coordination in supply chain-270907

8/8/2019 Coordination in Supply Chain-270907

1/33

2004 Prentice-Hall, Inc. 16-1

Coordination in Supply Chain and

Bullwhip effect

.


2/33


Coordination in the Supply Chain

Outline

x Lack of Supply Chain Coordination and theBullwhip Effect

x Effect of Lack of Coordination on Performance

x Obstacles to Coordination in the Supply Chainx Managerial Levers to Achieve Coordination

x Building Strategic Partnerships and TrustWithina Supply Chain

x Achieving Coordination in Practice


3/33


Lack of SC Coordination

and the Bullwhip Effect

x Supply chain coordination all stages in the supplychain take actions together (usually results ingreater total supply chain profits)

x SC coordination requires that each stage take intoaccount the effects of its actions on the other stages

x Lack of coordination results when: Objectives of different stages conflict or

Information moving between stages is distorted


4/33


Bullwhip Effect

x Fluctuations in orders increase as they move upthe supply chain from retailers to wholesalers tomanufacturers to suppliers (shown in Figure

16.1)x Distorts demand information within the supply

chain, where different stages have very differentestimates of what demand looks like

x

Results in a loss of supply chain coordinationx Examples: Proctor & Gamble (Pampers); HP

(printers); Barilla (pasta)


5/33


The Bullwhip Effect


6/33


The Bullwhip Effect


7/33 2004 Prentice-Hall, Inc. 16-7

The Effect of Lack of

Coordination on Performancex Manufacturing cost (increases)x Inventory cost (increases)

x Replenishment lead time (increases)

x Transportation cost (increases)

x Labor cost for shipping and receiving (increases)x Level of product availability (decreases)

x Relationships across the supply chain (worsens)

x Profitability (decreases)

x

The bullwhip effect reduces supply chain profitability bymaking it more expensive to provide a given level of productavailability


8/33



Incentive Obstacles

x 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 totalsupply chain objectives and individual

objectives

x Local optimization within functions or stages

of a supply chain

x Sales force incentives



Information Processing Obstacles

x When demand information is distorted as itmoves between different stages of the supplychain, leading to increased variability in orders

within the supply chainx Forecasting based on orders, not customer

demand Forecasting demand based on orders magnifies

demand fluctuations moving up the supply chainfrom retailer to manufacturer

x Lack of information sharing



Operational Obstacles

x Actions taken in the course of placing andfilling orders that lead to an increase invariability

x

Ordering in large lots (much larger thandictated by demand) Figure 16.2

x Large replenishment lead times

x Rationing and shortage gaming (common in

the computer industry because of periodiccycles of component shortages and surpluses)


12/33



Behavioral Obstaclesx Problems in learning, often related to communication in the supply chain

and how the supply chain is structured

x Each stage of the supply chain views its actions locally and is unable to seethe impact of its actions on other stages

x Different stages react to the current local situation rather than trying toidentify the root causes

x Based on local analysis, different stages blame each other for thefluctuations, with successive stages becoming enemies rather than partners

x No stage learns from its actions over time because the most significantconsequences of the actions of any one stage occur elsewhere, resulting in avicious cycle of actions and blame

x Lack of trust results in opportunism, duplication of effort, and lack ofinformation sharing


14/33



Aligning Goals and Incentives

x Align incentives so that each participant has an

incentive to do the things that will maximize

total supply chain profits

x Align incentives across functions

x Pricing for coordination

x Alter sales force incentives from sell-in (to the

retailer) to sell-through (by the retailer)



Improving Information Accuracy

x Sharing point of sale data

x Collaborative forecasting and planning

x Single stage control of replenishment

Continuous replenishment programs (CRP)

Vendor managed inventory (VMI)


17/33



Designing Pricing Strategies

to Stabilize Orders

x Encouraging retailers to order in smaller lots and reduceforward buying

x Moving from lot size-based to volume-based quantity discounts(consider total purchases over a specified time period)

x

Stabilizing pricing Eliminate promotions (everyday low pricing, EDLP)

Limit quantity purchased during a promotion

Tie promotion payments to sell-through rather than amount purchased

x Building strategic partnerships and trust easier to implement

these approaches if there is trust


19/33


Building Strategic Partnerships

and Trust in a Supply Chain

x Background

x Designing a Relationship with Cooperation and

Trust

x Managing Supply Chain Relationships for

Cooperation and Trust


20/33


Building Strategic Partnerships

and Trust in a Supply Chain

x Trust-based relationship

Dependability

Leap of faith

x

Cooperation and trust work because: Alignment of incentives and goals Actions to achieve coordination are easier to implement

Supply chain productivity improves by reducingduplication or allocation of effort to appropriate stage

Greater information sharing results


21/33


Trust in the Supply Chain

x Table 16.2 shows benefits

x Historically, supply chain relationships are

based on power or trust

x 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


22/33


Building Trust into a

Supply Chain Relationship

x Deterrence-based view Use formal contracts

Parties behave in trusting manner out of self-interest

x Process-based view Trust and cooperation are built up over time as a

result of a series of interactions

Positive interactions strengthen the belief incooperation of other party

x Neither view holds exclusively in all situations


23/33


Building Trust into a

Supply Chain Relationship

x Initially more reliance on deterrence-based

view, then evolves to a process-based view

x Co-identification: ideal goal

x Two phases to a supply chain relationship

Design phase

Management phase


24/33


Designing a Relationship

with Cooperation and Trust

x Assessing the value of the relationship and its

contributions

x Identifying operational roles and decision

rights for each party

x Creating effective contracts

x Designing effective conflict resolution

mechanisms


25/33


Assessing the Value of the

Relationship and its Contributions

x Identify the mutual benefit provided

x Identify the criteria used to evaluate the

relationship (equity is important)

x Important to share benefits equitably

x Clarify contribution of each party and the

benefits each party will receive


26/33


Identifying Operational Roles and

Decision Rights for Each Party

x 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

x Sequential interdependence is the traditional supply

chain form

x Reciprocal interdependence is more difficult but can

result in more benefitsx Figure 16.4


27/33


Effects of Interdependence on Supply

Chain Relationships (Figure 13.4)

Organization s

De

pendence

High

Low

Partners Dependence

Low High

Partner

Relatively

Powerful

Organization

Relatively

Powerful

High Level of

Interdependence

Effective Relationship

Low Level of

Interdependence


28/33


Creating Effective Contracts

x Create contracts that encourage negotiation

when unplanned contingencies arise

x It is impossible to define and plan for every

possible occurrence

x Informal relationships and agreements can fill

in the gaps in contracts

x

Informal arrangements may eventually beformalized in later contracts


29/33


Designing Effective Conflict

Resolution Mechanisms

x Initial formal specification of rules and

guidelines for procedures and transactions

x Regular, frequent meetings to promote

communication

x Courts or other intermediaries


30/33


Managing Supply Chain Relationships

for Cooperation and Trust

x Effective management of a relationship is

important for its success

x Top management is often involved in the design

but not management of a relationshipx Figure 16.5 -- process of alliance evolution

x Perceptions of reduced benefits or opportunistic

actions can significantly impair a supply chain

partnership


31/33


Achieving Coordination in Practice

x Quantify the bullwhip effect

x Get top management commitment for coordination

x Devote resources to coordination

x Focus on communication with other stagesx Try to achieve coordination in the entire supply

chain network

x Use technology to improve connectivity in thesupply chain

x Share the benefits of coordination equitably


32/33


Summary of Learning Objectives

x What are supply chain coordination and the bullwhip

effect, and what are their effects on supply chain

performance?

x What are the causes of the bullwhip effect, and what are

obstacles to coordination in the supply chain?

x What are the managerial levers that help achieve

coordination in the supply chain?

x

What are actions that facilitate the building of strategicpartnerships and trust in the supply chain?


33/33

Reading References

x Supply Chain Management by Chopra and Peter-

Chapter16

coordination in supply chain-270907

Documents