Unit 4: Co-ordination in a Supply Chain

Topic covered in the syllabus:

• Lack of supply chain coordination and the Bullwhip effect
• Effect of co-ordination on performance
• Obstacles to co-ordinate in a supply chain
• Managerial levers to achieve coordination
• Role of IT in coordination, forecasting, and Replenishment

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Lack of Supply Chain Coordination and Bullwhip Effect

Supply chain coordination improves if all stages of the chain take actions that together increase the total supply chain profits. Supply chain coordination requires each stage of the supply chain to take into account the impact its action have on other stages. What happens when there is a lack in SC Coordination?

Lack of Coordination leads to:

• Degradation of responsiveness
• Increase in cost within a supply chain

The lack of coordination occurs because:

1. Different stages of the supply chain have objectives that conflict.
2. Information moving between stages is delayed and distorted.
3. Different stages have different owners so each tries to maximize its own profit that often diminish total supply chain profits.

Supply chain partners can benefit by sharing information on sales, demand forecasts, inventory levels & marketing campaigns. Inaccurate or distorted information leads to the Bullwhip Effect. If information isn’t shared, everyone has to guess what is going on downstream. Guessing wrong leads to too much or too little inventory:

• If too much, firms hold off buying more until inventories fall (leading suppliers to think demand has fallen).
• If too little, firms demand a rush order  & order more than usual to avoid being caught short in the future (leading suppliers to think demand has risen).

The increase in demand variability as we move up in the supply chain is referred to as the bullwhip effect. It is important to understand the effect and take necessary actions to reduce its detrimental impacts:

• excessive inventory
  • inefficient utilization of capacity
  • poor customer service
• excess raw materials cost
  • excess manufacturing and warehousing
  • expenses additional transportation costs

Procter and Gamble (P&G): An example

P&G has observed the Bullwhip effect for its product Pampers diapers. The company found that raw material order from P&G to its suppliers fluctuated significantly over time. Further down the chain, when sales at retail stores were studied, it was found that the fluctuations, while present, were small.

It is reasonable to assume that the consumers of diapers (babies) at the last stage of the supply chain used them at a steady rate. Although consumption of the end product was stable, orders for raw material were highly variable, increasing costs and making it difficult for supply chain to match demand.

The increase in variability is an increasing function of the lead time. The more complicated the demand models and the forecasting techniques, the greater the increase. Centralized demand information can reduce the bullwhip effect, but will not eliminate it.

The effect on performance of lack of coordination

A supply chain lacks coordination if each stage optimizes only its local objectives, without considering the impact on the complete chain. The following are the impact of increase in variability on various measures of performance in the diaper supply chain:

1. Manufacturing cost : Increases
2. Inventory cost: Increases
3. Replenishment lead time: Increases
4. Transportation cost: Increases
5. Labor cost for shipping and receiving: Increases
6. Level of product availability: Decreases
7. Profitability: Decreases
8. Relations across the supply chain: The bullwhip effect has a negative effect on performance at every stage and thus hurts the relationship between different stages of the supply chain. The bullwhip effect leads to a loss of trust between different stages of the supply chain and makes any potential coordination efforts more difficult.

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

Obstacles to coordination in a Supply Chain

Any factor that leads to either local optimization by different stages or an increase in information delay is an obstacle to coordination. The following are the major obstacles:

• Incentive obstacles: It occurs in situations when incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits.
  • Local optimization within functions or stages of a supply chain
  • Sales Force Incentives
• Information-processing obstacles: It occurs in situations when demand information is distorted as it moves between different stages of supply chain, leading to increased variability in orders within the supply chain.
  • Forecasting based on orders and not customer demand
  • Lack of information sharing
• Operational obstacles: It occurs when actions taken in the course of placing and filling orders lead to an increase in variability.
  • Ordering in large lots

• • • Large replenishment lead time
    • Rationing and shortage gaming
• Pricing obstacles: Pricing obstacles arise when the pricing policies for a product lead to an increase in variability of orders placed.
• • Lot size based on quantity
  • discounts Price fluctuations
• Behavioral obstacles: Behavioral obstacles are problems in learning within organizations that contribute to the bullwhip effect. Some of the behavioral obstacles are as follows:
• • Each stage of supply chain views its actions locally and is unable to see the impact of its actions on other stages
  • Different stages of the supply chain react to the current local situation rather than trying to identify the root causes.
  • Different stages of supply chain blame each other for the fluctuations, with successive stages in the supply chain becoming enemies rather partners.
  • No stage of supply chain learns from its actions over time.
  • A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply chain performance.

Managerial Levers to achieve Coordination

We have identified the obstacles to coordination, now we focus on actions that manager can take to overcome the obstacles and achieve  coordination in  supply chain.  The following are the managerial actions to increase the profitability of the supply chain and moderate the bullwhip effect.

• Aligning of goals and incentives
• • Aligning incentives across functions

• • Pricing for coordination

• • Altering sales force incentives from Sell-In to Sale-through
• Improving information policy
• • Sharing point-of-sale data

• • Implementing collaborative forecasting and planning

• • Designing single stage control of replenishment
• Improving operational performance
• • Reducing replenishment lead time

• • Reducing lot sizes

• • Rationing based on past sales and sharing information to limit gaming
• Designing pricing strategies to stabilize orders
• • Moving from lot size based to volume based quantity discounts

• • Stabilizing pricing
• Building partnership and trust:
• • Designing a relationship with partnership and trust

• • Managing supply chain relationships for cooperation and trust

Role of IT in Supply Chain

• Information is crucial to supply chain performance. (Information about customer needs, inventory in stock, when more product should be produced and shipped, etc)
• Information makes the supply chain visible to manager.
• Information is the  most important driver among six Supply Chain drivers: Facilities, Inventory, Transportation, Information, sourcing and pricing.
• The information serves as the connection between the supply chain’s various stages, allowing them to coordinate and bring about many of the benefits of maximizing total supply chain profitability.

Role of IT in Coordination, Forecasting and Replenishment

• Supply chain coordination occurs when all the different stages of a supply chain work towards the objective of maximizing total supply chain profitability.
• Forecasting is the art and science of making projections about what future demand and conditions will be.
• Replenishment information consists of when to reorder and how much to reorder.

Therefore, Information sharing or the role of IT is crucial for the supply chain and helps companies to become more efficient and responsive.

Managing SC Relationship for Cooperation and Trust:

“A manager can build trust and strategic partnerships by designing a relationship where the mutual benefit to both sides is clear, both parties are mutually interdependent, contracts are allowed to evolve over time, and conflicts are effectively resolved.”

Questions

1. Why coordination is required in supply chain? Explain the causes of lack of coordination.
2. What is bullwhip effect? Explain.
3. What are the effects of lack of coordination in supply chain?
4. Why is Coordination important in Supply Chain? What are the obstacles to coordination and what are the managerial levers to achieve coordination?
5. Explain the role of IT in coordination and forecasting.