scm chapter 6

© 2007 Pearson Education© 2007 Pearson Education

COORDINATION IN A SUPPLY CHAIN

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MODULE-6

© 2007 Pearson Education

Lack of SC 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

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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.

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The Effect of Lack ofCoordination on Performance

Manufacturing cost Inventory cost Replenishment lead time Transportation cost Labor cost for shipping and receiving Level of product availability Relationships across the supply chain Profitability

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Impact of Bullwhip Effects on Supply Chain Performance

Performance Measures Impact of Bullwhip Effect

Manufacturing Cost Increases

Inventory Cost Increase

Replenishment Lead Time Increase

Transportation cost Increase

Shipping and Receiving cost Increase

Level of product availability Decreases

profitability Decreases

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

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Obstacles to Coordination in a Supply Chain

Incentive Obstacles Information Processing Obstacles Operational Obstacles Pricing Obstacles Behavioral Obstacles

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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

Sales force incentives16-9


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

Lack of information sharing16-10


Operational Obstacles Actions taken in the course of placing and

filling orders that lead to an increase in variability

Ordering in large lots (much larger than dictated by demand) –

Large replenishment lead times Rationing and shortage gaming (common

in the computer industry because of periodic cycles of component shortages and surpluses)

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Ordering in large lots

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Pricing Obstacles When pricing policies for a product

lead to an increase in variability of orders placed

Lot-size based quantity decisions Price fluctuations (resulting in forward

buying)

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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

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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

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Aligning Goals and Incentives

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

Align incentives across functions Aligned to firm’s overall objective All decisions to be evaluated based on

effect on profitability not total cost Pricing for coordination

Manufacturer can use lot size based quantity discount to achieve coordination if manufacturer has large fixed cost associated with each lot

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Aligning Goals and Incentives

Given demand uncertainty manufacturer can use Buyback Revenue Sharing Quantity flexibility contract

Altering Sales force incentive from sell-in to sell-through The incentive to push product is reduced Helps to reduce forward buying & resulting

in fluctuating in orders

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Improving Information Accuracy

Sharing point of sale data Across the SC will reduce the bullwhip

effect Order received at diff. stage vary, as well

as the forecast Only need to be satisfied is of the final

customer Retailer has to share the data for accurate

forecast All stages will now follow the same change

in customer demand Appropriate system will facilitate the

sharing of such data 16-18


Improving Information Accuracy

Company can use internet to share such data

Dell – easy to share such data as it directly interact with customer as well as supplier

P&G has convinced many retailer to share demand data

Implementing collaborative forecasting & planning Once POS is shared different stages must

forecast & plan jointly Retailer –large demand –January – because

of promotion 16-19


Improving Information Accuracy If no promotion planned forecast may differ

–retailer & manufacturer Entire SC to work on common forecast Voluntary Interindustry Commerce

Standards (VICS) has set up Collaborative Planning, Forecasting and Replenishment (CPFR) to identify the best practice & design guidelines

Designing single stage control of replenishment can help diminish bullwhip effect Each stage uses order from the previous

stage Single stage to control replenishment

decision16-20


Improving Operational Performance Reducing replenishment lead time

Reduces uncertainty in demand Electronic Data Interchange (EDI) is useful

Reducing lot sizes Computer-assisted ordering Shipping in TL sizes by combining shipments Technology and other methods to simplify receiving Changing customer ordering behavior

Rationing based on past sales and sharing information to limit gaming “Turn-and-earn” Information sharing

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Designing Pricing Strategiesto 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

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Building Strategic Partnerships and Trust in a Supply Chain

Designing a Relationship with Cooperation and Trust

Managing Supply Chain Relationships for Cooperation and Trust

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Building Strategic Partnerships and Trust in a Supply Chain

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 to appropriate stage

Greater information sharing results

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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

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Building Trust into aSupply Chain 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

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Building Trust into aSupply 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

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Designing a Relationshipwith Cooperation and Trust

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

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Assessing the Value of the Relationship and its Contributions

Identify the mutual benefit provided Identify the criteria used to evaluate

the relationship (equity is important) Important to share benefits equitably Clarify contribution of each party and

the benefits each party will receive

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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

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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

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Designing Effective Conflict Resolution Mechanisms

Initial formal specification of rules and guidelines for procedures and transactions

Regular, frequent meetings to promote communication

Courts or other intermediaries

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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

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PRESENTATION ON:-CONTINUOS REPLENISHMENT &VENDOR-MANAGED

INVENTORIES


WHY THERE IS A NEED FOR CONTINUOS REPLESHISHMENT &VENDOR MANAGEMENT INVENTORIES?

Bullwhip effect can be dampened by practices that assign replenishment responsibility across the supply chain to a single entity

A single point of replenishment decision ensures visibility & a common forecast that drives orders across the supply chain

so industry practices the above 2 system to assign a single point of responsibility

INTRODUCTION


The wholesaler or manufacturer replenishes a retailer regularly based on POS data

CRP may be supplier, distributor or third –party managed

In most instances CRP system are driven by actual withdrawals of inventory from retailer warehouse rather than POS data at the retailer level

CRP Is linked to good IT system across the supply chain to provide a good information infrastructure

CONTINUOS REPLENISHMENT PROGRAMS(CRP)


The manufacturer or supplier is responsible for all decision regarding product inventories at the retailer as a result control of replenishment decision moves to the manufacturer instead of the retailer .

In many instances of VMI ,the inventory is owned by the supplier until it is sold by retailer

VENDOR-MANAGED INVENTORY(VMI)


COLLABORATIVE PLANNING, FORECASTING,

AND REPLENISHMENT (CPFR)


What is CPFR? A business practice Trading partners working together in

planning fulfilling customer demand. Links sales and marketing best practices to

supply chain planning and execution processes.

Objective is to increase availability to the customer while reducing inventory, transportation and logistics costs.


The Voluntary Interindustry Commerce Standards Association (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 1988, “over 300 companies have implemented the process.”


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

1. Strategy and Planning2. Demand and Supply Management3. Execution

4. Analysis


1) Strategy and Planning: This activity establishes the ground rules for the collaborative relationship. It determines the product mix and placement and develops event plans for the period.

2) Demand and Supply Management: This activity estimates consumer demand and order and shipment requirements over the planning horizon.

3) Execution: In this activity, orders are placed, shipments are placed and delivered, products are received and stocked, sales transaction are recorded and payments are made.

4) Analysis: In this activity, planning and execution are monitored for exceptions, results are aggregated and key performance metrics are calculated. The insight thereof is shared between the partners and plans are adjusted for improving results.


Four common CPFR ScenariosCPFR Scenario Applicability Typical Industry Retail event Collaboration

Highly promoted channels or categories

All except EDLP

DC replenishment Collaboration

Retail DC distribution Drug chain, hardware, grocery

Store replenishment Collaboration

Direct store delivery or retail DC-to-store distribution

Mass merchant, club store

Collaborative Assortment planning

Apparel and seasonal goods Department store Specialty retail


Retail event collaboration In many stores, promotions and other retail

events generate the largest swings in demand, resulting in most out-of-stocks, excess inventory and unplanned logistics costs during these events affect financial performance for both the retailer and the manufacturer.

In such a setting, collaboration between retailers and suppliers to plan, forecast, and replenish promotions is very effective.

The event including timing, duration, price point, advertising, display tactics


DC replenishment Collaboration DC Replenishment Collaboration has been the most

common starting point for trading partners to improve the replenishment and forecasting processes between their organizations. Executed within the framework of CPFR, suppliers and buyers work together to optimize the flow of inventory into the retail distribution center and out to the stores

In this system, trading partners collaborate to improve the accuracy of DC-to-Store and Supplier-to-Retail DC forecasts.

Also, optimal inventory levels are calculated as transportation and operational efficiencies are maximized.


Store replenishment Collaboration Store Replenishment Collaboration aims to link

manufacturers and retailers to plan store sales and promotion volumes, calculate store inventory requirements, and respond to on-going operational issues. The objective is to increase sales and reduce out-of-stocks at the most important point of the supply chain: where the consumer purchases the product.

The benefits attributed to store-level collaboration include greater visibility to consumer take-away and overstock reduction.

Trading partners have a direct view of how consumers are responding to new products, existing shelf distribution, and promotional take-away.


Collaborative Assortment planning

The assortment planning process for apparel and footwear retailers and vendors is the activity of determining product placement by location and by delivery.

Retailers and vendors must work together to build and modify assortment plans based upon financial plans, historical sell-thru data, market trends, and production schedules. The coordination and sharing of this information both internally and among trading partners is critical to delivering the right products to the right place at the right time.


SARA LEE

Federated Dept. Stores

MeadSchool & Office

Kimberly Clark

JCPenney

VF Corp.

Staples

CPFR Initiative Participants


THE ROLE OF IT IN CO-ORDINATION


The enablement of coordination can be viewed as the ultimate goal of IT in the supply chain .

Sharing ,forecasts , visibility of inventory levels transmitting arrival times –which have talked about has been internal supply chain operations

At the highest level there are 2 ways in which IT can help to improve this area .


Information availability Significant benefit from inter enterprise

coordination arises just from the sharing of information between companies .IT enables their in 2 ways :a) actual physical sharing of the information.b) IT also helps in sorting these data and preparing them for viewing .


IT helps to improve co-ordination

IT helps to Improve the co ordination by using the visible information to make the decision.


There are perhaps more pitfalls in using IT for co – ordination because of the complexity and difficulty of the task at hand .

The biggest hurdle is the trust factor . For eg: Major companies that provide

software in this area are the supply chain software provides from ERP ranks such as SAP and Oracle and best of player such as i2 Technologies and Manugistics .


Achieving co ordination in practice. Quantity the bullwhip effect:

Managers should start by comparing the variability in the orders .they receive and variability in the orders they places .This helps a firm quantify its own coordination to the bullwhip effect.

Get top management commitment for co ordination .coordination requires managers at all levels of supply chain to subordinate their local interests to the greater interest of the firm and even the supply chain.


Devote resources to coordination All practice should be involved devoting significant managerial resources to this effort.for e.g.: Wal –mart and P&G.

Focus on communication with other stages.

good communication creates situations that highlight the value of coordination for both sides.

All companies are frustrated by the lack of coordination and would be happy to share information if it helped the supply chain to operative in more effective manner.eg.PC Company ordering its microprocessors


Try to achieve coordination in the entire supply chain network:The full benefits of coordination is achieved.only when the entire supply chain network is coordination e.g. . Toyota.

Use technology to improve the connectivity in the supply chain:The internet and a variety of different types of software systems can be used to increased the visibility of throughout the supply chain .

Share the benefits of coordination equitably :Manager from the stronger party in the supply chain relationship must be sensitive to this fact and ensure that all parties perceive that the way benefits are shared is fair.

scm chapter 6

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