Aquisition and Supply Chain Mgmt Help

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Supply Chain Management: Strategy, Planning, and Operation

Seventh Edition

Chapter 10

Coordination in a Supply Chain

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Learning Objectives

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

10.2 Identify obstacles to coordination in a supply chain.

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

10.4 Understand some practical approaches to improve coordination in a supply chain.

Lack of Supply Chain Coordination and Its Impact on Performance

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 (1 of 2)

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

Bullwhip Effect (2 of 2)

Figure 10-1 Demand Fluctuation at Different Stages of a Supply Chain

The Effect on Performance (1 of 2)

Lack of coordination increases variability and hurts supply chain surplus

Impact on costs

Manufacturing cost

Inventory cost

Replenishment lead time

Transportation cost

Labor cost for shipping and receiving

Level of product availability

Relationships across the supply chain

The Effect on Performance (2 of 2)

Table 10-1 Impact of the Lack of Coordination on Supply Chain 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

Summary of Learning Objective 1

Supply chain coordination requires all stages to take actions that maximize total supply chain profits. A lack of coordination results if different stages focus on optimizing their local objectives or if information is distorted as it moves across the supply chain. The phenomenon that fluctuation in orders increases as one moves up the supply chain from retailers to wholesalers to manufacturers to suppliers is referred to as the bullwhip effect. This effect results in an increase in all costs in the supply chain and a decrease in customer service levels. The bullwhip effect moves all parties in the supply chain away from the efficient frontier and results in a decrease of both customer satisfaction and profitability within the supply chain.

Obstacles to Coordination in a Supply Chain

Incentive Obstacles

Information Processing Obstacles

Operational Obstacles

Pricing Obstacles

Behavioral Obstacles

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

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 and not customer demand

Lack of information sharing

Operational Obstacles (1 of 2)

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

Ordering in large lots

Large replenishment lead times

Rationing and shortage gaming

Operational Obstacles (2 of 2)

Figure 10-2 Demand and Order Stream with Orders Every Five Weeks

Pricing Obstacles (1 of 2)

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

Lot-size based quantity decisions

Price fluctuations

Pricing Obstacles (2 of 2)

Figure 10-3 Retailer Sales and Manufacturer Shipments of Soup

Behavioral Obstacles (1 of 2)

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

Behavioral Obstacles (2 of 2)

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

Summary of Learning Objective 2

A key obstacle to coordination in the supply chain is misaligned incentives that result in different stages optimizing local objectives instead of total supply chain profits. Other obstacles include lack of information sharing, operational inefficiencies leading to large replenishment lead times and large lots, sales force incentives that encourage forward buying, rationing schemes that encourage inflation of orders, promotions that encourage forward buying, and a lack of trust that makes any effort toward coordination difficult.

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

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)

Improving Information Visibility and Accuracy

Sharing customer demand data

Implementing collaborative forecasting and planning

Designing single-stage control of replenishment

Continuous replenishment programs (C R P)

Vendor managed inventory (V M I)

Improving Operations to Synchronize Supply and Demand

Reducing replenishment lead time

Reducing lot sizes

Rationing based on past sales and sharing information to limit gaming

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

Easier to use levers to achieve coordination if trust and strategic partnerships are built

Sharing accurate information

Lower transaction costs between stages

All parties must believe that the benefits of improved coordination are being shared equally

Improving Coordination in Practice

Get top management commitment for coordination

Devote resources to coordination

Focus on communication with other stages

Summary of Learning Objective 3

Managers can improve coordination in the supply chain by aligning goals and incentives across different functions and stages of the supply chain. Other actions that managers can take to improve coordination include sharing of sales information and collaborative forecasting and planning, implementation of single-point control of replenishment, improving operations to reduce lead times and lot sizes, E D L P and other pricing strategies that limit forward buying, and the building of trust and strategic partnerships within the supply chain. Top management commitment, the devotion of resources to coordination, and a focus on communication across the supply chain are important requirements for coordination to improve in practice.

Some Practical Approaches to Improve Supply Chain Coordination (1 of 2)

Continuous replenishment and vendor-managed inventories

A single point of replenishment

C R P – wholesaler or manufacturer replenishes based on P O S data

V M I – manufacturer or supplier is responsible for all decisions regarding inventory

Substitutes

Some Practical Approaches to Improve Supply Chain Coordination (2 of 2)

Collaborative planning, forecasting, and replenishment (C P F R)

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

Common C P F R Scenarios

Table 10-2 Four Common C P F R Scenarios

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

Collaborative Planning, Forecasting, and Replenishment (C P F R) (1 of 2)

Retail event collaboration

D C replenishment collaboration

Store replenishment collaboration

Collaborative assortment planning

Organizational and technology requirements for successful C P F R

Risks and hurdles for a C P F R implementation

Collaborative Planning, Forecasting, and Replenishment (C P F R) (2 of 2)

Figure 10-4 Collaborative Organizational Structure

Summary of Learning Objective 4

V M I and C P F R are two practical approaches to improve coordination in the supply chain. Under V M I, the supplier is responsible for managing product inventories at the retailer while ensuring an agreed upon level of service. Under C P F R, supply chain members manage forecasting, planning, and replenishment in a collaborative manner. Partners may set C P F R relationships to collaborate on store events, D C replenishment, store replenishment, or assortment planning. D C replenishment collaboration is often the easiest to implement because it requires aggregate-level data. Store replenishment collaboration requires a higher level of investment in technology and data sharing to be successful.

Aquisition and Supply Chain Mgmt Help

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