstacles
16-
 Problems in learning, often related to communication in the supply chain and how the
10
supply chain is structured

 Each stage of the supply chain views its actions locally and is unable to see the impact of its

actions on other stages

 Based on local analysis, different stages blame each other for the fluctuations, with successive

stages becoming enemies rather than partners

 No stage learns from its actions over time because the most significant consequences of the

actions of any one stage occur elsewhere, resulting in a vicious cycle of actions and blame (e.g.

discount offered by downstream not informed to upstream will lead to chaos)

 Lack of trust results in opportunism, duplication of effort, and lack of information sharing (e.g.

in case of short supply SKU, retailers may try to hoard stock)

 Managerial Levers to
16-11
Achieve Coordination
 Aligning Goals and Incentives
 Improving Information Accuracy
 Improving Operational Performance
 Designing Pricing Strategies to Stabilize Orders
 Building Strategic Partnerships and Trust
16-
12 Aligning Goals and Incentives
 Align incentives so that each participant has an incentive to do the things
that will maximize total supply chain profits
 Align incentives across functions
 Pricing for coordination (e.g. use buyback, revenue sharing, qty flexibility
clauses in contracts)
 Alter sales force incentives from sell-in (to the retailer) to sell-through (by
the retailer)
16-
13 Improving Information Accuracy
 Sharing point of sale data
 Collaborative forecasting and planning
 Single stage control of replenishment
 Continuous replenishment programs (CRP)
 Vendor managed inventory (VMI)
16-
Improving Operational Performance
14
 Reducing replenishment lead time (e.g. cross docking)
 Reduces uncertainty in demand
 EDI is useful
 Reducing lot sizes
 Computer-assisted ordering, B2B exchanges (e.g. auto parts supplier is paid based on the
cars produced)
 Shipping in LTL sizes by combining shipments
 Technology and other methods to simplify receiving
 Changing customer ordering behavior
 Rationing based on past sales and sharing information to limit gaming
 “Turn-and-earn” – Allocation is based on past sales and not on order placed
 Information sharing
16-
Designing Pricing Strategies
15 to Stabilize Orders
 Encouraging retailers to order in smaller lots and reduce unwanted
forward buying
 Moving from lot size-based to volume-based quantity discounts (consider total
purchases over a specified time period)
 Stabilizing pricing
 Eliminate promotions (everyday low pricing, EDLP)
 Limit quantity purchased during a promotion
 Tie promotion payments to sell-through rather than amount purchased
16-
16 Building Strategic Partnerships and Trust in
a Supply Chain
 Background
 Designing a Relationship with Cooperation and Trust
 Managing Supply Chain Relationships for Cooperation and Trust
 Building Strategic Partnerships and Trust in a Supply
16- Chain
17
 Trust-based relationship

 Dependability

 Leap of faith

 Cooperation and trust work because:

 Alignment of incentives and goals

 Actions to achieve coordination are easier to implement

 Supply chain productivity improves by reducing duplication or allocation of effort to

appropriate stage

 Greater information sharing

 Example:

 Receiving material and not inspecting,

 implementing postponement at distributor

16-
18 Trust in the Supply Chain
 Historically, supply chain relationships are based on power or trust
 Disadvantages of power-based relationship:
 Results in one stage maximizing profits, often at the expense of other stages
 Can hurt a company when balance of power changes
 Less powerful stages have sought ways to resist (e.g. powerful distributor may
result in company appointing other distributor)
16- Building Trust into a
19
Supply Chain Relationship
 Deterrence-based view
 Use formal contracts
 Parties behave in trusting manner out of self-interest
 Process-based view
 Trust and cooperation are built up over time as a result of a series of
interactions
 Positive interactions strengthen the belief in cooperation of other party
 Neither view holds exclusively in all situations
 Building Trust into a
16-
20 Supply Chain Relationship
 Initially more reliance on deterrence-based view, then evolves to a
process-based view
 Co-identification: ideal goal
 Each party considers the other party’s objective as its own.
 Two phases to a supply chain relationship
 Design phase – ground rules are established and relationship is initiated
 Management phase – relationship evolves as regular interactions take place.
16-
Designing a Relationship
21 with Cooperation and Trust
 Assessing the value of the relationship and its contributions
 Identifying operational roles and decision rights for each party
 Creating effective contracts
 Designing effective conflict resolution mechanisms
16-
Assessing the Value of the Relationship and
22 its Contributions
 Identify the mutual benefit provided (e.g. how does each stage help the
supply chain)
 Identify the criteria used to evaluate the relationship (equity is
important)
 Important to share benefits equitably
 Clarify contribution of each party and the benefits each party will receive
(E.g. What does the supplier get by reducing costs?)
 Identifying Operational Roles and Decision
16-
23 Rights for Each Party
 Recognize interdependence between parties

 Sequential interdependence: activities of one partner precede the other

 Reciprocal interdependence: the parties come together, exchange information

and inputs in both directions (e.g. collaborative forecasting)

 Sequential interdependence is the traditional supply chain form

 Reciprocal interdependence is more difficult but can result in more

benefits
16-
Effects of Interdependence on Supply Chain
24 Relationships

Partner High Level of

Organization’s Dependence
Relatively Interdependence
High Powerful
Effective Relationship

Organization
Low Level of Relatively
Low Powerful
Interdependence

Low High

Partner’s Dependence
16-
25 Creating Effective Contracts
 Create contracts that encourage negotiation when unplanned
contingencies arise
 It is impossible to define and plan for every possible occurrence
 Informal relationships and agreements can fill in the “gaps” in contracts
 Informal arrangements may eventually be formalized in later contracts
16-
Designing Effective Conflict Resolution
26 Mechanisms
 Initial formal specification of rules and guidelines for procedures and
transactions
 Regular, frequent meetings to promote communication
 Courts or other intermediaries
16-
Achieving Coordination in Practice
27

 Quantify the bullwhip effect

 Get top management commitment for coordination
 Devote resources to coordination i.e. team comprising members from different
stages of supply chain.
 Focus on communication with other stages – setup periodic meetings
 Try to achieve coordination in the entire supply chain network – coordination
should be across all stages and not just two stages
 Use technology to improve connectivity in the supply chain
 Share the benefits of coordination equitably
Thank You