chapter 10

• Coordination in a supply chain and ways to improve it.
• Lack of coordination leads to reduced responsiveness and increased costs.
• Obstacles exacerbate variability.
• Managerial levers help overcome obstacles.
• Collaboration improves supply chain performance.

Lack of Supply Chain Coordination and Its Impact

• Supply chain coordination improves when all stages align actions to increase the total supply chain surplus by sharing information and considering the impact of actions on other stages.
• Lack of coordination stems from conflicting local objectives or delayed and distorted information.
• Stages try to maximize their profits, which diminishes the total supply chain profits.
• Supply chains consist of stages with different owners, i.e., Ford has thousands of suppliers, each having many suppliers in turn.
• Each stage focuses on its objectives, but information is distorted because complete information isn't shared.
• Supply chains produce large variety of products, making coordination difficult, so a fundamental challenge is to achieve coordination despite multiple ownership and increased product variety.
• The bullwhip effect happens as a result of lacking suply chain coordination; fluctuations in orders increase when moving up the supply chain.
• The bullwhip effect distorts demand information within the supply chain, as each stage has a different estimate of what demand looks like.
• Procter & Gamble (P&G) observed the bullwhip effect in the supply chain for Pampers diapers.
• Raw material orders from P&G to its suppliers fluctuated significantly, but sales at retail stores showed small fluctuations.
• Ultimately consumption was stable while orders were highly variable, increasing costs and making it harder to match supply and demand.
• Hewlett-Packard (HP) found that order fluctuation increased from resellers to the printer division to the integrated circuit division.
• Product demand showed some variability, orders placed with the integrated circuit division were much more variable, making it hard for HP to fill orders, and raised costs.
• Apparel and grocery industries experience the same, with order fluctuation increasing upstream from retail to manufacturing, and Barilla observed that weekly orders placed by a distribution center fluctuated by up to a factor of 70.
• Weekly sales at the distribution center (representing supermarket orders) fluctuated by a factor of less than three, resulting in increased inventories, poorer product availability, and a drop in profits for Barlilla
• Memory chips show the same over a longer time frame: "boom and bust" cycles.
• Between 1985 and 1998, prices of memory chips fluctuated by a factor of more than three due to shortages or surpluses in capacity.
• Shortages were exacerbated by panic buying and overordering, followed by a sudden drop in demand.
• The lack of coordination increases variability and hurts the supply chain surplus.
• The impact of the bullwhip effect on costs and responsiveness can mostly be seen in P&G with their diaper supply chain.

Manufacturing Costs

• Lack of coordination raises manufacturing cost in the supply chain.
• P&G and its suppliers must satisfy a stream of orders that is more variable than customer demand because of the bullwhip effect.
• P&G can respond to demand by building excess capacity or holding excess inventory, both increasing manufacturing cost per unit produced.

Inventory Cost

• The lack of coordination increases inventory cost in the supply chain.
• P&G must carry a higher inventory level with increased variability in demand than if the supply chain were coordinated. the high inventory levels increase warehousing space required and thus the warehousing cost incurred.

Replenishment Lead Time

• The Lack of coordination increases replenishment lead times in the supply chain.
• Scheduling at P&G and supplier plants is much more difficult with increased variability due to the bullwhip effect than when demand is level
• With limited capacity and inventory there will be an inability to supply the orders, resulting in higher replenishment lead times.

Transportation Cost

• Lack of coordination increases transportation cost in the supply chain.
• Transportation needs over time at P&G and its suppliers are correlated with the orders being filled and as a result of the bullwhip effect, transportation requirements fluctuate significantly over time raising costs because surplus transportation capacity needs to be maintained to cover high-demand periods.

Labor Cost

• Lack of coordination increases labor costs associated with shipping and receiving in the supply chain.
• Labor needed for shipping at P&G and its suppliers fluctuates with orders and occurs for distributors and retailers.
• Carrying excess labor capacity or varying labor capacity in response to order fluctuation will increase labor costs.

Level of Product Availability

• Lack of coordination hurts product availability and results in more stockouts.
• Large order fluctuations make it harder for P&G to supply all distributor and retailer orders on time, raising the chance of stockouts and lost sales.

Relationships in the Supply Chain

• Lack of coordination negatively effects the performance at every stage and their individual relationships among different stages of the supply chain.
• There is a tendency to assign blame, because each stage thinks it is doing the best it can, leading to a loss of trust among stages and makes potential coordination efforts more difficult.
• It negatively impacts supply chain's performance by raising cost and decreasing responsiveness.

Obstacles to Coordination in a Supply Chain

• Any factor that leads to local optimization, information delay/distortion, and variability is an obstacle to coordination, broken down into:
  • Incentive obstacles
  • Information-processing obstacles
  • Operational obstacles
  • Pricing obstacles
  • Behavioral obstacles

Incentive Obstacles

• Incentive obstacles happen when incentives given at different stages of the supply chain lead to actions that increase variability, and reduce total profits.
• It's natural for any supply chain participant to optimize measures along which they are evaluated, i.e., managers at a retailer such as Carrefour make all their purchasing and inventory decisions to maximize Carrefour profits.
• Buying that maximizes profits at a single stage leads to ordering policies that do not maximize supply chain profits.

Sales Force Incentives

• Improperly structured sales force incentives area significant obstacle to coordination.
• Incentives can be based on exceeding sales thresholds during an evaluation period, measured by quantity sold to distributors/retailers (sell-in).
• Measuring performance is justified on the grounds that the manufacturer's sales force does not control sell-through.
• Barilla offered incentives to its sales force based on what was sold to distributors during a four- to six-week promotion period. - Barilla's sales force urged distributors to buy more pasta toward the end to maximize bonuses, increasing variability.
• Therefore, sales force incentives based on sell-in result in order variability being larger than consumer variability.

Information-Processing Obstacles

• Occur when demand information is distorted when it moves between different stages of the supply chain, leading to: increased variability in orders
• When stages make forecasts based on orders received, any variability in customer demand is magnified upstream.
• When orders are the fundamental means of communication, information is distorted as it moves up the supply chain
• Each stage views itself as filling orders of its downstream partner, views demand as stream of orders received, and forecasts based off that.
• A small change can become magnified as it moves up the supply chain in the form of customer orders.
• A retailer may interpret a random increase as a growth trend and order more than needed for anticipated growth during lead time.
• Wholesaler has no way to interpret the order increase correctly and infers a growth trend.
• Now assume that periods of random increase are followed by periods of random decrease in demand, the retailer will now anticipate a declining trend and reduce order size, being magnified.
• The lack of information sharing between stages magnifies distortion.
• Retailer may increase the size of an order because of a planned event and if the manufacturer is not aware, it may place orders with suppliers assuming it is now permanent.
• The manufacturer and suppliers thus carry much inventory for future orders.
• When future retailer orders return to normal, manufacturer orders will be smaller, thus having a large fluctuation.

Operational Obstacles

• Happen when actions taken in the course of placing and filling orders lead to an increase in variability.
• Variability of orders get magnified when a firm places orders in lot sizes that are much larger than demand.
• Firms may order in large lots because fixed cost is associated with placing, receiving, or transporting an order and also if a supplier offers quantity discounts.
• Because orders are batched every five weeks, the order stream has four weeks without orders followed by a large order, manufacturers supplying retailers faces orders more variable than what the retailers experience
• In many instances, such as the first or last week of a month, synchronizing orders exacerbates batching.
• Replenishment lead times magnify information distortion.
• If a retailer faces a lead time of two weeks, they will incorporate the anticipated growth over two weeks when placing the order.
• If a retailer faces lead time of two months, they will incorporate for over two months which will be larger.
• Schemes that allocate limited production in proportion to the orders placed by retailers lead to a magnification of information distortion and can occur with popular short supply products.
• If supply available is 75% of what's ordered, each retailer receives 75% of their order, leading to retailers trying to increase the size of their orders to get more.
• In addition, retailers get less and lose sales, inflating their orders gets rewarded.
• If a manufacturer uses orders to forecast future demand, they will interpret the increase in orders as an increase in demand, even though customer demand hasn't changed.
• Enough capacity will be built, and orders return to their original level because they were inflated in response to the scheme.

Pricing Obstacles

• Arise when pricing policies lead to an increase in variability of orders placed.
• Lot-size-based quantity discounts increase the lot size of orders placed within the supply chain because lower prices are offered for larger lots, and resulting large lots magnify the bullwhip effect.
• Trade promotions and discounts result in forward buying, where wholesalers/retailers purchase lots to cover demand during future periods, resuling in large orders during the promotion period followed small orders after and result in a variability of manufacturer
• Shipments are higher during promotions than sales because of sales.

Behavioral Obstacles

• Problems in learning that contribute to information distortion, related to supply chain structure and communications among stages
• Each stage views its actions locally, unable to impact it's actions on stages
• Different stages of the supply chain react to the current local situation rather than trying to identify the root causes.
• Successive chains blame each other on the fluctuations, turning enemies instead of partners.
• No stage learns, most significant actions occur elsewhere, vicious cycle happens as actions create problems that the stage blames on others.
• Trust lacking causes opportunism at the expense of overall supply chain performance, duplication of effort happens
• All relevant information is not shared because it is not trusted.

Managerial Levers to Improve Coordination

• Managerial actions increase total supply chain profits and moderate information distortion:
  • Align goals and incentives
  • Improving information visibility and accuracy
  • Improving operations to synchronize supply and demand
  • Designing pricing strategies to stabilize orders
  • Building strategic partnerships and trust

Aligning Goals and Incentives

• Coordination requires every chain to focus on the total size of pie, creating win-win scenarios growing surplus and profits for all.
• Walmart pays Hewlett-Packard (HP) for each printer sold and gives HP the power to make replenishment decisions while specifying the service level to be achieved.
• Key coordinated decisions: objective of any function is aligned with the firms overall, decisions should be evaluated on their effect on profitability/total costs. prevents situations such as a transportation manager making decisions that lower transportation cost but increase overall costs.
• Manufacture can do to achieve coordination for commodity products if it has large fixed costs, for products with market power a manufacturer can use two-tariffs and volume discounts, or quantity contracts for product availabilty. Buyback contracts can increase total profits.
• Any change that reduces the incentive reduces helps the bullwhip. Linking sells through incentives and increasing sales over a rolling horizon reduces the impulse for retailers to encourage forward buying.

Improving Information Visibility and Accuracy

• Sharing customer demand sharing can reduce variability in orders, forecast at different stages also vary when orders are different.
• Only one demand the supply needs is from the last stage; customer sharing of data helps all stages forecast.
• Necessary to share aggregate demand data because all areas respond to same customer.
• implementing forecasting means different chains must plan for each event to be achieved; and also require colaborative planning and sharing
• If a stage manages their orders from historical, their role is to view it as repenishing orders and use retailer for control

Improving Operations to Synchronize Supply and Demand

• Improve performance and schemes to increase supply and help demand.
• Decrease uncertainty demand; time sensitive material helps accuracy of forecaster; forecast consumption if short which eliminates need for lead time.
• Various chain stages can helps reduce replenishment through; EDI can cut the lead time and transfer; potential orders can be scheduled.
• cellular can be used at plants to achieve lead line while decreasing the distortion and improving scheduling when manufacturing large goods. This helps because the product creates a larger inventory to advance shipping notices.
• The amount of fluctuates causes less fluctuation during chain stages.
• Managers take actions reduce ordering and receiving costs which helps smaller sizes; computer ordering CAO through retailer technology products to help sales.
• EDI helps reduces placing for each order
• Manager can imply by eliminating the use of orders that's number of costs. the auto industries is to depend the needed is build for number of cars

Designing Pricing Strategies to Stabilize Orders

• Price strategies that encourage retailers in smaller lots and reduce buying
• volume has been quantity retailers and increases there a retailer when full advantage
• volume have limited to an incentive discount period and reduce orders

Stabilizing Pricing

• Can help dampen the bullwhip effect.
• Eliminating promotions helps forward buying and orders helps match customer demands with those retailers
• Limitation can set for to decrease forward to tie promotion for retailer help sell through than for helping purchase and increase if they sell good
• Reduces information significantly

Building Strategic Partnerships and Trust

• Trust is a key for levers in the supply chain management chain.
• Sharing and matched data with suppliers eliminates to focus; helps improve supply and chain to help lower costs for all chain stages.
• Helps improve retailers and supplies because actions will be good .

Improving Coordination in Practice

• Most manager levers improve cooperation and can go for across multiple companies across chain; the following conditions improve coordination across supply chain
  • get management with support for chains that may be involved that a to the supply chain help their better interest. These factors improve forecast collaboration
  • most have devote resources because if all efforts devoted; because lack this either of their
  • resources teams make all different numbers highlight all chain number; helps coordinate

Some Practical Approaches to Improve Supply Chain Coordination

• Starting efficient industry can improve companies by industry, and must all can buy into industry which results and give traction and results:

Continuous Replenishment and Vendor-Managed Inventories

Information can reduce by a responsibility given for a singular across the entity.

• decisions made by a singular to provide a common chain forecaster across the chain.
• Practices that chain has a single can involve vendor managed invent and continues programs with the manufacture suppliers for the responsibility product.
• Manufacture replenishes data of with POS from the supplier but not by any means the store level. IT linking provides of information with CRM is available to base can owned by the lender.

Collaborative Planning, Forecasting, and Replenishment

The standards the industry can defined standards with multiple business intelligence partnership full of demand.

• implemented best practice where to have party and standards; they can all collaborate the:
  • Plans and Strategy to create responsibilities and checkpoint to provide industry to create affect and demand industry.
  • These forecasts provide consumer best customer product over time, future of inventory
  • Provide industry when to order for stock chain of inventory
  • Can manage analysis to identify exceptions
  • These efforts of process to involve chains and the industry when to provide process and details with CPFR guides.
• One CPFR implementation includes retailers where the see what the retailer saw of inventory. When process happen the retailer saw to what was forecast In 4 months the forecast with inventory service of products.

Retail Event Collaboration

Super markets effect with stocks of the financial with helps retailers:

• The requires collaboration to improve suppliers forecasts. The Requires a new process such as time, pricing, to helps these forces convert, it can identified process which iterative of each the process partner.

DC Replenishment Collaboration

DC chain is common that a collaborative of simple chain. Process involves help DC to provide the best for chain product.