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Chapter 17
Coordination in the Supply Chain
Supply Chain Management
(3rd Edition)
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Objectives
x Describe supply chain coordination, the bullwhip effect,and their impact on performance
x Identify causes of the bullwhip effect and obstacles to
coordination in the supply chainx Discuss managerial levers that help achieve
coordination in the supply chain
x Describe actions that facilitate the building of strategic
partnerships and trust within the supply chain
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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 Trust Withina Supply Chain
x Achieving Coordination in Practice
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Lack of SC Coordination
and the Bullwhip Effect
x Supply chain coordination all stages in the supplychain take actions together (usually results in greatertotal 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
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Bullwhip Effect
x Fluctuations in orders increase as they move up thesupply chain from retailers to wholesalers tomanufacturers to suppliers (shown in Figure 16.1)
x Distorts demand information within the supplychain, where different stages have very differentestimates of what demand looks like
x Results in a loss of supply chain coordination
x Examples: Proctor & Gamble (Pampers); HP(printers); Barilla (pasta)
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The Effect of Lack of
Coordination on Performance
x 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 profitabilityby making it more expensive to provide a given levelof product availability
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Obstacles to Coordination
in a Supply Chain
x Incentive Obstacles
x Information Processing Obstacles
x Operational Obstacles
x Pricing Obstacles
x Behavioral Obstacles
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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 total supply chainobjectives and individual objectives
x Local optimization within functions or stages of a
supply chain
x Sales force incentives
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Information Processing Obstacles
x When demand information is distorted as it movesbetween different stages of the supply chain,leading to increased variability in orders within the
supply chainx Forecasting based on orders, not customer demand
Forecasting demand based on orders magnifies demandfluctuations moving up the supply chain from retailer tomanufacturer
x Lack of information sharing
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Operational Obstacles
x Actions taken in the course of placing and filling
orders that lead to an increase in variability
x Ordering in large lots (much larger than dictated by
demand) Figure 17.2
x Large replenishment lead times
x Rationing and shortage gaming (common in the
computer industry because of periodic cycles ofcomponent shortages and surpluses)
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Pricing Obstacles
x When pricing policies for a product lead to an
increase in variability of orders placed
x Lot-size based quantity decisions
x Price fluctuations (resulting in forward buying)
Figure 17.3
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Behavioral Obstacles
x Problems in learning, often related to communication in thesupply chain and how the supply chain is structured
x Each stage of the supply chain views its actions locally and isunable to see the impact of its actions on other stages
x
Different stages react to the current local situation rather thantrying to identify the root causes
x Based on local analysis, different stages blame each other for thefluctuations, with successive stages becoming enemies ratherthan partners
x No stage learns from its actions over time because the mostsignificant consequences of the actions of any one stage occurelsewhere, resulting in a vicious cycle of actions and blame
x Lack of trust results in opportunism, duplication of effort, and
lack of information sharing
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Managerial Levers to
Achieve Coordination
x Aligning Goals and Incentives
x Improving Information Accuracy
x Improving Operational Performance
x Designing Pricing Strategies to Stabilize Orders
x Building Strategic Partnerships and Trust
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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)
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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)
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Improving Operational Performance
x Reducing replenishment lead time Reduces uncertainty in demand
EDI is useful
x Reducing lot sizes Computer-assisted ordering, B2B exchanges
Shipping in LTL sizes by combining shipments
Technology and other methods to simplify receiving
Changing customer ordering behavior
x Rationing based on past sales and sharing information tolimit gaming Turn-and-earn
Information sharing
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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 quantitydiscounts (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
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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
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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 reducing
duplication or allocation of effort to appropriate stage Greater information sharing results
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Trust in the Supply Chain
x Table 17.2 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
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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 in cooperation
of other party
x Neither view holds exclusively in all situations
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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
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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
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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
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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 traditionalsupply chain form
x
Reciprocal interdependence is more difficult butcan result in more benefits
x Figure 17.4
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Effects of Interdependence on Supply
Chain Relationships (Figure 17.4)
OrganizationsDe
pendence
High
Low
Partners Dependence
Low High
Partner
Relatively
Powerful
Organization
Relatively
Powerful
High Level of
Interdependence
Effective Relationship
Low Level of
Interdependence
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Creating Effective Contracts
x Create contracts that encourage negotiation when
unplanned contingencies arise
x It is impossible to define and plan for every
possible occurrencex Informal relationships and agreements can fill in
the gaps in contracts
x
Informal arrangements may eventually beformalized in later contracts
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Designing Effective Conflict
Resolution Mechanisms
x Initial formal specification of rules and guidelines
for procedures and transactions
x Regular, frequent meetings to promote
communicationx Courts or other intermediaries
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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 17.5 -- process of alliance evolution
x Perceptions of reduced benefits or opportunistic
actions can significantly impair a supply chainpartnership
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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 the supplychain
x Share the benefits of coordination equitably
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Summary of Learning Objectives
x What are supply chain coordination and the bullwhipeffect, and what are their effects on supply chain
performance?
x
What are the causes of the bullwhip effect, and whatare obstacles to coordination in the supply chain?
x What are the managerial levers that help achievecoordination in the supply chain?
x What are actions that facilitate the building of strategicpartnerships and trust in the supply chain?