Collaborative SCM

12

“Misalignment of Supply Chain Incentives and Bullwhip effectEffect ” Comment by Cynthia Wolfe: Capitalize this word.

Edwin C. Udeh

Embry-Riddle Aeronautical University (Worldwide)

Supply Chain Management (LGMT 683)

December, 2014

ABSTRACT

As a business of supply chain grows, more it becomes complex. Supply chain depends on one another for information and resources; this interdependence has expanded due to globalization and information technology. The purpose of the paper is to examine the extent of the impact of lack of supply chain coordination on the performance of an organization and effect of inaccurate demand forecast that result to in a bullwhip effect. Lack of coordination has a significant impact on the performance of supply chain. When information is distorted due to misalignment, it causes bullwhip effect (Irregularities of order fluctuation from the downstream members to the upstream members that resulted to poor supply chain performance). The effect on performance of misalignment are increase in manufacturing cost, increase in inventory cost, increase in Replenishment lead time, increase in transportation cost, increase in labor cost for shipping and receiving, decrease in level of product availability and decrease in relationships across the supply chain.

TABLE OF CONTENT

1. Introduction 4

2. Misalignment of Supply Chain 5

2.1. Causes of Misalignment Incentives 6

2.2. Impact of Lack of Coordination on Performance 7

2.3. Challenges of Coordination in Supply Chain 8

3. Bullwhip effect and its Causes 9

3.1 Consequences of bullwhip effect 11

4. Collaboration and Integration in Supply Chain 11

4.1. Relationship in Supply Chain 12

4.2. Trust and Information Distortion in Supply Chain 12

5. Conclusion 14

6. Reference 15

1. Introduction Comment by Cynthia Wolfe: Pull up and remove the extra space.

Supply chain incentives in today’s global business require a consistent monitoring of activities that ensure optimal efficiency. The element of supply chain incentive is are risk, cost, and rewards. When these factors are not distributed fairly across supply chain partners, it results to in misalignment of incentives. Misalignment of supply chain occurs as a result of individual interests within the supply chain network that are contrary to goals and objectives of the lead corporation. The negative effect of misaligned incentives is excess inventory, stock-outs incorrect forecast, inadequate sales efforts and even poor customer service. The reason purpose of this paper is to examine the extent of the impact of lack of supply chain coordination on the performance of an organization and effect of inaccurate demand forecasts that result to in the bullwhip effect. The extent of the impact depends on the co-ordination and track compliance. These functions are attributed to the lead corporation that are expected to ensure proper coordination and to monitor supply chain. Misalignment and its impact depend on the extent of the lack of coordination and defiant of corporate strategies by supply chain partners. According to Wall street Street Journal of April 16, 2001, Cisco, the World’s largest network equipment maker announced that it would scrap $2.5 billion worth of surplus inventory. Cisco, in May of the same year, reported a net loss of $2.69 billion for that quarter and its share price dropped to 6% the day the announcement was made. When the unfortunate event happened, expert attributed it to forecasting software while analyst blamed senior executive of buying their heads in sockets. After the incident, Cisco had recounted that 18 months prior to the disclosure, they ended up with a mountain of subassembly boards and semiconductors it did not need due to lack of coordination and oversight. Cisco outsource their component product to contract manufacturers. In the good days, Cisco demand more supplies from its suppliers to the extent that Cisco offered some incentives (build a buffer stock, offer rewards if delivered supplies on time) if they could meet up with demand. Based on that, contractor manufacturer were working overtime, stockpiled semi-finished product in anticipation that demand for Cisco product usually exceeded supply. When the economy slowed down in 2000, that affected demand and supply, Cisco could not put hold on supplies in a short notice and again Cisco did not know the actual order quantity it requested from its suppliers. However, the supply chain were was disconnected because Cisco’s partners acted in their sole interest rather than the interest of the supply chain. Having said that, the case of Cisco has explained the impact of misalignment and bullwhip effect in supply chain. Cisco lost billions of dollar due to lack of coordination and oversight. Comment by Cynthia Wolfe: This would have been a good place to define the bullwhip effect. Comment by Cynthia Wolfe: I am not sure what you mean here. Comment by Cynthia Wolfe: Choose another word. Comment by Cynthia Wolfe: This introduction should be divided into multiple paragraphs. Introduce the topic before going into detail.

Keywords: Misalignment Incentives, Information distortion, Bullwhip effect, Collaboration, and Demand forecast.

2. Misalignment of supply chain Comment by Cynthia Wolfe: APA headings are required. This format is not APA. Do you have an APA manual??

Supply chain alignment is the capacity to have common and shared interests across the supply chain. When the common interests are sabotaged, misalignment of supply chain occurs. Misalignment is capable of downgrade downgrading a business or may lead to its failure. Misalignment occurs with for different reasons; it could be that different participants in the supply network have objectives that are not in line with corporate strategy or information across supply networks are delayed and distorted.

2.1. Causes of Misalignment of Incentives

There are different ways in which misalignment of supply chain could creep into an organization. The causes could be internal, external or at the initial stage when supply chain was designed. For the purpose of the paper, I will discuss more on the selected few that are so important in the global business. Organizations encounter misalignment problems in their supply chain activities because of explained reasons below. Comment by Cynthia Wolfe: Do not refer to yourself in the paper. Just state the information. Do not impose bias.

(i) Latent interest by individual partners: The attitude of supply chain partners contributes to the performance of an organization. When partners decide to act solely for their interest against the general interest and objective of the supply chain in such that the lead company could not interpret other partners actions, it become difficult to persuade those partners to do the right thing for the interest of the supply chain.

(ii) Undisclosed Information and Knowledge: It is obvious to encounter misalignment incentives in a cycle where information or knowledge are not shared evenly. Information is key to success as they say, in the World of business today individual, corporations hide information from one another with the fear that their shared ideas could be taking taken and developed into a bigger fortune without their consent or dump them for someone else. For instance, some US auto suppliers are reluctant to share their cost information with the notion that the automakers could use their data to compress their margins. For that reason suppliers refused to participate in improvement initiatives that will allow auto industries collect such information. Comment by Cynthia Wolfe: Remove.

(iii) Improper incentives design: When supply chain network are mis-designed especially in the global context it makes coordination and information flow difficult. When such a thing occurs, the supply chain partners should get together redesign a functional and efficient supply chain.

2.2. Impact of lack of Coordination on Performance:

Supply chain suffers when lack of coordination in stages intend to optimize its internal objectives without considering the effect on the whole system. When the stages of supply chain network optimizes actions that aid their sole objectives the resultant effect hurts the performance of the entire supply chain. For supply chains to move forward all participants must agree on the performance measures, structure rewards such that members are appropriately motivated. Lack of coordination reduces the profit of a supply chain by making it more expensive to provide a given level of product availability. The impact of lack of supply chain coordination on different measures of performance is listed below. Comment by Cynthia Wolfe: Word use – what are you referring to? Comment by Cynthia Wolfe: Explain and define each of these and the impact on the supply chain.

(i) Increase in manufacturing cost

(ii) Inventory cost

(iii) Replenishment lead time

(iv) Transportation Cost

(v) Labor cost for shipping and receiving.

(vi) Level of Product Availability

(vii) Relationship across the supply chain.

2.3. Challenges of Coordination in Supply Chain

Some of the challenges that might be seen in supply chain coordination are as a result of human factors, which may contribute to the obstacles and difficulties in coordinating supply chain. The supply chain stages have different interest and disagreements over the domain of supply chain decisions and actions.

* Local interest from different stages of supply chain and the opportunistic attitude of each member that contributes to fluctuation of order demand.

* The standard performance metrics based on supply chain member performance may be unacceptable to the optimization of supply chain profit in a coordinated manner.

*According to Piplani and Fu (2005), supply chain “plug and play” misalignment is associated with the difficulties involved in dynamically interchanging products and partners in the fast changing business environment.

* organizations searching where to source products in a considerable rate and the best suppliers across the globe has exposed supply chain into many risks and uncertainties. Perhaps, the more the network of supply chain and the distance from one stage to another so the increase in complexity in supply chain that make coordination difficult. Comment by Cynthia Wolfe: This information would have been more effective if it had not been presented in a list, but rather paragraph form.

3. Bullwhip effect and its causes

Bullwhip effect is a phenomenon that described the inconsistency on how demand variability fluctuates as it moves up the supply chain. Bullwhip effect moves all supply chain participants away from the efficient frontier and results in a decrease of both customer satisfaction and profitability within the supply chain. The primary cause of the bullwhip effect is the distortions on demand information within the supply chain, in such a way that each stage is providing different estimates of what demands could be. Bullwhip effect are common in all the supply chain. Lack of coordination could result to the bullwhip effect and if not checked would lead to unsatisfactory performance. The case of Cisco in the introductory part of this paper explained exactly what bullwhip effect could result. The report revealed that Cisco lost $2.69 billion after it had scrapped inventory worth of $2.5 billion, and also its stock price fell to 6% the day it was announced. The causes of the bullwhip effect will be analyzed in two forms, from behavioral and operational perspective.

(i). Behavioral causes: Primarily, the bullwhip effect was attributed to the irrational behavior of individuals. J.D. Sterman and J.W. Forrester apportioned behavioral causes to the bullwhip effect. Forrester proposed that the logical reasoning of the individuals that are in charge for demand management creates a tendency to over-reaction to increasing or decrease in demand from customers in regard to orders placed. J.D.Sterman pointed some behavioral causes of the bullwhip effect. Partners in supply chain do not take record of the delays between order placement and the order delivery. These inattention of time lags lead to continuing over and under ordering in the intervening periods. More so, partners of supply chain never use optimal stock levels and only try to optimize their individual part of the chain. Comment by Cynthia Wolfe: You presented this as a list. It would have been more effective in paragraph form as sections. Comment by Cynthia Wolfe: You have provided authors’ names but did not cite them correctly. Dates are required.

(ii). Operational Causes: H.L. Lee in his research identified that the bullwhip effect is not only a result irrational logic reasoning but the consequences of the individual rational behavior within the supply chain’s infrastructure. H.L.Lee went forward to state four high-level causes of the bullwhip effect. Among other causes stated below have become the standard and accepted framework to classifying all causes of the bullwhip effect. Comment by Cynthia Wolfe: Again, you have presented an author but not cited the work correctly. See the APA manual or ERAU Eaglet.

(a) Demand signal Processing: The major causes of the bullwhip effect is inaccurate demand forecast. Virtually every supply chain members do product forecasting for its materials planning, production scheduling, and inventory control and capacity planning. The product forecasting is based on the order history from the company’s immediate downstream neighbor. In the beer game sitting where each player’s behavior and intuition are based on demand pattern he or she observed. Comment by Cynthia Wolfe: The beer game has not been presented in this paper. While it is well known in supply chain circles, it is not common knowledge and requires a citation.

(b) Ordering Batching: Is accumulation of demands before an order could be issued. In some cases, companies prefer to batch their orders periodically instead of using a single order frequently. One reason of doing so is to receive a quantity discount, to minimize transport cost. Companies that adopted the use of an MRP system normally run the system periodically (weekly, bi-weekly and monthly) generating couple of orders. Periodical ordering increases variability in demand and therefore lead to the bullwhip effect. Comment by Cynthia Wolfe: This is not a complete sentence. Comment by Cynthia Wolfe: Companies may generate thousands of orders!

(c). Price Fluctuation: Companies that stockpiles inventories in advance especially more they due to offering discounts, promotion, and price reductions could run into a negative long term consequences of varying capacity utilization. When this occurs it lead to the bullwhip effect. Buying products in large quantity are a good idea as long as it meets the firm’s need or when the cost of holding inventory is less than the price difference. But companies should not stock inventories that will affect another supply chain.

(d). Rationing and Shortage Gaming: If for some reasons, manufacturers could not produce as demanded and supplies are rationed in proportion to the orders customers might react by inflating their demand in other to receive a bigger share of the short supply. When demand normalizes, orders are cancelled, and the problem is that it become difficult for the manufacturer to separate real orders from counterfeit orders.

3.1. Consequences of the bullwhip effect

When a stage in supply chain decides to act solo alone or take make a decisions that are not aligned to the overall interest of the supply chain, it leads to bigger unsatisfactory performance. Some of the consequences that may occur are excess inventory, poor customer service, lost revenues, misguided capacity plans, inactive transportation and uncoordinated production schedules. Comment by Cynthia Wolfe: Move this section up to the section on impact. Or, move that section here.

4. Collaboration and integration in Supply Chain

Collaboration in supply chain is an integration of different entities or network coming together to pursue a common interest that are capable of yielding economic benefits. Collaboration could be short term or long term but in any case collaboration should be transparent. Long-term collaboration takes time to overcome the ups, and down supply chain might encounter before a new collaboration takes place. The supply chain participants should acknowledge this and structure an appropriate long term expectation into their goals. These expectations may include measures that review performance as well as setting up a long term planning together in such that both parties can gain an understanding of each other’s objectives and identify a path they can work together for a long time. Comment by Cynthia Wolfe: Collaboration should have been introduced before the section on issues with supply chain.

4.1. Relationship in Supply Chain

Relationship in supply chain is very crucial in global business of today. To build a relationship is one, to maintain the relationship is another. For a relationship to stand parties involve must have an economic drivers in place that I consider as optimization, synchronization, profitability, adaptability and velocity, In a typical supply chain the relationship are in two parts, that is between the manufacturer and the supplier and manufacturer and the customer. Relationship must be balanced to yield an efficient result. Relationship between the manufacturer and the supplier they should build a relationship in such that they exchange information, demand data and the visibility of statues. They should not overlook their responsibility to teach others the technicalities that will lead to the success of the partnership. Relationship between the manufacturer and the customer is not different from the one described before. It should not be one sided, forecasting replacement and planning process should be done collaboratively. The customer should know about manufacturer capacities and capabilities likewise manufacturer should know theirs. When relationship is different from what I have stated above, it hinders communication flow and productivity which generally affect the supply chain performance. Comment by Cynthia Wolfe: The paper is about the BW effect. It is not clear how these sections fit with the overall paper. I suggest moving them forward in the paper and then discussing how the BW effect impacts these sections.

4.2 Trust and Information Distortion in Supply Chain

One of the crucial element in every relationship is trust. When trust lack in committed collaboration relationship loses its quality, and transactional cost could rise through a poor performance. When trust is present, it could lead supply chain beyond their expectations. Trust is very difficult to develop and maintain. There are risks and interdependence in supply chain relationship, and for that no participant will take advantage of that to exploit the loopholes and vulnerabilities of other partners. The characteristic of trust in supply chain should be openness, loyalty, honesty, fairness and competence. Where any of these is missing relationship suffers a setback.

In this complex business environment, for companies to remain relevant it requires a better information platform for easy information flow, quick access and retrieval of data. Lau.H. & Lee. W. (200). According to Monczka et al.,. Information sharing means the magnitude in which information is shared to one’s supply chain partner. Information is key to success. Imagine different entities come together to form a partnership each expected an order from its immediate upstream member. In this regard orders received from downstream supply chain serves as an important information to the upstream operations. Information relays through the supply chain in the form orders tend to be distorted and can mislead upstream members in their operational decisions. Inaccuracy in demand information indicates that the upstream member who only observed its immediate order information will be misguided by the inflation of demand patterns, and this has serious implications on costs. Comment by Cynthia Wolfe: Improper citation format. Comment by Cynthia Wolfe: Where is the date?

The level of coordination in supply chain will determine the accuracy of the information passed along the network or help to track down that information that are not useful for that purpose. Lack of coordination distorts information flow. The development of information technology has made a significant strides in the integration of inter-organizational information system. Enterprise resource planning has speed the inter-functional coordination and use of electronic data interexchange between two stages of supply chain has helped to improve inter organizational coordination in supply chain. Comment by Cynthia Wolfe: What is the meaning here? Comment by Cynthia Wolfe: This has already been discussed in another section.

5. Conclusion:

Coordination in supply chain requires all the participating members to take actions that optimize total supply chain profit. Misalignment of supply chain occurs if different network focus on their internal objectives or if information is distorted along the supply chain. The lack coordination affects information flow, in regard to orders. When information is distorted, it creates room for order fluctuation from downstream upstream to affect accurate decision on operational management (inventory, production, and forecasting). The downside resulted from misalignment of supply chain causes the bullwhip. The level of misalignment will determine the level of impact the bullwhip effect will have on the supply chain. In the case of Cisco in the introductory part, within 18 months of failure to coordinate Cisco scrapped an inventory worth of $2.5 billion, and its stock fell to 6% after the announcement was made. Comment by Cynthia Wolfe: This conclusion needs work. It might be OK to give Cisco as an example but it should not be the final sentence. A more effective technique would have been to summarize the information presented in the paper, leaving out Cisco. The paper is not about Cisco, but Cisco is the only example presented. Do other companies struggle with the BW effect?

References. Comment by Cynthia Wolfe: Incorrectly formatted reference page. Do you have an APA manual?

Barratt M (2004) Understanding the meaning of collaboration in the supply chain. Supply Chain

manage Int. J 9(1):30–42.

Chopra, Sunil & Meindi, Peter, (2010). Supply chain management strategy, planning and Comment by Cynthia Wolfe: Do not include authors’ names. Use initials. See APA manual.

operation (4th) upper saddle River, NJ Prentice Hall Inc.

H.L.Lee, V. Padmanabhan, and S. Whang. The bullwhip effect in supply chain; Sloan

Management Review, 38 (3), (1997).

Holstrom, J., Product range management: A case study of supply chain operations in the

european grocery industry, Supply Chain Management, Vol. 2, No. 3, 1997, pp.

107115.

J. D. Sterman, modeling managerial behavior; misperception of feedback in a dynamic decision

making experiment management science 35(3), (1989).

J.W. Forrester. Industrial. MIT press Cambridge, MA, (1961). Comment by Cynthia Wolfe: A source from 1961 is unlikely to be relevant. Chose a more current source. There are a lot of papers written on the BW effect to choose from.

Lau. H. and Lee. W. (2000). On a responsive supply chain information system. International

journal of physical distribution and logistics management 598-610.

Monczka, R., Petersen, K., Handfield, R., and Ragatz, G. (1998). Success factors in strategic

supply alliances; the buying company perspective decision science 5553-5577.

Piplani, R., Fu. Y. (2005). A coordination framework for the supply chain inventory alignment. J

Manuf Technol Manage 16 (6) 598-614

Tsay A (1999). The quantity flexibility contract and supplier–customer incentives. Manage Sci

45 (10):1339–1358

www.atkearneypas.com/.../2009/Aligning_Misaligned_Supply_Chain.pdf Comment by Cynthia Wolfe: Incorrect formatting here.

Individual Research Report Evaluation Rubric 100-point scale
Criteria	Superior	Average	Poor
Quality of Content and Depth of Analysis (60%) Points Possible: 60	Comprehensive review and assessment of the existing body of knowledge on topic; identifies and analyzes key issues and relationships between evidence and examples with accurately-cited details; assumptions and missing information are revealed and addressed, if any.	Comprehensive review and assessment of the existing body of knowledge on topic; identifies and analyzes at least a few key issues and relationships between evidence and examples with acceptably-cited details; assumptions and missing information are not revealed and addressed at any level.	Writing generally shows minimal or no evidence the student has done the required research review and analysis, consisting instead of generally-uncited information and frequent opinions, feelings and impressions.
Points Possible:	54-60	42-53	41 or less
Feedback:		The question of “why” is not answered in this paper. Evidence is weak and statements are made as fact without convincing data to support. Multiple industries and companies could have been presented as examples.
Points Received:		50
Organization (10%) Points Possible: 10	Provides an effective overview/introduction and develops a coherent, central theme that is expressed in a well-structured, organized, and logically-consistent manner throughout.	Provides a sufficient overview/introduction and develops some level of a central theme that is expressed in an acceptably organized manner.	Provides little or no overview/introduction and lacks any coherent, central theme; illogical structure and organization.
Points Possible:	9-10	7-8	6 or less
Feedback:			Information is repeated section to section. The central theme is not supported in all of the sections in an effective way. Introduction and conclusion are weak.
Points Received:			6
Formatting (10%) Points Possible: 10	Overall formatting requirements fully met: Times New Roman font, 12pt, double-spaced, meeting total page requirements, use of page numbers, title page, table of contents, appropriate labels on figures and tables.	Overall formatting met somewhat: Times New Roman font, 12pt, double-spaced, meeting total page requirements, use of page numbers, title page, table of contents, appropriate labels on figures and tables.	Formatting requirements not met.
Points Possible:	9-10	7-8	6 or less
Feedback:		Formatting needs work. Headings and reference page are not formatted correctly.
Points Received:		8
Mechanics (10%) Points Possible: 10	Uses correct grammar and evidence of proof-reading, i.e., no spelling errors.	An acceptable level of writing is exhibited, even with a few mechanical mistakes, but the communication is clear nonetheless.	Grammar, spelling, and/or word choice errors are frequent enough that the communication is muddled or incomprehensible.
Points Possible:	9-10	7-8	6 or less
Feedback:			Word misuse and grammar issues led to difficulty understanding statements. This paper requires stronger proofreading. Be especially vigilant with subject/verb agreement.
Points Received:			5
Sources (10%) Points Possible: 10	Excellent variety of sources and correct documentation of references used; uses proper APA citations and references.	Acceptable variety of sources and sufficient documentation of references used; APA citations are sometimes missing and/or are incorrect.	Minimal, irrelevant or no sources; lack of any sort of citation.
Points Received:	9-10	7-8	6 or less
Feedback:		Avoid sources older than 7 years. Citations are missing in critical sections of the paper. Proper citation format is not followed in this paper.
Points Received:		7
Total Points Possible: 100 Feedback	Edwin, it is clear after reviewing this paper, that you need some additional help with APA format. APA format not only includes the physical aspects of the paper, but also how and when to cite as well as organization and presenting information. Let me point you to our ERAU Eaglet writing tools as well as Purdue OWL ( https://owl.english.purdue.edu/owl/resource/560/01/ ). While you did present important information about the BW effect, it was not presented in an effective way. The entire paper should be cohesive with each section supporting the topic; this paper appears to have been pulled together in pieces. It may have been that you read an article, and then wrote a summary of each. Grammar and word usage are also areas in which you can improve. It is important that you are able to present information in a way that is clear and concise. I hope that you will read the comments in the margins and here in the rubric as a way to help improve your writing skills. You appear to understand the topic, but struggled in this paper to present the information to a reader.
Total Points Received:	76