10

Coordination in a
Supply Chain

PowerPoint presentation to accompany

Chopra and Meindl Supply Chain Management, 5e
Global Edition
Copyright ©2013 Pearson Education.

10-1
1-1
 Objectives
 Describe supply chain coordination, the bullwhip
effect, and their impact on performance
 Identify obstacles to coordination in a supply chain
 Discuss managerial levers that help achieve
coordination in a supply chain
 Describe actions that facilitate the building of strategic
partnerships and trust within a supply chain
 Understand the different forms of collaborative
planning, forecasting and replenishment possible in a
supply chain

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 Lack of Supply Chain Coordination
and the Bullwhip Effect
 Supply chain coordination – all stages in the supply
chain take actions together (usually results in greater
total supply chain profits)
 SC coordination requires that each stage take into
account the effects of its actions on the other stages
 Lack of coordination results when:
– Objectives of different stages conflict or
– Information moving between stages is distorted
 Challenge: achieving co-ordination despite multiple
owenership and product variety

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 Bullwhip Effect
 Fluctuations in orders increase as they move up
the supply chain from retailers to wholesalers to
manufacturers to suppliers
 Distorts demand information within the supply
chain, where different stages have very different
estimates of what demand looks like
 Results in a loss of supply chain coordination
 Examples: Proctor & Gamble (Pampers); HP
(printers); Barilla (pasta)

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 Bullwhip Effect

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 The Effect on Performance
• Supply chain lacks coordination if each
stage optimizes only its local objective
• Reduces total profits
• Performance measures include
– Manufacturing cost
– Inventory cost
– Replenishment lead time
– Transportation cost
– Labor cost for shipping and receiving
– Level of product availability
– Relationships across the supply chain
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 The Effect on Performance of Lack of
Coordination
 Manufacturing cost (increases) [excess capacity]
 Inventory cost (increases) [increased safety stock]
 Replenishment lead time (increases)
 Transportation cost (increases) [expediting, spot prices]
 Labor cost for shipping and receiving (increases)
 Level of product availability (decreases)
 Relationships across the supply chain (worsens)
[blame and mistrusts]
 Profitability (decreases)

The bullwhip effect reduces supply chain profitability

by making it more expensive to provide a given level
of product availability
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 Causes and Counter-measures of the
Bullwhip Effect

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 Obstacles to Coordination
in a Supply Chain
 Incentive Obstacles
 Information Processing Obstacles
 Operational Obstacles
 Pricing Obstacles
 Behavioral Obstacles

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 Incentive Obstacles
 When incentives offered to different stages or participants
in a supply chain lead to actions that increase variability
and reduce total supply chain profits – misalignment of
total supply chain objectives and individual objectives
 Local optimization within functions or stages of a supply
chain
– Double marginalisation
– Localised objective (e.g. bulk transportation  high inventory)
 Sales force incentives
– End-of-period “sell-in” spike to distributors;
– no impact on “sell-through” to customers  bullwhip effect!

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 Information Processing Obstacles
 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, not customer demand
– Forecasting demand based on orders magnifies demand
fluctuations moving up the supply chain from retailer to
manufacturer (e.g. beer game)
 Lack of information sharing
– Mis-interpretation of fluctuations in demand

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 Operational Obstacles
• Occur when placing and filling orders
lead to an increase in variability
• Ordering in large lots (much larger than
according to demand)
• Large replenishment lead times
• Rationing and shortage gaming

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 Operational Obstacles
Figure 10-2

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 Operational Obstacles
 Large replenishment lead times
 Rationing and shortage gaming (common in the
computer industry because of periodic cycles of
component shortages and surpluses)

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 Pricing Obstacles
 When pricing policies for a product lead to an
increase in variability of orders placed
 Lot-size based quantity decisions
 Price fluctuations

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 Pricing Obstacles
Figure 10-3

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 Behavioral Obstacles
 Problems in learning, often related to communication in the
supply chain and how the supply chain is structured
 Each stage of the supply chain views its actions locally and is unable to see
the impact of its actions on other stages
 Different stages react to the current local situation rather than trying to
identify the root causes
 Based on local analysis, different stages blame each other for the
fluctuations, with successive stages becoming enemies rather than partners
 No stage learns from its actions over time because the most significant
consequences of the actions of any one stage occur elsewhere, resulting in a
vicious cycle of actions and blame
 Lack of trust results in opportunism, duplication of effort, and lack of
information sharing …at the expense of overall supply chain
performance

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 Managerial Levers to
Achieve Coordination
 Aligning Goals and Incentives
 Improving Information Accuracy
 Improving Operational Performance
 Designing Pricing Strategies to Stabilize Orders
 Building Strategic Partnerships and Trust

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 Aligning Goals and Incentives
Aligning incentives and sharing risks grow total
supply-chain surplus, hence grow profit share for
each supply-chain member (win-win scenario)
 Align incentives so that each participant has an
incentive to do the things that will maximize total
supply chain profits
 Sharing risks (e.g. buyback contracts)
 Align incentives across functions
 Pricing for coordination
 Alter sales force incentives from sell-in (to the
retailer) to sell-through (by the retailer)
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 Improving Information Accuracy
 Sharing point of sale data, inventory info, etc.
 Collaborative forecasting and planning
– e.g. manufacturer need to know retailer’s promotion
plans
 Single stage control of replenishment
– Continuous replenishment programs (CRP)
– Vendor managed inventory (VMI)

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 Improving Operational Performance
 Reducing replenishment lead time
– Reduces uncertainty and increase accuracy in demand forecasts (e.g. so allows
multiple replenishment orders in the selling season)
– Strategies to reduce lead time:
» EDI useful to reduce “paperwork” in order-processing
» Flexible manufacturing (reduce batch setup times)
» Cross-docking (speeding transport)
 Reducing lot sizes (e.g. reduced ordering/setup costs)
– Computer-assisted ordering, B2B exchanges
– Shipping in TL sizes by combining LTL shipments across products and suppliers
– Technology and other methods to simplify receiving
– Changing customer ordering behavior (e.g. periodic orders at beginning of month)
 Rationing based on past sales and sharing information to limit gaming
– “Turn-and-earn”; no incentive to inflate orders
– Information sharing (pre-order, e.g. moon-cakes)
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 Designing Pricing Strategies
to Stabilize Orders
 Encouraging retailers to order in smaller lots and reduce forward
buying
 Moving from lot size-based to volume-based quantity discounts
(consider total purchases over a specified time period)
 Stabilizing pricing
– Eliminate promotions (everyday low pricing, EDLP)
– Limit quantity purchased during a promotion
– Tie promotion payments to sell-through rather than amount purchased
 Building strategic partnerships and trust – easier to implement
these approaches if there is trust

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 Building Strategic Partnerships
and Trust in a Supply Chain
Each party is interested in the others’ welfare and will not act
without considering impact on others.
 Trust-based relationship
– Dependability
– Leap of faith
 Cooperation and trust work because:
– Alignment of incentives and goals
– Actions to achieve coordination are easier to implement
– Supply chain productivity improves by reducing duplication or
allocation of effort in appropriate stage
– Greater information sharing results
» No quality/quantity checking upon receiving orders if suppliers shares
quality control charts

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 Trust in the Supply Chain
 Historically, supply chain relationships are based
on power or trust
 Disadvantages of power-based relationship:
– Results in one stage maximizing profits, often at the
expense of other stages
– Can hurt a company when balance of power changes
– Less powerful stages have sought ways to resist

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 Building Trust into a
Supply Chain Relationship
How to initiate and sustain a trust relationship?
 Deterrence-based view
– Use formal contracts
– Parties behave in trusting manner out of self-interest
 Process-based view
– Trust and cooperation are built up over time as a result of a series
of interactions
– Positive interactions strengthen the belief in cooperation of other
party
 Neither view holds exclusively in all situations
– Contracts cannot cover every contingency
– “Word (teeth)” good as gold … but maybe still need some agreed-upon
ground rules
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 Building Trust into a
Supply Chain Relationship
 Initially more reliance on deterrence-based view, then
evolves to a process-based view
 Co-identification: ideal goal
 Two phases to a supply chain relationship
– Design phase
– Management phase
 Designing a Trusting Relationship
– Assessing the value of the relationship and its contributions
– Identifying operational roles and decision rights for each party
– Creating effective contracts
– Designing effective conflict resolution mechanisms

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 Assessing the Value of the
Relationship and its Contributions
 Identify the mutual benefit provided
 Identify the criteria used to evaluate the
relationship (equality and fairness important)
 Important to share benefits equitably
 Clarify contribution of each party and the benefits
each party will receive
 Need mechanisms for partners to monitor and
adjust contributions and allocation of benefits

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 Identifying Operational Roles and
Decision Rights for Each Party
 Recognize interdependence between parties
– Sequential interdependence: activities of one partner
precede the other
– Reciprocal interdependence: the parties come together,
exchange information and inputs in both directions
 Sequential interdependence is the traditional
supply chain form
 Reciprocal interdependence is more difficult but
can result in more benefits

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 Effects of Interdependence on Supply
Chain Relationships

Partner High Level of

Organization’s Dependence

Relatively Interdependence
High
Powerful Effective Relationship

Organization
Low Level of Relatively
Low Interdependence
Powerful

Low High
Partner’s Dependence
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 Creating Effective Contracts
 Create contracts that encourage negotiation when
unplanned contingencies arise
 It is impossible to define and plan for every
possible occurrence
 Informal relationships and agreements can fill in
the “gaps” in contracts
 Informal arrangements may eventually be
formalized in later contracts

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 Designing Effective Conflict
Resolution Mechanisms
 Initial formal specification of rules and guidelines
for procedures and transactions
 Sharing information over time engenders trust and
smooth relationships
 Regular, frequent meetings to promote
communication
 Conflict resolution and cultural perspectives
– USA: Courts or other intermediaries
– Asia: negotiated settlements

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 Managing Supply Chain Relationships
for Cooperation and Trust
 Effective management of a relationship is important for its
success
 Top management is often involved in the design but not
management of a relationship
 Perceptions of reduced benefits or opportunistic actions can
significantly impair a supply chain partnership
 Relationship success factors:
– Flexibility, trust and commitment of top management
– Good organisational arrangements (e.g. for information sharing and
conflict resolution)
– “Visibility”: helps identify defective process and reduces
opportunistic exploitation by one party
– The more fairly the dominant party treats the weaker, the stronger
the relationship
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 Continuous Replenishment and
Vendor-Managed Inventories
 A single point of replenishment
 CRP – wholesaler or manufacturer replenishes based on POS
data
 VMI – manufacturer or supplier is responsible for all decisions
regarding inventory
 VMI requires retailer to share sales information with suppliers
 improved forecasts and better matching of supply to
demand
 Impact of Substitution
– Some retailers may have VMI arrangements with competing suppliers
(e.g. P&G, Lever Brothers) leading to overstock.

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 Collaborative Planning, Forecasting,
and Replenishment (CPFR)
A business practice that combines intelligence of multiple partners in the
planning and fulfilment of customer demand.
 Sellers and buyers in a supply chain may collaborate along any or all of the
following:
– Strategy and planning
– Demand and supply management
– Execution
– Analysis
 Organizational requirements
– Procedures for exception handling
– Cross-functional customer-specific teams
 Risks and Hurdles for a CPFR implementation
– Information leakage and misuse
– “forced” technology upgrade
– Merging of cultures (e.g. MTR/KCR)
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 Common CPFR Scenarios

Where Applied in Supply

CPFR Scenario Chain Industries Where Applied
Retail event collaboration Highly promoted channels All industries other than
or categories those that practice EDLP
DC replenishment Retail DC or distributor DC Drugstores, hardware,
collaboration grocery
Store replenishment Direct store delivery or Mass merchants, club stores
collaboration retail DC-to-store delivery
Collaborative assortment Apparel and seasonal goods Department stores, specialty
planning retail

Table 10-2

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 Collaborative Planning, Forecasting,
and Replenishment (CPFR)

 Store replenishment collaboration

 Collaborative assortment planning
 Organizational and technology requirements for
successful CPFR
 Risks and hurdles for a CPFR implementation

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 Collaborative Planning, Forecasting,
and Replenishment (CPFR)

Figure 10-4

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 Collaborative Planning, Forecasting,
and Replenishment (CPFR)
• Sellers and buyers in a supply chain may
collaborate along any or all of the following
1. Strategy and planning
2. Demand and supply management
3. Execution
4. Analysis
• Retail event collaboration
• DC replenishment collaboration
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 Collaborative Planning, Forecasting,
and Replenishment (CPFR)
A business practice that combines intelligence of multiple partners in the
planning and fulfilment of customer demand.
 Sellers and buyers in a supply chain may collaborate along any or all of the
following:
– Strategy and planning
– Demand and supply management
– Execution
– Analysis
 Organizational requirements
– Procedures for exception handling
– Cross-functional customer-specific teams
 Risks and Hurdles for a CPFR implementation
– Information leakage and misuse
– “forced” technology upgrade
– Merging of cultures (e.g. MTR/KCR)
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 The Role of IT in Coordination
 Enablement of coordination the ultimate goal
 IT’s role:
– Information availability
– Use of information available to make decisions
– Facilitate sharing of forecasts and historical information, and enable
revisions
– Enterprise systems that record all the supply-chain transactions
 Pitfalls/Challenges:
– Systems integration
– Co-ordinating operational procedures
– trust

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 Achieving 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

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 Summary of Learning Objectives
 What are supply chain coordination and the bullwhip
effect, and what are their effects on supply chain
performance?
 What are obstacles to coordination in the supply chain?
 What are the managerial levers that help achieve
coordination in the supply chain?
 What are actions that facilitate the building of strategic
partnerships and trust in the supply chain?
 What are the different forms of CPFR available in a
supply chain?

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