Unit 4:

Co-ordination in a Supply Chain

Outline
 Lack of supply chain co-ordination and the
Bullwhip effect
 Effect of lack of co-ordination on performance
 Obstacles to co-ordination in a supply chain
 Managerial Levers to achieve co-ordination
 Role of IT in co-ordination, forecasting and
replenishment
Introduction

 A Supply chain is assumed to have a good co-ordination if:

 All stages of the chain take actions that together increase
total supply chain profits.

 Supply chain co-ordination requires each stage of the supply

chain to take into account the impact its actions have on other
stages.
Lack of Co-ordination

 Reasons:

 Different stages of the supply chain have conflicting

objectives

 Information moving between stages is delayed and distorted

 Overall Supply chain profit enables overall welfare of all

stages but marginalized objectives of profit distorts the
overall profit
Bull Whip effect

 A major consequence faced by business due to lack of supply chain

co-ordination

 Bullwhip Effect
 Increased fluctuations in orders as they move up the supply chain stages
(from retailers to wholesalers to manufacturers to suppliers)

 Small change in demand causing a major change in

Production/Warehousing
Bull Whip effect

 Distorts demand information within the supply chain

 Each stage having a different estimate of what demand

looks like

 Forecast accuracy decreases the higher we move to the SC

stages

 Result
 Loss of supply chain co-ordination
Impacts of Lack of SC co-ordination
 MANUFACTURING COST
 Increases

 INVENTORY COST
 Increases

 Labor cost for shipping

 increases

 TRANSPORTATION COST
 Increases
Impacts of Lack of SC co-
ordination
 LEVEL OF PRODUCT AVAILABILITY
 Decreases

 RELATIONSHIPS ACROSS THE SUPPLY CHAIN

 Tendency to blame each other
 Distorted relationship

 REPLENISHMENT LEAD TIME

 Increases

 Profitability
 decreases
Impacts of Lack of SC co-
ordination
 Ultimately, bad co-ordination affects
 Supply chain responsiveness
 Supply chain cost
OBSTACLES TO CO-ORDINATION
IN A SUPPLY CHAIN

 Any factor that leads to either local optimization by different stages of the
supply chain, or an increase in information delay, distortion, and variability
within the supply chain, is an obstacle to co-ordination.

 Major obstacles
 • Incentive obstacles
 • Information-processing obstacles
 • Operational obstacles
 • Pricing obstacles
 • Behavioral obstacles
1. Incentive obstacles

 occur in situations when incentives offered to different

stages in a supply chain lead to actions that increase
variability and reduce total supply chain profits.

 It is natural for any participant in the supply chain to take

actions that optimize performance measures along which
they are evaluated
1. Incentive obstacles
 For example, if the compensation of a transportation manager at a
firm is linked to
 the average transportation cost per unit,
 the manager is likely to take actions that lower transportation costs even if
they hurt customer service

 Sales force incentives

 In many firms, sales force incentives are based on the amount the sales
force sells during an evaluation period of a month or quarter

 sales force incentive based on sell-in thus results in order variability

being larger than customer demand variability.
2. Pricing obstacles
 It arises when the pricing policies for a product lead to an increase in
variability of orders placed.

 Lot size-based quantity discounts

 increase the lot size of orders placed within the supply chain
 the resulting large lots magnify the bullwhip effect

 Trade promotions and 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
3. Behavioral obstacles
 Each stage of the supply chain views its actions locally
 unable to see the impact of its actions on other stages
 supply chain blame each other for the fluctuations,
 stages in the supply chain becoming enemies rather than partners.
3. Behavioral obstacles

 No stage of the supply chain learns from its actions over time
 consequences of the actions any one stage takes occur elsewhere.

 Lack of trust among supply chain partners

 Rigidity in information sharing
 Received information is also ignored many a times
4. Operational obstacles
 occurs when actions taken in the course of placing and filling orders
lead to an increase in variability.

 Ordering in Large Lots

 Typically done to reduce total costs due to fixed cost on each lot
 Also due to discount on larger lots
5. Information processing
obstacles
 Occur in situations 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.

 each stage views its demand as the stream of orders

received and produces a forecast based on this information
 But customer demand and orders are different
5. Information processing
obstacles
 magnification of fluctuations in demand as we move up the supply
chain from the retailer to the manufacturer.

 Lack of information sharing among participants

Managerial Levers to Achieve
co-ordination
 Aligning of goals and incentives
 Improving information accuracy
 Improving operational performance
 Designing pricing strategies to stabilize orders
 Building partnerships and trust
Managerial Levers to Achieve
co-ordination
1. Aligning of goals and incentives
 Match functional goals of stage with the SC objective
 Don’t focus on local cost and profits more than total cost and
profit
 For salesperson:
 Align incentive for “sell through” from retailer rather than just “sell
in” to the retailer
 Use pricing schemes like buyback contracts, quantity flexibility
contract, etc so that loss wont be faced by a particular stage in
case of no sales
Managerial Levers to Achieve
co-ordination
2. Improving information visibility and accuracy
 Share Point Of Sale (P.O.S) data across SC Stages by the retailer
 Relates each stage’s order with customer demand and increases accuracy
 Collaborative forecasting and demand planning among stages can be
done to reduce uncertainty

 Design single stage replenishment, typically assigning replenishment

decision to the retailer stage
 As retailer is the one who knows customer demand closely than other stages
Managerial Levers to Achieve
co-ordination
3. Improving operational performance
 Reduce replenishment lead time to decrease demand uncertainty

 Reduce individual lot size of order to reduce uncertainty

 Increase frequency of orders, but minimize risk on a big order
 Rationing orders based on past efficiency of retailer sales rather than
order quantity
 This discourages order inflating and gaming by retailers
Managerial Levers to Achieve
co-ordination
4. Designing pricing strategies to stabilize orders
 Move from lot size based discount to volume based(on a specific time
period) quantity discount

 Stabilize pricing
 Pay promotion fees based on sale ability of retailers than quantity ordered
 Buy only if u can sell, but discourage forward buying as much as possible
 Based on specific retailer’s historical sales
Managerial Levers to Achieve
co-ordination
5. Building strategic partnerships and trust
 Share accurate information improves trust in the long term among stages
 Trust among each other helps to save time and effort for individual stages
too

 All the previously mentioned levers if handled properly, improves trust

 Trust improves information accuracy
End Of Unit 4