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Coordination in a Supply Chain

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Chopra and Meindl Supply Chain Management, 5e

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Learning Objectives

Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance.

Identify obstacles to coordination in a supply chain.

Discuss managerial levers that help achieve coordination in a supply chain.

Understand the different forms of collaborative planning, forecasting, and replenishment possible in a supply chain.

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Lack of Supply Chain Coordination and the Bullwhip Effect

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

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Lack co-ordintation tend to be higher when more and more complex a supply chain is. E.g. having thousand of suppliers and lack of communication. E.g. Ford having thousand of suppliers.

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

Results from a loss of supply chain coordination

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Demand at Different Stages

Figure 10-1

distributors

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Fluctuations are low in the beginning and gets higher downstream

Creates problem with inventory

E.g. Walmart- decide to place a bigger order with the distributer. So they believe that there is a rise in demand and then they then place a higher order with manufacturer and then they place a bigger order with supplier. Then in another period the promotion is over and the orders is then reduced and then the orders are then reduced and this is the bull-whip effect.

The Effect on Performance

Supply chain lacks coordination if each stage optimizes only its local objective

Reduces total profits

Performance measures include

Manufacturing cost

Inventory cost

Replenishment lead time

Transportation cost

Labor cost for shipping and receiving

Level of product availability

Relationships across the supply chain

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Manufacturing cost ( Increase) Why ? Capacity and inventory

Inventory cost( Increase)

Replenishment lead time( Increase) orders are not put in time and

Transportation cost( Increase)

Labor cost for shipping and receiving ( Increase) – carry excess labour capacity or fluctuation such as sub-contract etc.

Level of product availability ( decrease) – retailer will run out of stock

Relationships across the supply chain ( causes lack of trust and conflict)

The Effect on Performance

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 10-1

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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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Conflict when departments are focused on their individual goals and not the overall strategic goal of the organization as a whole.

Incentive Obstacles

Occur when incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits

Local optimization within functions or stages of a supply chain

Sales force incentives

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E.g. local optimization. When incentives are only within local optimization only for retailer, distributor or supplier it will not be cohesive. e.g. being part of a team as a soccer player but only hogging the ball and never using your team make to score a goal.

Sales Force Incentives

Quantity sold to distributors/retailers (sell-in)

Quantity sold to final customers (sell-through)

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

Lack of information sharing

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Eg- customer to retailer to wholesaler … supplier demand is distorted.. Wholesaler forecast is based on orders and not customer demand

E.g. Walmart is having a promotion for product and wholesaler and manufacturer are not aware of the promotion they plan the same forecast for future as a permanent forecast. But when the oreder return to normal the manufacturer may believe that the orders of demand is now lower and may then order smaller lots.

Operational Obstacles

Occur when placing and filling orders lead to an increase in variability

Ordering in large lots

Large replenishment lead times

Rationing and shortage gaming

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Large lots. Demand fluctuations are smaller from retailer but then orders are done in larger lots due the time of replenishment. E.g. Demand every week but orders are placed every 5 weeks.

Large Replenishment Lead Times: eg lead time is 1 week. Retailer thinks that it will take 1 week to get items. Retailer see a growth in demand they will make an adjustment. But what if they have a lead time of 8 weeks they will then project a larger order. This will cause huge fluctuations when lead times are greater.

Rationing: high demand products and short supply-

Shortage gaming: what is the order size: retailer as for 100 and wholesaler gives 75 so next time they may ask for 125 to get the 100

Operational Obstacles

Figure 10-2

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Pricing Obstacles

When pricing policies for a product lead to an increase in variability of orders placed

Lot-size based quantity decisions

Price fluctuations

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E.g. LS: Discounts are offered based on lot sizes. And then lot sizes are bigger and bigger.

PF: Short term discounts that causes forward buying by wholesalers or retailer.

Pricing Obstacles

Figure 10-3

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Behavioral Obstacles

Problems in learning within organizations that contribute to information distortion

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 ( Causes lack of trust)

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

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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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How coordination can be improved

Aligning Goals and Incentives

Align goals and incentives so that every participant in supply chain activities works to maximize total supply chain profits

Align goals across the supply chain

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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E.g. Walmart pays HP for each printer sold. HP directly has information straight from customer.

Improving Information Visibility and Accuracy

Sharing point of sale data (customer demand data)

Implementing collaborative forecasting and planning

Designing single-stage control of replenishment (information sharing)

Continuous replenishment programs (CRP)

Vendor managed inventory (VMI)

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E.g. Walmart assign one of its suppliers as the leader for each major product category. They are responsible for store level replenishment.

Improving Operational Performance

Reducing replenishment lead time

Reducing lot sizes

Rationing based on past sales and sharing information to limit gaming

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Online ordering or EDI- Electronic Data Interchange

Information is not as distorted in smaller lot sizes because it is more often. (RFID)

Rationing based on PS and LG: manufacturer can look at past sales data and then do rationing based on that data.

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

Stabilizing pricing

Building strategic partnerships and trust

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Lot size tend to create bigger fluctuations

Volume Based quantity discounts is based on overall purchased in a specific period e.g. quarter or year.

Improve order coordination.

Stabalize pricing- no promotings- Everyday low prices less fluctuations (no forward buying needed)

Continuous Replenishment and Vendor-Managed Inventories

A single point of replenishment

CRP – wholesaler or manufacturer replenishes based on POS (point of sale) data

VMI – manufacturer or supplier is responsible for all decisions regarding inventory

Substitutes

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Continuous replenishment program

Vendor managed inventories.

Collaborative Planning, Forecasting, and Replenishment (CPFR)

Sellers and buyers in a supply chain may collaborate along any or all of the following

Strategy and planning

Demand and supply management

Execution

Analysis

Retail event collaboration

DC replenishment collaboration

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Visibility in the supply chain, minimize excess inventory

Common CPFR Scenarios

CPFR Scenario	Where Applied in Supply Chain	Industries Where Applied
Retail event collaboration	Highly promoted channels or categories	All industries other than those that practice EDLP
DC replenishment collaboration	Retail DC or distributor DC	Drugstores, hardware, grocery
Store replenishment collaboration	Direct store delivery or retail DC-to-store delivery	Mass merchants, club stores
Collaborative assortment planning	Apparel and seasonal goods	Department stores, specialty retail

Table 10-2

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Collaborative Planning, Forecasting, and Replenishment (CPFR)

Store replenishment collaboration

Collaborative assortment planning

Organizational and technology requirements for successful CPFR

Risks and hurdles for a CPFR implementation

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Collaborative Planning, Forecasting, and Replenishment (CPFR)

Figure 10-4

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-blockchain

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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Bullwhip effect is to match supply with demand. Minimum and maximum you want to keep it all in alignment with all parties. Supplier, manufacturer and retailer to do what : keep cost down.

Summary of Learning Objectives

Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance

Identify obstacles to coordination in a supply chain

Discuss managerial levers that help achieve coordination in a supply chain

Understand the different forms of CPFR possible in a supply chain

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Depends on your business model and when you are going plan activities.

Block Chain: https://www.linkedin.com/learning/search?keywords=block%20chain%20in%20supply%20chain&u=26194554

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Printed in the United States of America.

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Chapter 10 • Coordination in a Supply Chain 251

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Time Time

Wholesaler’s Orders to Manufacturer

Consumer Sales at Retailer

Manufacturer’s Orders with Supplier

Retailer’s Orders to Wholesaler

FIGURE 10-1 Demand Fluctuations at Different Stages of a Supply Chain

to coordinate information exchange with thousands of suppliers and dealers. The fundamental challenge today is for supply chains to achieve coordination in spite of multiple ownership and increased product variety.

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, as shown in Figure 10-1. The bullwhip effect distorts demand information within the supply chain, with each stage having a different estimate of what demand looks like.

Procter & Gamble (P&G) has observed the bullwhip effect in the supply chain for Pampers diapers.1 The company found that raw material orders from P&G to its suppliers fluctuated significantly over time. Farther down the chain, when sales at retail stores were studied, the fluctuations, while present, were small. It is reasonable to assume that the consumers of diapers (babies) at the last stage of the supply chain used them at a steady rate. Although consumption of the end product was stable, orders for raw material were highly variable, increasing costs and making it difficult to match supply and demand.

HP also found that the fluctuation in orders increased significantly as they moved from the resellers up the supply chain to the printer division to the integrated circuit division.2 Once again,

1 Lee, Padmanabhan, and Whang (1997). 2 Ibid.

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