CHAPTER -17

Coordination in a supply chain

Contents

Lack of supply chain coordinates and bullwhip effect Effect of lack of coordinates on performance Obstacles of coordinates in a supply chain Managerial levers to achieve coordination Building strategic partnership and trust with a supply chain Achieving coordination in practice

Lack of supply chain coordination

Supply chain coordination improves if all stages of chain takes actions together that results in greater profits. Supply chain coordination requires each stage of the supply chain to take into account impact of its action on other stages. Lack of coordination occurs when different stages of supply chain have objectives that conflict or information moving between the stages is delayed and distorted.

Lack of supply chain coordination

Different stages of a supply chain may have conflicting objectives if each stage has different owner.

Each stage tries to maximize its own profits, resulting in actions that often diminish total supply chain profits.

Example : Ford Motor Company has 1000s of suppliers and these suppliers have many suppliers in turn. Information is not shared completely between all the stages. For different variety of models it becomes difficult to coordinate information exchange with 1000s of suppliers and dealers.

Bullwhip Effect

Fluctuation in orders increase as they move up the supply chain from retailer to wholesalers to manufacturers to suppliers. Bullwhip effect distorts demand information within the supply chain with each stage having different estimate of what demand looks like. As a result there is a loss of supply chain coordination. Example : Proctor & Gamble (P&G) observed bullwhip effect in supply chain of diapers. The raw material order from P&G to its suppliers fluctuated significantly over time. As sales at retail store were studied.

Effects on performance of lack of coordination

Supply chain lacks coordination if each stage optimizes only its local objective without considering impact on complete chain. Thus profits are less than what could be achieved through coordination. Each stage of supply chain takes action to optimize local objective that end up hurting performance of the entire supply chain. It also occurs when information distortion occurs within supply chain.

Effects on performance of lack of coordination

Manufacturing Cost
It increases due to bullwhip effect in supply chain. Due to bullwhip effect, its supplier must satisfy stream of orders more variable than customer demand. To respond need to build excess capacity or holding excess inventory is required.

Inventory Cost
It increases due to bullwhip effect in supply chain. To handle increased variability in demand. High level of inventory also increases the warehousing space required and thus warehousing cost increases.

Effects on performance of lack of coordination

Replenishment Lead Time

Bullwhip effect increases replenishment lead time. Due to increased variability as a result of bullwhip effect it makes scheduling much more difficult compared to situation with level demand. Increases transportation cost. Transportation requirement fluctuates significantly over time because surplus transportation capacity needs to be maintained to cover high demand period.

Transportation Cost

Labor Cost for Shipping and Receiving

Bullwhip effect increases labor costs associated with shipping and receiving in the supply chain. Labor requirement for shipping and its supplier fluctuate with orders

Effects on performance of lack of coordination

Level of Product Availability

Bullwhip effect hurts level of product available and results in more stock out in the supply chain.
Bullwhip effect decreases the profitability in the supply chain due to lack of coordination.

Profitability

Relationship across supply chain worsens

Bullwhip effect has negative effect on performance at every stage and hurts the relationships between different stages of the supply chain. Bullwhip effect can lead to loss of trust between different stages of the supply chain and makes coordination efforts more difficult.

Obstacles to coordination in a supply chain

Any factor that leads to either local optimization by different stages of supply chain, or an increase in information delay, distortion and variability within the supply chain is an obstacle to coordination. If managers in supply chain are able to identify key obstacle they can then take suitable actions to help to achieve coordination.

Obstacles to coordination in a supply chain

Incentive Obstacles
Local Optimizati on within functions or stages of supply chain

Information processing Obstacles

Forecastin g based on Orders and Not Customer Demand

Operational Obstacles

Pricing Obstacle s
Lot Size Based Quantity Discount

Behavioral Obstacles

Ordering in Large Lots

Large replenishm ent lead times
Rationing and shortage gaming

Sales force incentives

Lack of Informatio n Sharing

Price Fluctuatio n

Incentive Obstacles

It occurs when incentives offered to different stages or participants in a supply chain leads to action that increases variability and reduce total supply chain profit. Local Optimization within functions or stages of supply chain
Incentives that focus only on the local impact of action results in decision that do not maximize total supply chain profits. It is natural for any participant in the supply chain to take actions that optimize performance measures along which they are evaluated.

Incentive Obstacles

Sales force incentives

Improperly

structured sales force incentives are a significant obstacles to coordination in a supply chain. Sales force incentives are based on the amount the sales force sells during a evaluation period of month or quarter. A sales force incentives based on sell in results in order variability being larger than customer demand variability.

Information Processing Obstacles

It occurs when demand information is distorted as it moves between different stages of a supply chain, leading to increased variability in orders within supply chain. Forecasting based on orders & not customer demand
When

stages within supply chain makes