CHAPTER 8 – COORDINATION IN A SUPPLY CHAIN

Faculty of International Economic Relations

University of Economics and Law

1 Het begint met een idee

CONTENTS

 Supply chain coordination

 Bullwhip effect
 Effect of lack of coordination
 Obstacles to coordination in a supply chain
 Managerial levers to achieve coordination
 Continuous replenishment
 Vendor-managed inventory
 Collaborative planning, forecasting, and replenishment
 Coordination in practice
Vrije Universiteit Amsterdam
SUPPLY CHAIN COORDINATION

All stages of the chain are aligned to increase total supply chain surplus
 Requires that each stage share information and take into account the
effects of its actions on the other stages
 Lack of coordination results when:
o Objectives of different stages conflict
o Information moving between stages is delayed or distorted

Vrije Universiteit Amsterdam

BULLWHIP EFFECT

Fluctuations in orders increase as they move up the supply chain from

retailers to wholesalers to manufacturers to suppliers

Vrije Universiteit Amsterdam

 BULLWHIP EFFECT

Manufacturer’s Orders to Wholesaler’s Orders to Retailer’s Orders to

Consumer Sales
Suppliers Manufacturers Wholesalers

Order Quantity
Order Quantity

Order Quantity
Order Quantity

Time Time Time Time

CAUSES

1. Demand forecast updating

2. Order batching
3. Price fluctuations
4. Rationing and shortage gaming
Source: Lee et al. (1997)

Vrije Universiteit Amsterdam

BULLWHIP EFFECT

INITIATIVES

• Information sharing
• Channel alignment
• Pricing stabilization
• Allocation based on past sales records rather than on orders.

Vrije Universiteit Amsterdam

EFFECT OF LACK OF COORDINATION

• Manufacturing cost: increase

• Inventory cost: increase
• Lead time: increase
• Transportation cost: increase
• Labor cost for shipping and receiving: increase
• Level of product availability: decrease
• Relationships across the supply chain: loss of trust

Vrije Universiteit Amsterdam

OBSTACLES TO COORDINATION IN A SUPPLY CHAIN

 Incentive obstacles:
o Local optimization within functions or stages of a supply chain
o Sales force incentives
 Information-processing obstacles:
o Forecasting based on orders and not customer demand
o Lack of information sharing
 Operational obstacles:
o Ordering in large lots
o Large replenishment lead times
o Rationing and shortage gaming

Vrije Universiteit Amsterdam

OBSTACLES TO COORDINATION IN A SUPPLY CHAIN

 Pricing obstacles:
o Lot-size–based quantity discounts
o Price fluctuations
 Behavioral obstacles:
o Problems in learning within organizations that contribute to information
distortion

Vrije Universiteit Amsterdam

MANAGERIAL LEVERS TO ACHIEVE COORDINATION

 Aligning goals and incentives

 Improving information visibility and accuracy
 Improving operational performance
 Designing pricing strategies to stabilize orders
 Building strategic partnerships and trust

Vrije Universiteit Amsterdam

ALIGNING GOALS AND INCENTIVES

 Aligning goals across the supply chain

 Aligning incentives across functions
 Pricing for coordination
 Altering sales force incentives from sell-in to sell-through

Vrije Universiteit Amsterdam

IMPROVING INFORMATION VISIBILITY AND ACCURACY

 Sharing customer demand data

 Implementing collaborative forecasting and planning
 Designing single-stage control of replenishment

Vrije Universiteit Amsterdam

IMPROVING OPERATIONAL PERFORMANCE

 Reducing the replenishment lead time

 Reducing lot sizes

Vrije Universiteit Amsterdam

DESIGNING PRICING STRATEGIES TO STABILIZE ORDERS

 Moving from lot-size–based to volume-based quantity discounts

 Stabilizing pricing

Vrije Universiteit Amsterdam

BUILDING STRATEGIC PARTNERSHIPS AND TRUST

 Actions such as information sharing, changing of incentives,

operational improvements, and stabilization of pricing typically help
improve the level of trust
 Require a clear identification of roles and decision rights for all
parties, effective contracts, and good conflict resolution mechanisms

Vrije Universiteit Amsterdam

CONTINUOUS REPLENISHMENT

The practice of partnering between supply chain members that

changes the traditional replenishment process to the replenishment
of products based on actual data.

Vrije Universiteit Amsterdam

VENDOR-MANAGED INVENTORY (VMI)

An approach to inventory and order fulfilment whereby the supplier,

not the customer, is responsible for managing and replenishing
inventory
 Benefits:
o Improve the forecast
o Minimize the impact of demand amplification
o Minimize inventory, but meeting the service level

Vrije Universiteit Amsterdam

VENDOR-MANAGED INVENTORY (VMI)

 Approach:
o Agree a contract
o Share information
o Monitor the process
o Replenish inventory
o Payment
 Problems:
o Unwillingness to share data
o Investment and restructuring costs
o Retailer vulnerability
o Lack of standard procedures

Vrije Universiteit Amsterdam

COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT (CPFR)

A business practice that combines the intelligence of multiple partners

in the planning and fulfillment of customer demand
 Cases of CPFR:
o Retail event collaboration
o DC replenishment collaboration
o Store replenishment collaboration
o Collaborative assortment planning

Source: VICS (2004)

Vrije Universiteit Amsterdam

CPFR STEPS

1. Creation of a front-end partnership agreement

2. Joint business planning
3. Development of demand forecasts
4. Sharing forecasts
5. Inventory replenishment

Vrije Universiteit Amsterdam

ACHIEVE COORDINATION IN PRACTICE

 Quantify the bullwhip effect

 Get top management commitment for coordination
 Devote resources to coordination
 Focus on communication with other stages
 Try to achieve coordination in the entire supply chain network
 Use technology to improve connectivity in the supply chain
 Share the benefits of coordination equitably

Vrije Universiteit Amsterdam

 CHAPTER 8 – COORDINATION IN A SUPPLY CHAIN

THANK YOU!

22 Het begint met een idee