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© 2007 Pearson Education 16-1 Chapter 17 Coordination in the Supply Chain Supply Chain Management (3rd Edition)
© 2007 Pearson Education 16-2 Objectives uDescribe supply chain coordination, the bullwhip effect, and their impact on performance uIdentify causes of the bullwhip effect and obstacles to coordination in the supply chain uDiscuss managerial levers that help achieve coordination in the supply chain uDescribe actions that facilitate the building of strategic partnerships and trust within the supply chain
© 2007 Pearson Education 16-3 Outline uLack of Supply Chain Coordination and the Bullwhip Effect uEffect of Lack of Coordination on Performance uObstacles to Coordination in the Supply Chain uManagerial Levers to Achieve Coordination uBuilding Strategic Partnerships and Trust Within a Supply Chain uAchieving Coordination in Practice
© 2007 Pearson Education 16-4 Lack of SC Coordination and the Bullwhip Effect uSupply chain coordination – all stages in the supply chain take actions together (usually results in greater total supply chain profits) uSC coordination requires that each stage take into account the effects of its actions on the other stages uLack of coordination results when: –Objectives of different stages conflict or –Information moving between stages is distorted
© 2007 Pearson Education 16-5 Bullwhip Effect uFluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers (shown in Figure 16.1) uDistorts demand information within the supply chain, where different stages have very different estimates of what demand looks like uResults in a loss of supply chain coordination uExamples: Proctor & Gamble (Pampers); HP (printers); Barilla (pasta)
© 2007 Pearson Education 16-6 The Effect of Lack of Coordination on Performance uManufacturing cost (increases) uInventory cost (increases) uReplenishment lead time (increases) uTransportation cost (increases) uLabor cost for shipping and receiving (increases) uLevel of product availability (decreases) uRelationships across the supply chain (worsens) uProfitability (decreases) uThe bullwhip effect reduces supply chain profitability by making it more expensive to provide a given level of product availability
© 2007 Pearson Education 16-7 Obstacles to Coordination in a Supply Chain uIncentive Obstacles uInformation Processing Obstacles uOperational Obstacles uPricing Obstacles uBehavioral Obstacles
© 2007 Pearson Education 16-8 Incentive Obstacles uWhen 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 uLocal optimization within functions or stages of a supply chain uSales force incentives
© 2007 Pearson Education 16-9 Information Processing Obstacles uWhen demand information is distorted as it moves between different stages of the supply chain, leading to increased variability in orders within the supply chain uForecasting based on orders, not customer demand –Forecasting demand based on orders magnifies demand fluctuations moving up the supply chain from retailer to manufacturer uLack of information sharing
© 2007 Pearson Education Operational Obstacles uActions taken in the course of placing and filling orders that lead to an increase in variability uOrdering in large lots (much larger than dictated by demand) – Figure 17.2 uLarge replenishment lead times uRationing and shortage gaming (common in the computer industry because of periodic cycles of component shortages and surpluses)
© 2007 Pearson Education Pricing Obstacles uWhen pricing policies for a product lead to an increase in variability of orders placed uLot-size based quantity decisions uPrice fluctuations (resulting in forward buying) – Figure 17.3
© 2007 Pearson Education Behavioral Obstacles uProblems in learning, often related to communication in the supply chain and how the supply chain is structured uEach stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages uDifferent stages react to the current local situation rather than trying to identify the root causes uBased on local analysis, different stages blame each other for the fluctuations, with successive stages becoming enemies rather than partners uNo 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 uLack of trust results in opportunism, duplication of effort, and lack of information sharing
© 2007 Pearson Education Managerial Levers to Achieve Coordination uAligning Goals and Incentives uImproving Information Accuracy uImproving Operational Performance uDesigning Pricing Strategies to Stabilize Orders uBuilding Strategic Partnerships and Trust
© 2007 Pearson Education Aligning Goals and Incentives uAlign incentives so that each participant has an incentive to do the things that will maximize total supply chain profits uAlign incentives across functions uPricing for coordination uAlter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer)
© 2007 Pearson Education Improving Information Accuracy uSharing point of sale data uCollaborative forecasting and planning uSingle stage control of replenishment –Continuous replenishment programs (CRP) –Vendor managed inventory (VMI)
© 2007 Pearson Education Improving Operational Performance uReducing replenishment lead time –Reduces uncertainty in demand –EDI is useful uReducing 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 uRationing based on past sales and sharing information to limit gaming –“Turn-and-earn” –Information sharing
© 2007 Pearson Education Designing Pricing Strategies to Stabilize Orders uEncouraging retailers to order in smaller lots and reduce forward buying uMoving from lot size-based to volume-based quantity discounts (consider total purchases over a specified time period) uStabilizing pricing –Eliminate promotions (everyday low pricing, EDLP) –Limit quantity purchased during a promotion –Tie promotion payments to sell-through rather than amount purchased uBuilding strategic partnerships and trust – easier to implement these approaches if there is trust
© 2007 Pearson Education Building Strategic Partnerships and Trust in a Supply Chain uBackground uDesigning a Relationship with Cooperation and Trust uManaging Supply Chain Relationships for Cooperation and Trust
© 2007 Pearson Education Building Strategic Partnerships and Trust in a Supply Chain uTrust-based relationship –Dependability –Leap of faith uCooperation 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
© 2007 Pearson Education Trust in the Supply Chain uTable 17.2 shows benefits uHistorically, supply chain relationships are based on power or trust uDisadvantages 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
© 2007 Pearson Education Building Trust into a Supply Chain Relationship uDeterrence-based view –Use formal contracts –Parties behave in trusting manner out of self-interest uProcess-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 uNeither view holds exclusively in all situations
© 2007 Pearson Education Building Trust into a Supply Chain Relationship uInitially more reliance on deterrence-based view, then evolves to a process-based view uCo-identification: ideal goal uTwo phases to a supply chain relationship –Design phase –Management phase
© 2007 Pearson Education Designing a Relationship with Cooperation and Trust uAssessing the value of the relationship and its contributions uIdentifying operational roles and decision rights for each party uCreating effective contracts uDesigning effective conflict resolution mechanisms
© 2007 Pearson Education Assessing the Value of the Relationship and its Contributions uIdentify the mutual benefit provided uIdentify the criteria used to evaluate the relationship (equity is important) uImportant to share benefits equitably uClarify contribution of each party and the benefits each party will receive
© 2007 Pearson Education Identifying Operational Roles and Decision Rights for Each Party uRecognize 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 uSequential interdependence is the traditional supply chain form uReciprocal interdependence is more difficult but can result in more benefits uFigure 17.4
© 2007 Pearson Education Effects of Interdependence on Supply Chain Relationships (Figure 17.4) Organization’s Dependence High Low Partner’s Dependence Low High Partner Relatively Powerful Organization Relatively Powerful High Level of Interdependence Effective Relationship Low Level of Interdependence
© 2007 Pearson Education Creating Effective Contracts uCreate contracts that encourage negotiation when unplanned contingencies arise uIt is impossible to define and plan for every possible occurrence uInformal relationships and agreements can fill in the “gaps” in contracts uInformal arrangements may eventually be formalized in later contracts
© 2007 Pearson Education Designing Effective Conflict Resolution Mechanisms uInitial formal specification of rules and guidelines for procedures and transactions uRegular, frequent meetings to promote communication uCourts or other intermediaries
© 2007 Pearson Education Managing Supply Chain Relationships for Cooperation and Trust uEffective management of a relationship is important for its success uTop management is often involved in the design but not management of a relationship uFigure process of alliance evolution uPerceptions of reduced benefits or opportunistic actions can significantly impair a supply chain partnership
© 2007 Pearson Education Achieving Coordination in Practice uQuantify the bullwhip effect uGet top management commitment for coordination uDevote resources to coordination uFocus on communication with other stages uTry to achieve coordination in the entire supply chain network uUse technology to improve connectivity in the supply chain uShare the benefits of coordination equitably
© 2007 Pearson Education Summary of Learning Objectives uWhat are supply chain coordination and the bullwhip effect, and what are their effects on supply chain performance? uWhat are the causes of the bullwhip effect, and what are obstacles to coordination in the supply chain? uWhat are the managerial levers that help achieve coordination in the supply chain? uWhat are actions that facilitate the building of strategic partnerships and trust in the supply chain?
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