1. Coordination in a Supply Chain10
Coordination in a Supply Chain

2. Objectives
Describe supply chain coordination, the bullwhip effect, and their impact on performance
Identify obstacles to coordination in a supply chain
Discuss managerial levers that help achieve coordination in a supply chain
Describe actions that facilitate the building of strategic partnerships and trust within a supply chain
Understand the different forms of collaborative planning, forecasting and replenishment possible in a supply chain

3. Lack of Supply Chain 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
Challenge: achieving co-ordination despite multiple owenership and product variety

4. 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)

5. Bullwhip Effect

6. 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

7. The Effect on Performance of Lack of Coordination
Manufacturing cost (increases) [excess capacity]
Inventory cost (increases) [increased safety stock]
Replenishment lead time (increases)
Transportation cost (increases) [expediting, spot prices]
Labor cost for shipping and receiving (increases)
Level of product availability (decreases)
Relationships across the supply chain (worsens) [blame and mistrusts]
Profitability (decreases)
The bullwhip effect reduces supply chain profitability by making it more expensive to provide a given level of product availability

8. Causes and Counter-measures of the Bullwhip Effect

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

10. 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
Double marginalisation
Localised objective (e.g. bulk transportation  high inventory)
Sales force incentives
End-of-period “sell-in” spike to distributors;
no impact on “sell-through” to customers  bullwhip effect!

11. 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 (e.g. beer game)
Lack of information sharing
Mis-interpretation of fluctuations in demand

12. Operational Obstacles
Occur when placing and filling orders lead to an increase in variability
Ordering in large lots (much larger than according to demand)
Large replenishment lead times
Rationing and shortage gaming

13. Operational Obstacles
Figure 10-2

14. Operational Obstacles
Large replenishment lead times
Rationing and shortage gaming (common in the computer industry because of periodic cycles of component shortages and surpluses)
17-14

15. Pricing Obstacles
When pricing policies for a product lead to an increase in variability of orders placed
Lot-size based quantity decisions
Price fluctuations

16. Pricing Obstacles
Figure 10-3

17. 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 …at the expense of overall supply chain performance

18. 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

19. Aligning Goals and Incentives
Aligning incentives and sharing risks grow total supply-chain surplus, hence grow profit share for each supply-chain member (win-win scenario)
Align incentives so that each participant has an incentive to do the things that will maximize total supply chain profits
Sharing risks (e.g. buyback contracts)
Align incentives across functions
Pricing for coordination
Alter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer)

20. Improving Information Accuracy
Sharing point of sale data, inventory info, etc.
Collaborative forecasting and planning
e.g. manufacturer need to know retailer’s promotion plans
Single stage control of replenishment
Continuous replenishment programs (CRP)
Vendor managed inventory (VMI)

21. Improving Operational Performance
Reducing replenishment lead time
Reduces uncertainty and increase accuracy in demand forecasts (e.g. so allows multiple replenishment orders in the selling season)
Strategies to reduce lead time:
EDI useful to reduce “paperwork” in order-processing
Flexible manufacturing (reduce batch setup times)
Cross-docking (speeding transport)
Reducing lot sizes (e.g. reduced ordering/setup costs)
Computer-assisted ordering, B2B exchanges
Shipping in TL sizes by combining LTL shipments across products and suppliers
Technology and other methods to simplify receiving
Changing customer ordering behavior (e.g. periodic orders at beginning of month)
Rationing based on past sales and sharing information to limit gaming
“Turn-and-earn”; no incentive to inflate orders
Information sharing (pre-order, e.g. moon-cakes)

22. 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

23. Building Strategic Partnerships and Trust in a Supply Chain
Each party is interested in the others’ welfare and will not act without considering impact on others.
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 in appropriate stage
Greater information sharing results
No quality/quantity checking upon receiving orders if suppliers shares quality control charts

24. 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

25. Building Trust into a Supply Chain Relationship
How to initiate and sustain a trust 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
Contracts cannot cover every contingency
“Word (teeth)” good as gold … but maybe still need some agreed-upon ground rules

26. 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
Designing a Trusting Relationship
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

27. Assessing the Value of the Relationship and its Contributions
Identify the mutual benefit provided
Identify the criteria used to evaluate the relationship (equality and fairness important)
Important to share benefits equitably
Clarify contribution of each party and the benefits each party will receive
Need mechanisms for partners to monitor and adjust contributions and allocation of benefits

28. 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

29. Effects of Interdependence on Supply Chain Relationships
Partner Relatively Powerful
High Level of Interdependence
Effective Relationship
High
Organization’s Dependence
Organization Relatively Powerful
Low Level of Interdependence
Low
Low
High
Partner’s Dependence

30. 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

31. Designing Effective Conflict Resolution Mechanisms
Initial formal specification of rules and guidelines for procedures and transactions
Sharing information over time engenders trust and smooth relationships
Regular, frequent meetings to promote communication
Conflict resolution and cultural perspectives
USA: Courts or other intermediaries
Asia: negotiated settlements

32. 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
Relationship success factors:
Flexibility, trust and commitment of top management
Good organisational arrangements (e.g. for information sharing and conflict resolution)
“Visibility”: helps identify defective process and reduces opportunistic exploitation by one party
The more fairly the dominant party treats the weaker, the stronger the relationship

33. Continuous Replenishment and Vendor-Managed Inventories
A single point of replenishment
CRP – wholesaler or manufacturer replenishes based on POS data
VMI – manufacturer or supplier is responsible for all decisions regarding inventory
VMI requires retailer to share sales information with suppliers  improved forecasts and better matching of supply to demand
Impact of Substitution
Some retailers may have VMI arrangements with competing suppliers (e.g. P&G, Lever Brothers) leading to overstock.

34. Collaborative Planning, Forecasting, and Replenishment (CPFR)
A business practice that combines intelligence of multiple partners in the planning and fulfilment of customer demand.
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
Organizational requirements
Procedures for exception handling
Cross-functional customer-specific teams
Risks and Hurdles for a CPFR implementation
Information leakage and misuse
“forced” technology upgrade
Merging of cultures (e.g. MTR/KCR)

35. 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

36. 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

37. Collaborative Planning, Forecasting, and Replenishment (CPFR)
Figure 10-4

38. 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

39. Collaborative Planning, Forecasting, and Replenishment (CPFR)
A business practice that combines intelligence of multiple partners in the planning and fulfilment of customer demand.
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
Organizational requirements
Procedures for exception handling
Cross-functional customer-specific teams
Risks and Hurdles for a CPFR implementation
Information leakage and misuse
“forced” technology upgrade
Merging of cultures (e.g. MTR/KCR)

40. The Role of IT in Coordination
Enablement of coordination the ultimate goal
IT’s role:
Information availability
Use of information available to make decisions
Facilitate sharing of forecasts and historical information, and enable revisions
Enterprise systems that record all the supply-chain transactions
Pitfalls/Challenges:
Systems integration
Co-ordinating operational procedures
trust

41. 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

42. Summary of Learning Objectives
What are supply chain coordination and the bullwhip effect, and what are their effects on supply chain performance?
What are obstacles to coordination in the supply chain?
What are the managerial levers that help achieve coordination in the supply chain?
What are actions that facilitate the building of strategic partnerships and trust in the supply chain?
What are the different forms of CPFR available in a supply chain?