coordination in the supply chain

Strategic Supply Chain Management

Chapter - 7Coordination

in the Supply Chain

Strategic Supply Chain

ManagementChapter # 7 Outline

• Lack of Supply Chain Coordination and theBullwhip Effect

• Effect of Lack of Coordination on Performance

• Obstacles to Coordination in the Supply Chain

• Managerial Levers to Achieve Coordination

• Achieving Coordination in Practice

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• Supply chain coordination – when all stages in the supply chain take actions together (usually results in greater total supply chain profits)

• SC coordination requires each stage of the supply chain to share information take into account the impact its actions have on other stages.

• Lack of coordination results when:– Objectives of different stages conflict or

– Information moving between stages is delayed or distorted

Lack of SC Coordination and the

Bullwhip Effect

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• 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); -Orders for raw materials

were highly variable, although consumption was stable.

• Barilla pasta – weekly orders varies with a factor of 70 where as

weekly sales varies with a factor less than 3.

Bullwhip Effect

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• Manufacturing cost – due to Bull whip effect increases variability which can be addressed by either building excess capacity or holding excess inventory so both increases cost.

• Inventory cost – to handle increased variability in demand increases cost

• Replenishment lead time – lack of coordination increases replenishment lead time in supply chain

• Transportation cost – due to bull whip effect transportation requirements fluctuate significantly which raises transportation cost.

• Labor cost for shipping and receiving (increases)

• Level of product availability (decreases)

• Relationships across the supply chain (worsens)

• Ultimately Profitability (decreases)

• The bullwhip effect reduces supply chain profitability by making it more expensive to provide a given level of product availability.

The Effect of Lack of

Coordination on Performance

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• Incentive Obstacles

• Information Processing Obstacles

• Operational Obstacles

• Pricing Obstacles

• Behavioral Obstacles

Obstacles to Coordination

in a Supply Chain

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The sales typically measured by a manufacturer are

quantity sold to distributors or retailers (sell in), not the

quantity sold to final customers (sell-through). Measuring

performance based on sell in is often justified on the

grounds that the manufacture's sales force does not

control sell-through.

Incentive Obstacles

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• 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.

• Any variability in demand is magnified as orders move up the supply chain to manufacturers and suppliers. In SC where the fundamental means of communication among different stages are the orders that are placed, information is distorted as it moves up the supply chain.

• The lack of information sharing between stages of SC magnifies the information distortion.

Information Processing Obstacles

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• It occurs when actions taken in the course of placing and filling orders that

lead to an increase in variability

• Ordering in large lots (much larger than usual demand) variability increases in

the SC.

• A manufacturer supplying several retailers that batch their orders faces an

order stream that is much more variable than the demand the retailers

experience.

• Large replenishment lead times – information distortion is magnified if

replenishment lead times between stages are long.

• Rationing and shortage gaming (common in the computer industry because

of periodic cycles of component shortages and surpluses)

Operational Obstacles

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• When pricing policies for a product lead to an increase in

variability of orders placed

• Lot-size based quantity discounts create bull whip effect.

• Price fluctuations- retailer purchase large lots during the

discounting period to cover demand for future periods

resulting in forward buying.

Pricing Obstacles

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• 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

Behavioral Obstacles

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• Aligning Goals and Incentives

• Improving Information Accuracy

• Improving Operational Performance

• Designing Pricing Strategies to Stabilize Orders

• Building Strategic Partnerships and Trust

Managerial Levers to

Achieve Coordination

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• Align incentives so that each participant has an incentive to do the things that will maximize total supply chain profits

• Align incentives across functions- One key to coordination decisions within a firm is to ensure that the objective any function uses to evaluate a decision is aligned with the firm’s overall objective.

• Pricing for coordination- A manufacture use lot size-based quantity discounts to achieve coordination for commodity products if the manufacturer has large fixed costs associated with each lot. Ex - volume discounts, revenue sharing etc.

• Alter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer to customers)-Managers should link incentives for the sales staff to sell through by retailer rather than sell-in to the retailer. It eliminates any motivation the sales staff may have for forward buying. elimination of forward buying helps reduce fluctuations in the orderstream.

Aligning Goals and Incentives

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• Sharing point of sale data – if retailers share POS data with other supply

chain stages, all supply chain stages can forecast future demand based on customer

demand. Sharing of POS helps reduce information distortion. Ex- wallmart, Dell.

• Collaborative forecasting and planning - Once Pos data shared,

different stages of the supply chain must forecast and plan jointly if complete

coordination is to be achieved. Manufacturer must be aware of the retailers promotion

plan for better coordination.

• Single stage control of replenishment - when a single stage

controls replenishment decisions for the entire chain, the problem of multiple forecasts

is eliminated and coordination within the supply chain follows. Several industry

practices Continuous replenishment programs (CRP), Vendor managed inventory

(VMI).

Improving Information visibility & Accuracy

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• Reducing replenishment lead time– Reduces uncertainty in demand.

– EDI is useful and can cut the lead time associated with order placement and information transfer.

• Reducing lot sizes – a reduction of lot sizes decreases the amount of fluctuation that can accumulate between any pair of stages of a supply chain thus decreasing distortion.

– Computer-assisted ordering (CAO) & EDI helps reduce the fixed cost.

– The gap in the prices of truckload (TL) and less than truckload (LTL) shipping encourages shipment in TL quantities.

– Technology and other methods to simplify receiving process. Such as (RFID) radio frequency identification.

– Changing customer ordering behavior – for a particular day of a week.

• Rationing based on past sales and sharing information to limit gaming - to diminish information distortion, mangers can design rationing schemes that discourages retailers from artificially inflating their orders in the case of shortage, one approach referred to as “Turn-and-earn”, is to allocate the available supply based on past retailer sales rather than current retailer orders.

– Information sharing across supply chain to minimize shortage situations.

Improving Operational Performance

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• Moving from Lot size based to volume –based quantity discounts– Encouraging retailers to order in smaller lots/ stable lot sizes 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 and charging everyday low pricing, EDLP removes forward

buying.

– Limit quantity purchased during a promotion to decrease forward buying.

– Tie promotion payments paid to the retailer to the amount of sell-through rather than amount purchased by the retailer.

• Building strategic partnerships and trust – easier to implement these approaches if there is trust within supply chain.

- Sharing of accurate information that is trusted by every stage results in a better matching of supply chain demand throughout the supply chain and a lower cost.

Designing Pricing Strategies

to Stabilize Orders

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• A single point of replenishment decisions ensures visibility and a common

forecast that drives orders across the supply chain.

• CRP (Continuous replenishment programs) & VMI (Vendor–managed Inventory

• CRP

– Wholesaler or manufacturer replenishes a retailer based on POS data.

– CRP may be supplier, distributor or third –party managed.

– CRP systems are driven by actual withdrawals of inventory from retailer warehouses.

– In CRP, inventory at the retailer is owned by the retailer.

– IT systems linked across the SC provide a good information infrastructure on which CRP may be based.

Continuous Replenishment and

Vendor Managed Inventories.

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• VMI (Vendor– managed Inventory– Manufacturer or supplier is responsible for product inventory decisions at the retailer.

as a result control of the replenishment decision moves to manufacturer instead of retailer.

– In many instances of VMI, the inventory is owned by the supplier untill it is sold by the retailer.

– VMI requires the retailers to share demand information with the manufacturer to allow it to make inventory decisions.

– VMI helps to convey customer data to manufacturer, which can be produced accordingly with improved forecasts and better match with customer demand.

– VMI can allow manufacturer to increase its profits as well as profits for the entire SC if both retailer and manufacturer margins are considered when making inventory decision.

Continuous replenishment and

vendor managed inventories.

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• Voluntary inter-industry commerce standards (VICS) – has defined CPFR

as a business practice that combines the intelligence of multiple partners in the planning and fulfillment of customer demand.

– According to VICS, since 1998, over 300 companies have implemented the process.

– It is important to understand successful CPFR can be built only on a foundation in which the two parties have synchronized their data and established standards for exchanging information that.

• Sellers and buyers in a supply chain may collaborate along any or all of the following four supply chain activities.

1. Strategy and planning

2. Demand and supply management

3. Execution

4. Analysis

Collaborative Planning, Forecasting

and Replenishment (CPFR)

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Sellers and buyers in a supply chain may collaborate along any or all of the

following four supply chain activities.

1. Strategy and planning - The partners determine the scope of the collaboration and assign roles, responsibilities, and clear check points. In a joint business plan, they identify significant events such as promotions, new product introductions, store openings/closings and changes in inventory policies that affect demand and supply.

2. Demand and supply management - A collaborative sales forecast projects’ best estimate of consumer demand at the point of sale. This is then converted to a collaborative order plan that determines future orders and delivery requirements based on sales forecasts, inventory positions, and replenishment lead times

.

3. Execution – once the forecast is firm then it is converted to actual order. It involves production, shipping, receiving, stocking of products.

4. Analysis - The key analysis tasks focus on identifying exceptions and evaluating metrics that used to assess performance or identify trends.

Collaborative Planning, Forecasting

and Replenishment (CPFR)

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• 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

Achieving Coordination in Practice

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coordination in the supply chain

Documents

supply chain profitability

supply chain managerial

lack of coordination

demand information

inventory cost

effect of lack ofcoordination

labor cost

performance obstacles