7a) What is meant by co-ordination in SCM and what are the effects of lack of co-ordination in supply chain?

Channel coordination or supply chain coordination aims at improving supply

chain performance by aligning the plans and the objectives of individual enterprises. It usually focuses on inventory management and ordering decisions in distributed inter-company settings. Channel coordination models may involve multi-echelon inventory theory, multiple decision makers, asymmetric information, as well as recent paradigms of manufacturing, such as mass customization, short product lifecycles, outsourcing and delayed differentiation.

THE EFFECT ON PERFORMANCE OF LACK OF COORDINATION

A supply chain lacks coordination if each stage optimizes only its local objective, without considering the impact on the complete chain. Total supply chain profits are thus less than what could be achieved through coordination. Each stage of the supply chain, in trying to optimize its local objective, takes actions that end up hurting the performance of the entire supply chain. Lack of coordination also results if information distortion occurs within the supply chain. Consider the bullwhip effect P&G observed in the diaper supply chain. As a result of the bullwhip effect, orders P&G receives from its distributors are much more variable than demand for diapers at retailers. We discuss the impact of this increase in variability on various measures of performance in the diaper supply chain.

a) MANUFACTURING COST

The bullwhip effect increases manufacturing cost in the supply chain. As a result of the bullwhip effect, P&G and its suppliers must satisfy a stream of orders that is much more variable than customer demand. P&G can respond to the increased variability by either building excess capacity or holding excess inventory, both of which increase the manufacturing cost per unit produced.

b) INVENTORY COST The bullwhip effect increases inventory cost in the supply chain. To handle the increased variability in demand, P&G has to carry a higher level of inventory than would be required in the absence of the bullwhip effect. As a result, inventory costs in the supply chain increase. The high levels of inventory also increase the warehousing space required and thus the warehousing cost incurred.
c) REPLENISHMENT LEAD TIME

The bullwhip effect increases replenishment lead times in the supply chain. The increased variability as a result of the bullwhip effect makes scheduling at P&G and supplier plants much more difficult compared to a situation with level demand. There are times when the available capacity and inventory cannot supply the orders coming in. This results in higher replenishment lead times in the supply chain from both P&G and its suppliers.

d) TRANSPORTATION COST

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

e) LABOR COST FOR SHIPPING AND RECEIVING

he bullwhip effect increases labor costs associated with shipping and receiving in the supply chain. Labor requirements for shipping at P&G and its suppliers fluctuate with orders. A similar fluctuation occurs for the labor requirements for receiving at distributors and retailers. The various stages have the option of carrying excess labor capacity or varying labor capacity in response to the fluctuation in orders. Either option increases total labor cost.

f) LEVEL OF PRODUCT AVAILABILITY

The bullwhip effect hurts the level of product availability and results in more stock outs in the supply chain. The large fluctuations in orders make it harder for P&G to supply all distributor and retailer orders on time. This increases the likelihood that retailers will run out of stock, resulting in lost sales for the supply chain.

7b) Discuss the causes for bullwhip effect and mechanism to counter it ?

Bullwhip Effect which is Supply Chain Demand Amplification caused due to distorted information moving from one end of a supply chain to the other causing tremendous inefficiencies. Companies can successfully counteract the bullwhip effect by thoroughly understanding its causes and effects. Several industry leaders are implementing innovative strategies that create new challenges such as integration of new information systems, definition of new organizational relationships, and implementation of new incentive and measurement systems. Various initiatives and remedies based on the underlying coordination mechanism, namely, information gathering and sharing, channel positioning, and operational efficiency can oppose the very effects. Through information sharing, demand information at a downstream site is transmitted upstream in a timely fashion. Channel positioning is the coordination of pricing, transportation, inventory planning, and ownership between the upstream and downstream sites in a supply chain. Operational efficiency refers to activities that improve performance, such as reduced costs and lead-time.

Supply Chain strategies to counter measure Bullwhip Effect Following are few Supply Chain strategies employed to reduce or tame the Bullwhip effect and to improve business performance. a) Avoidance of Multiple Demand Forecast Updates Members of a supply chain conducts forecasting in association with its planning based demand input from their immediate downstream member in producing their

own forecasts. Demand input from the immediate downstream member, results from that member's forecasting, whose input is from its own downstream member. Solution to the recurring processing of consumption data in a supply chain is to make demand data at a downstream position available to the upstream site allowing both sites can update their forecasts with the same raw data in the current computerized scenario, manufacturers request sell-through data on withdrawn stocks from their resellers' central repository warehouse. Although the data are not as absolute as pointof-sale data from the resellers' stores, it offers considerably more information than was available when manufacturers didn't know what happened after shipping of their products. b) Break Bulk Orders Order batching contributes to the bullwhip effect therefore companies need to devise strategies that lead to smaller batches or more frequent resupply. Electronic data interchange [EDI] can reduce the cost of the paperwork in generating an order. P&G has introduced standardized ordering terms across all business units to simplify the process and dramatically cut the number of invoices. General Electric is electronically coordinating buyers and suppliers throughout the company. Nabisco perform computer-assisted ordering, paperless, thereby customers order more frequently.

c) Stabilize Price Variations Reduction of both the frequency and the level of wholesale price discounting can control bullwhip effect caused by forward buying and diversions. The manufacturer can reduce the incentives for retail forward buying by establishing a uniform wholesale pricing policy. Everyday Low Price (EDLP): Retailers and distributors can aggressively negotiate with their suppliers to give them everyday low cost (EDLC). P&G, Kraft, and Pillsbury have moved to an everyday low price (EDLP) or value pricing strategy.

P&G reported its highest profit margins in twenty-one years and showed increases in market share in early 1990s. Activity-based costing (ABC) systems facilitate companies to recognize the unnecessary costs of forward buying and diversions. When companies run provincial promotions, some retailers buy in bulk in the area where these promotions are held, then divert the products to other regions for utilization. ABC systems provide explicit accounting of the storage, individual handling, costs of inventory, transportation, and so on that previously were hidden and often outweigh the profit of promotions. d) Eliminate Gaming in Shortage The sharing of capacity and inventory information helps to lessen customers' anxiety and, consequently, lessen their need to employ in gaming. Times when a supplier faces a shortage, instead of assigning products based on orders, it can assign in proportion to past sales records. Customers have no incentive to overstate their orders. General Motors has long used this method of allotment in cases of short supply. Sharing capacity information is insufficient when there is a genuine shortage. Few manufacturers work with consumers to place orders well in advance of the sales time. Thus adjust production capability or scheduling with improved knowledge of product demand. e) Counter measure to Generous return policies Generous return policies that manufacturers offer retailers heighten gaming. Without a penalty, retailers will continue to overstate their needs and cancel orders. Few computer manufacturers are starting to enforce more stern cancellation policies. f) Eliminate incentives for customers and distributors On eliminating these incentives, it can prevent demand accumulation and order staging. Minimizing incentivized promotions will cause the customers to delay orders and there by smoother ordering patterns.