Supply Chain Management Chapter 17 Coordination in the Supply Chain

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Supply Chain Coordination

Supply Chain Coordination happens when all stages in the supply chain take actions collectively resulting in higher total supply chain profitability Supply chain coordination requires that each stage takes into account the effects of its actions on the other stages

Lack of coordination results when:

Objectives of different stages conflict Information flow between stages is delayed and distorted

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Bullwhip Effect
Bullwhip Effect (or Whiplash effect):
Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers

Uncertain demand information within the supply chain where each stage has different demand estimates (addition of buffers) and results in loss of supply chain coordination Happens due to customer demand fluctuations and inaccurate forecasts
Example: Effect on Textile industry in 2004-2006
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The Effect of lack of coordination (Bullwhip effect) on supply chain performance

Manufacturing cost increases Increased demand variability leads to building excess capacity or higher inventory thereby increasing manufacturing cost Inventory cost increases Higher inventory levels lead to higher inventory holding costs Warehousing cost increases - Higher inventory levels increase warehousing space required thereby increasing warehousing cost Replenishment lead time increases - High demand variability makes production scheduling and inventory planning difficult which increases replenishment lead time Transportation cost increases Since the demand varies, transportation requirements also fluctuate which increases transportation cost

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The Effect of lack of coordination (Bullwhip effect) on supply chain performance continued
Labour cost for shipping and receiving increases Demand fluctuations lead to variation in labour requirements which increases labour cost Level of product availability decreases High demand variability makes product supply on time difficult and may result in stock outs Relationships across the supply chain worsens Poor performance at every stage impacts the interaction between stages negatively Profitability decreases Reduced supply chain profitability as its more expensive to provide a given level of product availability

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Obstacles to Coordination in a Supply Chain

Incentive Obstacles:
Happens when incentives offered to different stages in a supply chain increase variability and reduce total supply chain profits Local optimization within functions or stages of a supply chain: Logistics department will aim at reducing transport cost even though it would increase inventory cost or impact customer service Sales force incentives Incentives are based on quantities sold to distributors or retailers (Sell-In) and not on quantities sold to end consumers (Sell-Through). This leads to order fluctuations especially during promotions or special offers.

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Obstacles to Coordination in a Supply Chain continued

Information Processing Obstacles:
Occurs when demand information is unclear between different stages of the supply chain leading to increased order variation Forecasting based on orders, not actual customer demand: Example: A random increase in customer demand at Big Bazaar would lead to placing high orders with manufacturer. The manufacturer places even higher orders with supplier (assuming it as a growth trend). This will lead to build-up of inventories at each stage. Lack of information sharing: Example: A Levis store increases orders of a particular product category due to a special promotion. If the manufacturer is not aware of this promotion, they might presume a growth trend and place higher orders with suppliers as a result.

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Obstacles to Coordination in a Supply Chain continued

Operational obstacles:
Happens when actions taken during placing and filling orders lead to an increase in variability Ordering in large lots Example: MegaMart orders lot sizes for belts much larger than what is essentially required in order to utilize economies of scale. Large replenishment lead times - Example: Shoppers Stop have a lead time of 15 days for luxury watches and have misjudged a random increase as a steady growth trend. They will include anticipated growth over 15 days into its orders leading to an inventory overload. Rationing and shortage gaming - Rationing schemes that allocate limited production in proportion to orders placed by retailers. Especially done for highdemand products which are in short supply. Retailers will place higher orders than what is actually required to increase the amount supplied to them. Example: For Lenovo, due to alternate phases of memory chip shortages and surpluses, inventory level fluctuations have a massive impact.
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Obstacles to Coordination in a Supply Chain continued

Pricing obstacles:
Occurs when pricing policies for a product lead to an increase in variability of orders placed Lot-size based quantity decisions Quantity discounts based on economies of scale increases lot size of orders which raises the variability up the supply chain Price fluctuations Trade promotions and other short-term discounts offered by a manufacturer lead to wholesaler/retailer buying large quantities which covers even future demand. This results in higher production and shipments during promotions followed by a sudden decrease thereafter.
Example: HULs trade promotion for Surf Excel at Big Bazaar
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Obstacles to Coordination in a Supply Chain continued

Behavioral Obstacles:
Related to problems in learning, communication between the supply chain stages and how the supply chain is structured Each stage of the supply chain views only its own actions and does not observe the impact of its actions on other stages Different stages blame each other for the fluctuations, rather than trying to identify the root causes and learning from errors Lack of trust results in selfish opportunism, duplication of effort and inadequate information sharing

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Managerial Levers to Achieve Coordination

Aligning Goals and Incentives:
Align goals and incentives so that each participant works towards maximizing total supply chain profits Align incentives across functions All facility, transportation and inventory decisions must be evaluated based on their effect on overall profitability Pricing for coordination Use lot size based discounts and suitable contracts to ensure product availability throughout the supply chain Alter sales force incentives - From Sell-In (sale by manufacturer to retailer) to Sell-Through (sale by retailer to end consumer)

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Managerial Levers to Achieve Coordination continued

Improving Information Accuracy:
Sharing POS data Shared POS data across the supply chain means each stage will forecast demand based on actual sales data Collaborative forecasting and planning Each stage must forecast and plan jointly so that complete benefits of POS data can be realized Single stage control of replenishment - Since key replenishment happens at the retailer, only this data must be considered for replenishment across the supply chain

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Managerial Levers to Achieve Coordination continued

Improving Operational Performance:
Reducing replenishment lead time: Reduces uncertainty in demand because multiple orders can be placed with higher accuracy of forecasts Orders through Internet (E-commerce), Flexible manufacturing, Advance Shipping Notice (ASN), Cross-docking techniques can significantly reduce lead times Reducing lot sizes: Reduces amount of fluctuations between any 2 stages Computer-assisted ordering reduces fixed ordering costs TL shipping by combining shipments of a variety of products 7-Eleven combines temperature dependent products into a TL ; Milk Runs Changing customer ordering to ensure evenly distributed orders over time Rationing based on past sales and sharing information: Turn-and-Earn Allocate stock based on past actual retailer sales rather than current orders. Example - Automobile industry Information sharing. Example - Retailers' Pre-ordering in Puma and Reebok
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Managerial Levers to Achieve Coordination continued

Designing Pricing Strategies to Stabilize Orders:
Moving from Lot-size based to Volume based quantity discounts : Since Volume-based quantity discounts consider total purchases over a specific time-frame rather than a single lot, this ensures smaller lot sizes Stabilizing pricing: Attempt to eliminate promotions and implement EDLP Limit quantity purchased during a promotion Tie promotion payments to Sell-Through rather than Sell-In Building strategic partnerships and trust: Easier to implement these approaches if there is trust Sharing of accurate information results in better matching of supply and demand Avoids duplicated efforts and leads to lower overall costs

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Continuous Replenishment Program (CRP)

Bullwhip effect can be reduced by assigning replenishment responsibility to a single entity Single point of replenishment decisions ensures visibility and a common forecast across the supply chain Continuous Replenishment Program (CRP):
Based on Pull process Wholesaler or Manufacturer replenishes a retailer regularly based on POS data or inventory consumption from retailer warehouse IT systems linked across the supply chain provides the information infrastructure Inventory at retailer is owned by the retailer Advantages Reduces inventory levels, decreased stock-outs, improves customer service levels, higher warehouse efficiency Examples: Wal-Mart, Dell, Hyper City retail
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Vendor-Managed Inventory (VMI)

Vendor-Managed Inventory (VMI) is an integrated approach where inventory at the distributor/retailer is monitored and managed by the manufacturer/supplier Control of replenishment decision moves to Manufacturer instead of Retailer In many instances, inventory is owned by supplier/manufacturer until its sold by retailer Requires retailer to share customer demand information with manufacturer for making inventory replenishment decisions Example: Wal-Mart and P&G Have a VMI program for over 10 years Customer Service levels increased significantly Turnover doubled Wal-Marts operating costs reduced drastically P&Gs market share grew (because Wal-Mart gave it preferred shelf space)
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Collaborative Planning, Forecasting and Replenishment (CPFR)

A business practice in which buyer and supplier integrate plans, forecasts and delivery schedules to ensure smooth flow of products across the supply chain Examples: Sears and Michelin tyres ; Wal-Mart and P&G have collaboration for the following activities:
Strategy and Planning Overall scope of the collaboration, responsibilities, identify product promotions, new product launches and store openings/closings. Demand and Supply management Sales forecasting, future product ordering, inventory levels and replenishment lead times. Execution Receipt of Actual orders and Order Fulfillment through production, shipping, receiving and stocking products. Analysis Identifying exceptions (gap in forecasts), assessing performance and past trends.

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