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.

Transportation Cost Increases transportation cost. Transportation requirement fluctuates significantly over time

because surplus transportation capacity needs to be maintained to cover high demand period.

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. Profitability

Bullwhip effect decreases the profitability in the supply chain due to lack of coordination.

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 Optimiz

ation within

functions or

stages of

supply chainSales force

incentives

Information processing ObstaclesForecas

ting based

on Orders and Not Custom

er DemandLack of Informa

tion Sharing

Operational Obstacles

Ordering in

Large Lots

Large replenishment lead

timesRationing

and shortage gaming

Lot Size Based

Quantity

Discount

Price Fluctuat

ion

Behavioral Obstacles

PricingObstacles

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