What is the main objective of Supply Chain Coordination?

-To increase total supply chain surplus.

How to achieve Supply Chain Coordination?

• Each stage of the supply chain must share information and take into account
the impact its actions have on other stages.
Why does lack of Supply Chain Coordination occur?
• A lack of coordination occurs either because different stages of the supply
chain have objectives that conflict or because information moving between
stages is delayed and distorted.
Why do different stages of the supply chain have objectives that conflict?
• Because each stage has a different owner.
• As a result, each stage tries to maximize its own profits, resulting in actions
that often diminish total supply chain profits
 This distortion is exaggerated by the fact that supply chains today produce a large variety of
products.
Example: Supply Chain of Automobile components
• Ford Motor Company has thousands of suppliers from Goodyear to Motorola,
and each of these suppliers has many suppliers in turn.
• Ford produces different models with several options for each model.

***The fundamental challenge today is for supply chains to achieve

coordination in spite of multiple ownership and increased product variety

One major outcome of lack of

coordination (and delay and
distortion of information) is:

• Fluctuations in orders
increase as they move
up the supply chain
from retailers to
wholesalers to
manufacturers to
suppliers
Information about demand at the site farthest
downstream must be made available to the upstream sites
• In other words, retailers must tell manufacturers exactly how
various items are selling. This gives the manufacturers necessary
data for making sound plans for the future.

Another traditional business practice that leads to the

bullwhip effect is “batching” orders at certain times of the
month or year.
• Companies make a practice of batching because it saves time and money.
It is cheaper, for example, to transport infrequent large orders than
frequent small ones.
• Likewise, the administrative costs of generating one large order of
a certain item are smaller than the cost of generating many small
orders of the same item.
‘Order batching’
• Plants may scramble to accommodate beginning-of-the-month orders, then
lie idle for weeks while the products they rushed to make sit in a
retailer’s warehouse.
• A healthier scenario, say the researchers, would be to have
manufacturers receive a steady stream of orders, reflecting actual day-
by-day consumer demand.
• The higher administrative and transportation costs of this system could
be reduced by consolidating loads from multiple suppliers to achieve
transportation economies of scale and switching from a paper-based to
a computer-based ordering system.
 one classic cause of the bullwhip effect ‘shortage gaming’.
 This describes how, when there is a shortage of a product, the
tendency is for downstream actors to inflate their supply needs
artificially, in order to claim a greater share of a scare
resource.

 For instance, an electronics chain might know that the maker of a popular new laser
printer currently has very limited capacity to produce the item. Meanwhile, the printer
is selling rapidly and generating healthy profits for the chain, which wants to order 100
more. The chain knows the manufacturer is going to be rationing printers: retailers will
be allocated half of what they request. So in order to get the 100 printers it wants, the
retailer asks for 200. When other retailers behave the same way and each orders
200, the chain may not receive 100 printers. But it also leaves the manufacturer with
a very distorted picture of consumer demand for the product. To discourage gaming,
they suggest manufacturers allocate scarce products to retailers based on past sales
records rather than on the amount requested in a particular order.
Supply chain planners will have to modify supply
quantities manually and scramble to adjust their
planning systems.
• It is impossible to predict how consumers will behave moving
forward, since the extent and duration of restricted
movements is unknowable.

• Will demand return to a normal baseline, or will there be

waves of large-scale buying? It is also challenging to know to
what extent restaurant closures will have a clear impact on
the level of grocery purchases.
A final strike against the bullwhip effect would be to
minimize price incentives.
• When manufacturers offer bargains, retailers stockpile inventory and
don’t order again for months. This is not the way to keep the supply
chain running smoothly. The logic behind an “everyday low price” is that
it promotes steady, regular purchases at all levels, from the retailer to
the wholesaler to the manufacturer, rather than sporadic shopping
binges, which are at the root of the bullwhip effect.
 THE EFFECT ON PERFORMANCE OF LACK OF
COORDINATION

• Manufacturing Cost • Inventory Cost • Labor Cost for Shipping and Receiving

• Transportation Cost • Replenishment Lead Time • Level of Product Availability

• Relationships across the Supply Chain

 OBSTACLES TO COORDINATION IN A SUPPLY CHAIN

Major obstacles into five categories:

• Incentive obstacles
• Information-processing obstacles
• Operational obstacles
• Pricing obstacles
• Behavioral obstacles
Incentive Obstacles
Incentive obstacles occur 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 :
Incentives that focus only on the local impact of an action result in decisions that do not
maximize total supply chain surplus.
• SALES FORCE INCENTIVES
Improperly structured sales force incentives are a significant obstacle to coordination in a
supply chain.
• A sales force incentive based on sell-in thus results in order variability being larger than
customer demand variability because the sales force tends to push product toward the end
of the incentive period.
• Information-Processing Obstacles

Information-processing obstacles occur when demand information is distorted as it

moves between different stages of the supply chain, leading to increased variability
in orders within the supply chain.
FORECASTING BASED ON ORDERS AND NOT CUSTOMER DEMAND

LACK OF INFORMATION SHARING

A retailer such as Wal-Mart may increase the size of a particular order because
of a planned promotion. If the manufacturer is not aware of the planned
promotion, it may interpret the larger order as a permanent increase in
demand and place orders with suppliers accordingly
• Operational Obstacles
Operational obstacles occur when actions taken in the course of placing and filling
orders lead to an increase in variability.
ORDERING IN LARGE LOTS
• Firms may order in large lots because a significant fixed cost is
associated with placing, receiving, or transporting an order
• Large lots may also occur if the supplier offers quantity discounts
based on lot size
Drawbacks:

• Because orders are batched and placed every ‘n’ weeks, the order stream has ‘n-1’ weeks
without orders followed by a large order that equals ‘n’ weeks of demand.
• A manufacturer supplying several retailers that batch their orders faces an order
stream that is much more variable than the demand the retailers experience.
• If the manufacturer batches its orders to suppliers, the effect is further magnified.
• In many instances, there are certain focal-point periods, such as the first or the last
week of a month, when a majority of the orders arrive. This concentration of orders
further exacerbates the impact of batching.
LARGE REPLENISHMENT LEAD TIMES
Information distortion is magnified if replenishment lead times between
stages are long.
• Consider a situation in which a retailer has misinterpreted a random
increase in demand as a growth trend. If the retailer faces a lead time of
two weeks, it will incorporate the anticipated growth over two weeks
when placing the order. In contrast, if the retailer faces a lead time of
two months, it will incorporate into its order the anticipated growth over
two months (which will be much larger). The same applies when a
random decrease in demand is interpreted as a declining trend.
RATIONING AND SHORTAGE GAMING

Rationing schemes that allocate limited production in proportion to the

orders placed by retailers lead to a magnification of information
distortion.
This can occur when a high-demand product is in short supply.

This phenomenon is fairly common in the electronics industry, in which

alternating periods of component shortages followed by a component surplus are
often observed. In particular, memory chip manufacturing experienced a couple
of such cycles in the 1990s.
• Pricing Obstacles
Pricing obstacles arise when the pricing policies for a product lead to an increase
in variability of orders placed.
LOT SIZE–BASED QUANTITY DISCOUNTS

• Lot size–based quantity discounts increase the lot size of orders placed
within the supply chain because lower prices are offered for larger
lots.
• The resulting large lots magnify the bullwhip effect within the supply
chain.
PRICE FLUCTUATIONS
• Trade promotions and other short-term discounts offered by a
manufacturer result in forward buying, by which a wholesaler or
retailer purchases large lots during the discounting period to cover
demand during future periods.
• Behavioral Obstacles
• Behavioral obstacles are problems in learning within organizations that contribute
to information distortion.
• These problems are often related to the way the supply chain is structured
and the communications among different stages.
Some of the behavioral obstacles are as follows:
1. Each stage of the supply chain views its actions locally and is unable to see the
impact of its actions on other stages.
2. Different stages of the supply chain react to the current local situation rather than
trying to identify the root causes
3. Based on local analysis, different stages of the supply chain blame one another for
the fluctuations, with successive stages in the supply chain becoming enemies rather
than partners.
4. No stage of the supply chain learns from its actions over time because the most
significant consequences of the actions any one stage takes occur elsewhere. The
result is a vicious cycle in which actions taken by a stage create the very problems
that the stage blames on others.
5. A lack of trust among supply chain partners causes them to be opportunistic at the
expense of overall supply chain performance. The lack of trust also results in significant
duplication of effort. More important, information available at different stages either is
not shared or is ignored because it is not trusted.
MANAGERIAL LEVERS TO ACHIEVE COORDINATION
The following managerial actions increase total supply chain profits and moderate
information distortion:

• Aligning of goals and incentives

• Improving information visibility and accuracy

• Improving operational performance

• Designing pricing strategies to stabilize orders

• Building strategic partnerships and trust

 CPFR
Collaborative Planning, Forecasting and Replenishment
Definition: by Voluntary Interindustry Commerce Standards (VICS)
CPFR is a business practice that combines the intelligence of multiple trading
partners in the planning and fulfilment of customer demand.
• Links sales and marketing best practices to supply chain planning and
execution processes.
Objective:
To increase availability to the customer while reducing inventory, transportation
and logistics costs.

Need:
Globalization, shorter product life cycles, industry-wide consolidations, or the rapid
advancements that have been made in information technology – all these factors
have contributed to a steady increase in competitive pressure on domestic and
foreign markets – all of them 1st realized in the 80s and 90s.

Solution:
The retail industry to recognize that real gains could only be realized through open
cooperative partnerships between retailers and manufacturers.
History:
In the 90s, trade association sponsors in the United States created a group named
“Efficient Consumer Response Movement” (ECR). ECR introduced four core
strategies, namely efficient promotions, replenishment, store assortment, and
product introductions.
 Development of a trust-based relationship between manufacturers and retailers and sharing
of strategic information aimed at optimizing overall supply chain results
 Continuous Replenishment (CR) is often mentioned as one of the steps towards
implementation.
• Instead of the retailer replenishing the inventory, the manufacturer or wholesaler
replenishes the retailer based on point-of-sale (POS) data

This strategy was first employed at BOSE to minimize purchasing costs as sales decreased.
BOSE integrated personnel of its key suppliers into its planning and purchasing system, allowing
them to perform essential functions and better anticipate BOSE’s changing needs.

While there are multiple anecdotal examples of enhanced organizational performance, this
strategy was never adopted industry-wide…….since many companies were not willing to engage
in partnerships that required long-term commitment and an openness about sharing information
with their vendors.
One practice significantly influenced CPFR.
 In the mid 1980s, Wal-Mart and Procter & Gamble popularized a system very similar to CR –
Vendor Managed Inventory (VMI) or Supplier Managed Inventory (SMI).
 While there are similarities to CR, in a VMI program the supplier has more complete control
over the determination of the distributor’s inventory levels and replenishment frequencies
 The main benefit of this system is that the supplier receives an undistorted demand signal
(i.e., information on sales and inventory levels) from the retailer.
 In addition, the supplier or manufacturer, who then controls the entire cycle of sales and order
forecasts, including order placement and replenishment, is able to pull the forecasting risk
across all its customers.
 With demand being more predictable, the supplier is able to reduce its inventory levels and
improve service to the retailer, and, in turn, the retailer is able to reduce its own inventory and
increase service, which results in increased sales over the whole supply chain.
 Upon launch of the ECR movement, many companies predicted that VMI, if properly
managed, would lead them to success in the four areas that were mentioned earlier.

However, a significant amount of companies seems to have abandoned this practice and
adopted other supply chain strategies (Katz M. , 2000), primarily because of VMI’s main
weaknesses: an impaired visibility of the whole supply chain (Cooke, 1998) and the negligence
of POS data as well as backroom inventory level data (Barratt & Oliveira, 2001).
Key elements in CPFR:
1. Strategy and planning.
2. Demand and supply management.
3. Execution.
4. Analysis.
 1. Strategy and planning. The partners determine the
Key elements in CPFR: scope of the collaboration and assign roles,
or responsibilities, and clear checkpoints. In a joint
business plan they then identify significant events
Four supply chain activities: such as promotions, new product introductions, store
openings/closings, and changes in inventory policy
that affect demand and supply.

2. Demand and supply management. A collaborative

sales forecast projects the partners' best estimate of
consumer demand at the point of sale. This is then
converted to a collaborative order plan that
determines future orders and delivery requirements
based on sales forecasts, inventory positions, and
replenishment lead times.

3. Execution. As forecasts become firm, they are

converted to actual orders. The fulfilment of these
orders then involves production, shipping, receiving,
and stocking of products.

4. Analysis. The key analysis tasks focus on identifying

exceptions and evaluating metrics that are used to
assess performance or identify trends.
What are the 4 common CPFR scenarios? Explain where they are applied in a supply chain and to which
industries they are applied to.

The most common areas where large-scale CPFR deployments have taken place between a
retailer and a manufacturer:
CPFR: Key Points

 The consumer is the ultimate focus of all efforts.

 “Buyers” (retailers) and “sellers” (manufacturers) collaborate at every level.

 Joint forecasting and order planning reduces surprises in the supply chain.

 The timing and quantity of physical flows is synchronized across all parties.

 Promotions no longer serve as disturbances in the supply chain.

 Exception management is systemized.

CPFR: Challenges

• Selection of CPFR Partners

• Senior Management Buy In

• Trust Based Relationship

• Confidentiality

• Detailed Definition of Systems’ Capabilities

• Internal Reward Structure

• Cultural Change
CPFR: Hurdles for Implementation (same as Challenges)
 Given the large-scale sharing of information, there is a risk of information
misuse. Often one or both of the CPFR partners have relationships with the
partner’s competitors.
 Another risk is that if one of the partners changes its scale or technology,
the other partner is forced to follow suit or lose the collaborative relationship.

 The implementation of CPFR and the resolution of exceptions require close

interactions between two entities whose cultures may be very different. The
inability to foster a collaborative culture across the partner organizations can
be a major hurdle for the success of CPFR.

 One of the biggest hurdles to success is often that partners attempt store-level
collaboration, which requires a higher organizational and technology investment.
It is often best to start with an event- or DC-level collaboration, which is more
focused and easier to collaborate on.
 One of the biggest hurdles for successful CPFR, however, is that demand
information shared with partners is often not used within the organization in an
integrated manner. It is important to have integrated demand, supply, logistics,
and corporate planning within the organization to maximize the benefits of a
CPFR effort with a partner.
 Inventory Replenishment Techniques
DESIGNING SINGLE-STAGE CONTROL OF REPLENISHMENT :

Key cause of information distortion:

 Diminish information distortion
 The problem of multiple forecasts is
eliminated and coordination within the
supply chain follows.
Industry practices:
1. Continuous replenishment programs (CRP)
 Each stage of the supply chain uses orders
from the previous stage as its historical
demand.
o As a result, each stage views its role as
one of replenishing orders placed by the
next stage.
o In reality, the key replenishment is at the
retailer, because that is where the final
customer purchases.

2. Vendor managed inventories (VMI)

 Wal-Mart typically assigns one of its suppliers as a

leader for each major product category to manage
store-level replenishment.
 This gives suppliers visibility into sales and a single
decision maker for replenishment decisions.
Continuous replenishment programs (CRP)
 In (CRP), the wholesaler or manufacturer replenishes a
retailer regularly based on POS data.
 CRP may be supplier, distributor, or third-party managed.
 In most instances, CRP systems are driven by actual
withdrawals of inventory from retailer warehouses rather
than POS data at the retailer level.
 Tying CRP systems to warehouse withdrawals is easier to
implement, and retailers are often more comfortable
sharing data at this level.
 IT systems that are linked across the supply chain provide a
good information infrastructure on which a continuous
replenishment program may be based.
In CRP, inventory at the retailer is
owned by the retailer.
Vendor managed inventories (VMI)
 With VMI, the manufacturer or supplier is responsible for all
decisions regarding product inventories at the retailer.
 The control of the replenishment decision moves to the
manufacturer instead of the retailer.
 VMI requires the retailer to share demand information with
the manufacturer to allow it to make inventory
replenishment decisions.
 VMI also helps by conveying customer demand data to the
manufacturer, which can then plan production accordingly.
This helps improve manufacturer forecasts and better
match manufacturer production with customer demand.
 VMI can allow a manufacturer to increase its profits as well
as profits for the entire supply chain if both retailer and
manufacturer margins are considered when making
inventory decisions.
In many instances of VMI, the inventory
is owned by the supplier until it is sold
by the retailer.
 One drawback of VMI arises because retailers often sell
products from competing manufacturers that are
substitutes in the customer’s mind.
 Understand the role of safety inventory in a supply chain.
 Identify factors that influence the required level of safety inventory

 How managers can set safety inventory levels to provide the desired product
availability
 Safety inventory is inventory carried to satisfy demand that exceeds the
amount forecasted for a given period.

Inventory profile without safety inventory

• Bloomingdale’s sells purses purchased
from Gucci, an Italian manufacturer.
• Given the high transportation cost from
Italy, the store manager at Bloomingdale’s
orders in lots of 600 purses.
• Demand for purses at Bloomingdale’s
averages 100 a week.
• Gucci takes 3 weeks to deliver the purses
to Bloomingdale’s in response to an order.
• If there is no demand uncertainty and
exactly 100 purses are sold each week, at
what inventory level should the store
manager place a new order?
Ans: When the store has exactly 300 purses
remaining.
• But due to uncertainty, the store manager decides to place an order with Gucci
when the store still has 400 purses.
• What is the safety inventory?
Ans: 100
How much safety inventory must be held?

Raising the level of safety inventory

- increases product availability and thus the margin captured from
customer purchases.
-increases inventory holding costs.
(particularly significant in industries in which product life cycles are
short and demand is volatile)
- Carrying excessive inventory can help counter demand volatility
but can really hurt if new products come on the market and
demand for the product in inventory dries up.

Ultimate Goal:
Provide a high level of product availability to customers
while carrying low levels of safety inventory in its supply
chain.
How do you determine the appropriate level of safety inventory?
- It is determined by the following two factors:
• The uncertainty of both demand and supply
• The desired level of product availability

 As the uncertainty of supply or demand grows, the required level of safety inventories increases.

Eg: When a new smart phone model is introduced, demand is highly uncertain.

 As the desired level of product availability increases, the required level of safety inventory also
increases.
Eg: If a higher level of product availability for the new phone model is targeted,
a higher level of safety inventory must be carried for that model.

Rule of thumb:
 Carry a high level of safety inventory for a new model. As the market’s
reaction to the new model becomes clearer, uncertainty is reduced and
demand is easier to predict. At that point, carry a lower level of safety
inventory relative to demand.
Lead time: It is the gap between when an order is placed and when it is received.

Product availability: It a firm’s ability to fill a customer order out of available inventory.

Stockout: A stockout is said to have occurred if a customer order arrives when product is
not available.
Measuring Product Availability
1. Product fill rate (fr):
• It is the fraction of product demand that is satisfied from product in inventory.
• Fill rate is equivalent to the probability that product demand is supplied from
available inventory.
• Fill rate should be measured over specified amounts of demand rather than time.
Thus, it is more appropriate to measure fill rate over every million units of demand
rather than every month.
Example
Assume that B&M provides smart phones to 90 percent of its customers from inventory, with
the remaining 10 percent lost to a neighboring competitor because of a lack of available
inventory.
• In this case, B&M achieves a fill rate of 90 percent
2. Order fill rate:

• It is the fraction of orders that are filled from available inventory.

• Order fill rate should also be measured over a specified number of orders rather than time.
• In a multi-product scenario, an order is filled from inventory only if all products in the order
can be supplied from the available inventory
Example

• In the case of B&M, a customer may order a phone along with a laptop.
• The order is filled from inventory only if both the phone and the laptop are available
through the store.
• Order fill rates tend to be lower than product fill rates because all products must be in stock
for an order to be filled.
3. Cycle service level (CSL)
• It is the fraction of replenishment cycles that end with all the customer demand
being met.
• A replenishment cycle is the interval between two successive replenishment
deliveries.
• The CSL is equal to the probability of not having a stockout in a replenishment cycle.
• CSL should be measured over a specified number of replenishment cycles.

Example

• If B&M orders replenishment lots of 600 phones, the interval between the arrival of two
successive replenishment lots is a replenishment cycle.
• If the manager at B&M manages inventory such that the store does not run out of inventory
in 6 out of 10 replenishment cycles, the store achieves a CSL of 60 percent.
• Observe that a CSL of 60 percent typically results in a much higher fill rate.
• In the 60 percent of cycles in which B&M does not run out of inventory, all customer demand
is satisfied from available inventory.
• In the 40 percent of cycles in which a stockout does occur, most of the customer demand is
satisfied from inventory.
• Only the small fraction toward the end of the cycle that arrives after B&M is out of inventory
is lost. As a result, the fill rate is much higher than 60 percent.
Replenishment Review Policies

• A replenishment policy consists of decisions regarding when to reorder and how much to
reorder.
• These decisions determine the cycle and safety inventories along with the fill rate and
the cycle service level CSL.
There are two types of review policies:

1. Continuous review:

2. Periodic review:
1. Continuous review:
• Inventory is continuously tracked, and an order for a lot size Q is placed when the
inventory declines to the reorder point (ROP).

Example
• Consider the store manager at B&M who continuously tracks the inventory of
phones.
• She orders 600 phones when the inventory drops below ROP 400.
• In this case, the size of the order does not change from one order to the next.
• The time between orders may fluctuate given variable demand.

2. Periodic review:
Inventory status is checked at regular periodic intervals, and an order is placed to
raise the inventory level to a specified threshold.
Example
• Consider the purchase of film at B&M. The store manager does not track film inventory
continuously.
• Every Thursday, employees check film inventory, and the manager orders enough so that the
total of the available inventory and the size of the order equals 1,000 films.
• In this case, the time between orders is fixed.
• The size of each order, however, can fluctuate given variable demand.
• These inventory policies are not comprehensive but suffice to illustrate the key managerial
issues concerning safety inventories.