MODULE 6

COORDINATION
IN THE SUPPLY CHAIN

Contents
Supply Chain Coordination
Bullwhip effect
Effects of Lack of Supply Chain Coordination
Obstacles to coordination
Managerial levers to Achieve Coordination
Continuous Replenishment Program (CRP)
Vendor Managed Inventory (VMI)
Collaborative Planning, Forecasting and
Replenishment (CPFR)
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
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 2006-2008

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
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 the costs
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
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 - Aims at reducing
transport cost even though it would increase
inventory levels downstream in the supply
chain.
Sales department - Sales Force 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.

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 random orders:
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 assume a growth trend and
place higher orders with suppliers as a result.

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: Mega-Mart 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 has 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 excess.
Obstacles to Coordination in a Supply Chain
continued
Operational obstacles continued
Rationing and shortage gaming - Rationing
schemes that allocate limited production in
proportion to orders placed by retailers.
Especially done for high-demand 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 IC chip shortages and surpluses,
inventory level fluctuations had a massive
impact on their financials.


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
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
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)

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

Managerial Levers to Achieve Coordination
continued
Improving Operational Performance:

Reducing replenishment lead time:
Orders through Internet (E-commerce), Flexible manufacturing,
Advance Shipping Notice (ASN) and Cross-docking techniques.
Reduces uncertainty in demand because multiple orders can be
placed with higher accuracy of forecasts.
Reducing lot sizes:
Advanced Planner & Optimizer (APO) assisted ordering ensures
correct orders
TL shipping by combining shipments of a variety of products:
E.g. 7-Eleven combines temperature dependent products into
a TL ; Milk Route
Temporal Aggregation 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. E.g. Automobile industry
Information sharing. E.g. Retailers' Pre-Ordering in Puma and
Reebok

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 stabilization.
Stabilizing Pricing:
Attempt to eliminate promotions and implement EDLP
Tie promotion payments to Sell-Through rather than
Sell-In
Building strategic partnerships and trust:
Easier to implement the above 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
Continuous Replenishment Program (CRP)
Bullwhip effect can be reduced by assigning replenishment
responsibility to a single entity.
Single Point of Replenishment decisions ensure 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, Decreases Stock-outs,
& Improves Customer Service
Examples: Wal-Mart, Dell, Hyper-City retail
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
Requires retailer to share customer demand
information with manufacturer for making inventory
replenishment decisions

Vendor-Managed Inventory (VMI)
continued
In many instances, inventory is owned by supplier or
manufacturer until its sold by retailer
Example: Wal-Mart and P&G
Have a VMI program for over 10 years
Revenues increased significantly
Wal-Marts operating costs reduced drastically
P&Gs market share grew (because Wal-Mart gave it
preferred shelf space)
Customer Service levels increased significantly


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.