Module-4

Coordination & Technology in

the Supply Chain
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

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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, where different stages have very different
estimates of what demand looks like
• Results in a loss of supply chain coordination
• Examples: Proctor & Gamble (Pampers); HP
(printers); Barilla (pasta)

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The Effect of Lack of
Coordination on Performance
• Manufacturing cost (increases)
• Inventory cost (increases)
• Replenishment lead time (increases)
• Transportation cost (increases)
• Labor cost for shipping and receiving (increases)
• Level of product availability (decreases)
• Relationships across the supply chain (worsens)
• Profitability (decreases)
• The bullwhip effect reduces supply chain profitability by making it
more expensive to provide a given level of product availability

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Obstacles to Coordination
in a Supply Chain
• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles

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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
• Sales force incentives

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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
• Forecasting based on orders, not customer
demand
• Forecasting demand based on orders magnifies
demand fluctuations moving up the supply chain from
retailer to manufacturer
• Lack of information sharing

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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) –
• Large replenishment lead times
• Rationing and shortage gaming (common in the
computer industry because of periodic cycles of
component shortages and surpluses)

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Pricing Obstacles
Occurs when the pricing policies for a product lead
to an increase in variability of order placed
• Lot-size based quantity decisions – Increases lot
size and results in bullwhip effect
• Price fluctuations – trade promotions and other
short term discounts result in forward buying

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Behavioral Obstacles
Problems in learning, often related to communication in the supply chain and
how the 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
• Different stages react to the current local situation rather than trying to
identify the root causes
• 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
• Lack of trust results in opportunism, duplication of effort, and lack of
information sharing

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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

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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
• Alter sales force incentives from sell-in (to the
retailer) to sell-through (by the retailer)

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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)

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Improving Operational Performance
• Reducing replenishment lead time
• Reduces uncertainty in demand
• EDI (Electronic Data Interchange)is useful
• Reducing lot sizes
• Computer-assisted ordering, B2B exchanges
• 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”
• Information sharing

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Designing Pricing Strategies
to Stabilize Orders
• Encouraging retailers to order in smaller lots and reduce 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
• Building strategic partnerships and trust – easier to implement
these approaches if there is trust

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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

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Building Strategic Partnerships and Trust in a
Supply Chain
• 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 results

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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

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Building Trust into a
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

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Building Trust into a
Supply Chain Relationship
• Initially more reliance on deterrence-based view,
then evolves to a process-based view
• Co-identification: ideal goal
• Two phases to a supply chain relationship
• Design phase
• Management phase

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Designing a Relationship
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

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Assessing the Value of the Relationship and
its Contributions
• Identify the mutual benefit provided
• 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

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Identifying Operational Roles and Decision
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
• Sequential interdependence is the traditional
supply chain form
• Reciprocal interdependence is more difficult but can
result in more benefits
• Figure 17.4

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Effects of Interdependence on Supply
Chain Relationships (Figure 17.4)

Partner High Level of

Organization’s Dependence Relatively Interdependence

High
Powerful Effective Relationship

Organization
Low Level of Relatively
Low Interdependence
Powerful

Low High
Partner’s Dependence
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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

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Designing Effective Conflict Resolution
Mechanisms
• Initial formal specification of rules and guidelines
for procedures and transactions
• Regular, frequent meetings to promote
communication
• Courts or other intermediaries

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Managing Supply Chain Relationships for
Cooperation and Trust
• Effective management of a relationship is
important for its success
• Top management is often involved in the design
but not management of a relationship
• Perceptions of reduced benefits or opportunistic
actions can significantly impair a supply chain
partnership

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Achieving Coordination in Practice
• Quantify the bullwhip effect
• Get top management commitment for coordination
• Devote resources to coordination
• Focus on communication with other stages
• Try to achieve coordination in the entire supply chain
network
• Use technology to improve connectivity in the supply
chain
• Share the benefits of coordination equitably

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Role of Information Technology
in a Supply Chain
• Information is the driver that serves as the “glue” to create a
coordinated supply chain
• Information must have the following characteristics to be
useful:
• Accurate
• Accessible in a timely manner
• Information must be of the right kind
• Information provides the basis for supply chain management
decisions
• Inventory
• Transportation
• Facility
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Characteristics of Useful
Supply Chain Information
• Accurate
• Accessible in a timely manner
• The right kind
• Provides supply chain visibility

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Use of Information
in a Supply Chain
• Information used at all phases of decision making:
strategic, planning, operational
• Examples:
• Strategic: location decisions
• Operational: what products will be produced during
today’s production run

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Use of Information
in a Supply Chain
• Inventory: demand patterns, carrying costs,
stockout costs, ordering costs
• Transportation: costs, customer locations,
shipment sizes
• Facility: location, capacity, schedules of a facility;
need information about trade-offs between
flexibility and efficiency, demand, exchange rates,
taxes, etc.

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Role of Information Technology
in a Supply Chain
• Information technology (IT)
• Hardware and software used throughout the supply
chain to gather and analyze information
• Captures and delivers information needed to make
good decisions
• Effective use of IT in the supply chain can have a
significant impact on supply chain performance

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The Importance of Information
in a Supply Chain
• Relevant information available throughout the
supply chain allows managers to make decisions
that take into account all stages of the supply
chain
• Allows performance to be optimized for the entire
supply chain, not just for one stage – leads to
higher performance for each individual firm in the
supply chain

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The Supply Chain IT Framework
• The Supply Chain Macro Processes
• Customer Relationship Management (CRM)
• Internal Supply Chain Management (ISCM)
• Supplier Relationship Management (SRM)
• Plus: Transaction Management Foundation
• Figure 16.1
• Why Focus on the Macro Processes?
• Macro Processes Applied to the Evolution of Software

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Macro Processes in a Supply Chain
(Figure 16.1)

Supplier Internal Customer

Relationship Supply Chain Relationship
Management Management Management
(SRM) (ISCM) (CRM)

Transaction Management Foundation (TFM)

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Customer Relationship
Management
• The processes that take place between an enterprise
and its customers downstream in the supply chain
• Key processes:
• Marketing
• Selling
• Order management
• Call/Service center

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Internal Supply Chain Management
• Includes all processes involved in planning for and
fulfilling a customer order
• ISCM processes:
• Strategic Planning
• Demand Planning
• Supply Planning
• Fulfillment
• Field Service
• There must be strong integration between the ISCM
and CRM macro processes

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Supplier Relationship Management
• Those processes focused on the interaction between
the enterprise and suppliers that are upstream in the
supply chain
• Key processes:
• Design Collaboration
• Source
• Negotiate
• Buy
• Supply Collaboration
• There is a natural fit between ISCM and SRM processes

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The Transaction Management Foundation

• Enterprise software systems (ERP)

• Earlier systems focused on automation of simple
transactions and the creation of an integrated method
of storing and viewing data across the enterprise
• Real value of the TMF exists only if decision making is
improved
• The extent to which the TMF enables integration
across the three macro processes determines its value

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The Future of IT in the Supply
Chain
• At the highest level, the three SCM macro processes
will continue to drive the evolution of enterprise
software
• Software focused on the macro processes will become
a larger share of the total enterprise software market
and the firms producing this software will become
more successful
• Functionality, the ability to integrate across macro
processes, and the strength of their ecosystems, will
be keys to success

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Supply Chain Information Technology in
Practice
• Select an IT system that addresses the company’s key
success factors
• Take incremental steps and measure value
• Align the level of sophistication with the need for
sophistication
• Use IT systems to support decision making, not to
make decisions
• Think about the future

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E business and the supply chain

• The Role of E-Business- E- business is the execution of business

transactions via the internet:
• Providing product information.
• Placing orders with Suppliers.
• Allowing customers to place orders.
• Allowing customers to track orders.
• Filling and delivering orders to customers.
• Receiving payment from Customers.
• Today, The internet plays a significant role in many supply chains
• And companies are using the internet to conduct a wide variety of
Supply Chain transactions.
• The Value of e-business will allow business to create significant value
in the future.
• The value however will depend upon the industry and the stage in the
supply chain a firm occupies.
The E-business Framework
• Impact on responsiveness. (which primarily affects a
company’s ability to grow and protect revenue).
• Impact on efficiency. (which primarily affects a
company’s cost).
Impact of E-Business on Responsiveness
 Enables a company to gain new revenues or to protect existing revenues.
 Direct Sales to Customers. 24 Hour access from any location.
 Wider Product portfolio and Information Aggregation.
 Personalization/Customization.
 Faster time to Market.
 Flexible pricing, product portfolio, and promotions
 Efficient funds Transfer Lower stock out levels.
 Convenience/automated processes
Impact of E-business on Cost
 Inventory
 Facilities
 Transportation.
 Information
Supply Chain Benefits
• Value of supply Chain benefits can be higher when
product life cycles are short.
• Increased visibility
• Collaboration
• A firm can be successful with e-business only if it
can integrate The internet with existing channels
of distribution in way that Uses the strengths of
each appropriately
 E-business in practice
1. Integrate the Internet with the existing physical network.
2. Devise shipment pricing strategies that reflect costs.
3. Optimize e-business logistics to handle packages not pallets.
4. Design the e-business supply chain to efficiently handle
returns.
5. Keep Customers informed throughout the order fulfillment
Cycle.