2007 Pearson Education 16-1

Chapter 17
Coordination in the SuppIy Chain
SuppIy Chain Management
(3rd Edition)
2007 Pearson Education 16-2
-ectives
Describe supply chain coordination, the bullwhip
eIIect, and their impact on perIormance
IdentiIy causes oI the bullwhip eIIect and obstacles to
coordination in the supply chain
Discuss managerial levers that help achieve
coordination in the supply chain
Describe actions that Iacilitate the building oI strategic
partnerships and trust within the supply chain
2007 Pearson Education 16-3
utIine
ack oI Supply Chain Coordination and the
Bullwhip EIIect
EIIect oI ack oI Coordination on PerIormance
Obstacles to Coordination in the Supply Chain
Managerial evers to Achieve Coordination
Building Strategic Partnerships and Trust Within
a Supply Chain
Achieving Coordination in Practice
2007 Pearson Education 16-4
ack of SC Coordination
and the BuIIwhip Effect
Supply chain coordination all stages in the supply
chain take actions together (usually results in greater
total supply chain proIits)
SC coordination requires that each stage take into
account the eIIects oI its actions on the other stages
ack oI coordination results when:
Objectives oI diIIerent stages conIlict or
InIormation moving between stages is distorted
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BuIIwhip Effect
luctuations in orders increase as they move up
the supply chain Irom retailers to wholesalers to
manuIacturers to suppliers (shown in igure 16.1)
Distorts demand inIormation within the supply
chain, where diIIerent stages have very diIIerent
estimates oI what demand looks like
Results in a loss oI supply chain coordination
Examples: Proctor & Gamble (Pampers); HP
(printers); Barilla (pasta)
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%he Effect of ack of
Coordination on Performance
ManuIacturing cost (increases)
Inventory cost (increases)
Replenishment lead time (increases)
Transportation cost (increases)
abor cost Ior shipping and receiving (increases)
evel oI product availability (decreases)
Relationships across the supply chain (worsens)
ProIitability (decreases)
The bullwhip eIIect reduces supply chain proIitability
by making it more expensive to provide a given level
oI product availability
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-stacIes to Coordination
in a SuppIy Chain
Incentive Obstacles
InIormation Processing Obstacles
Operational Obstacles
Pricing Obstacles
Behavioral Obstacles
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ncentive -stacIes
When incentives oIIered to diIIerent stages or
participants in a supply chain lead to actions that
increase variability and reduce total supply chain
proIits misalignment oI total supply chain
objectives and individual objectives
ocal optimization within Iunctions or stages oI a
supply chain
Sales Iorce incentives
2007 Pearson Education 16-9
nformation Processing -stacIes
When demand inIormation is distorted as it moves
between diIIerent stages oI the supply chain,
leading to increased variability in orders within
the supply chain
orecasting based on orders, not customer
demand
orecasting demand based on orders magniIies demand
Iluctuations moving up the supply chain Irom retailer
to manuIacturer
ack oI inIormation sharing
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perationaI -stacIes
Actions taken in the course oI placing and Iilling
orders that lead to an increase in variability
Ordering in large lots (much larger than dictated
by demand) igure 17.2
arge replenishment lead times
Rationing and shortage gaming (common in the
computer industry because oI periodic cycles oI
component shortages and surpluses)
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Pricing -stacIes
When pricing policies Ior a product lead to an
increase in variability oI orders placed
ot-size based quantity decisions
Price Iluctuations (resulting in Iorward buying)
igure 17.3
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BehavioraI -stacIes
Problems in learning, oIten related to communication in the
supply chain and how the supply chain is structured
Each stage oI the supply chain views its actions locally and is
unable to see the impact oI its actions on other stages
DiIIerent stages react to the current local situation rather than
trying to identiIy the root causes
Based on local analysis, diIIerent stages blame each other Ior
the Iluctuations, with successive stages becoming enemies
rather than partners
No stage learns Irom its actions over time because the most
signiIicant consequences oI the actions oI any one stage occur
elsewhere, resulting in a vicious cycle oI actions and blame
ack oI trust results in opportunism, duplication oI eIIort, and
lack oI inIormation sharing
2007 Pearson Education 16-13
ManageriaI evers to
Achieve Coordination
Aligning Goals and Incentives
Improving InIormation Accuracy
Improving Operational PerIormance
Designing Pricing Strategies to Stabilize Orders
Building Strategic Partnerships and Trust
2007 Pearson Education 16-14
AIigning GoaIs and ncentives
Align incentives so that each participant has an
incentive to do the things that will maximize total
supply chain proIits
Align incentives across Iunctions
Pricing Ior coordination
Alter sales Iorce incentives Irom sell-in (to the
retailer) to sell-through (by the retailer)
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mproving nformation Accuracy
Sharing point oI sale data
Collaborative Iorecasting and planning
Single stage control oI replenishment
Continuous replenishment programs (CRP)
Vendor managed inventory (VMI)
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mproving perationaI Performance
Reducing replenishment lead time
Reduces uncertainty in demand
EDI is useIul
Reducing lot sizes
Computer-assisted ordering, B2B exchanges
Shipping in T sizes by combining shipments
Technology and other methods to simpliIy receiving
Changing customer ordering behavior
Rationing based on past sales and sharing inIormation to
limit gaming
'Turn-and-earn
InIormation sharing
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esigning Pricing Strategies
to Sta-iIize rders
Encouraging retailers to order in smaller lots and reduce
Iorward buying
Moving Irom lot size-based to volume-based quantity
discounts (consider total purchases over a speciIied time
period)
Stabilizing pricing
Eliminate promotions (everyday low pricing, EDP)
imit 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 iI there is trust
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BuiIding Strategic Partnerships
and %rust in a SuppIy Chain
Background
Designing a Relationship with Cooperation and
Trust
Managing Supply Chain Relationships Ior
Cooperation and Trust
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BuiIding Strategic Partnerships
and %rust in a SuppIy Chain
Trust-based relationship
Dependability
eap oI Iaith
Cooperation and trust work because:
Alignment oI incentives and goals
Actions to achieve coordination are easier to implement
Supply chain productivity improves by reducing
duplication or allocation oI eIIort to appropriate stage
Greater inIormation sharing results
2007 Pearson Education 16-20
%rust in the SuppIy Chain
Table 17.2 shows beneIits
Historically, supply chain relationships are based
on power or trust
Disadvantages oI power-based relationship:
Results in one stage maximizing proIits, oIten at the
expense oI other stages
Can hurt a company when balance oI power changes
ess powerIul stages have sought ways to resist
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BuiIding %rust into a
SuppIy Chain ReIationship
Deterrence-based view
Use Iormal contracts
Parties behave in trusting manner out oI selI-interest
Process-based view
Trust and cooperation are built up over time as a result
oI a series oI interactions
Positive interactions strengthen the belieI in
cooperation oI other party
Neither view holds exclusively in all situations
2007 Pearson Education 16-22
BuiIding %rust into a
SuppIy Chain ReIationship
Initially more reliance on deterrence-based view,
then evolves to a process-based view
Co-identiIication: ideal goal
Two phases to a supply chain relationship
Design phase
Management phase
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esigning a ReIationship
with Cooperation and %rust
Assessing the value oI the relationship and its
contributions
IdentiIying operational roles and decision rights
Ior each party
Creating eIIective contracts
Designing eIIective conIlict resolution
mechanisms
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Assessing the VaIue of the
ReIationship and its Contri-utions
IdentiIy the mutual beneIit provided
IdentiIy the criteria used to evaluate the
relationship (equity is important)
Important to share beneIits equitably
ClariIy contribution oI each party and the beneIits
each party will receive
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dentifying perationaI RoIes and
ecision Rights for Each Party
Recognize interdependence between parties
Sequential interdependence: activities oI one partner
precede the other
Reciprocal interdependence: the parties come together,
exchange inIormation and inputs in both directions
Sequential interdependence is the traditional
supply chain Iorm
Reciprocal interdependence is more diIIicult but
can result in more beneIits
igure 17.4
2007 Pearson Education 16-26
Effects of nterdependence on SuppIy
Chain ReIationships (Figure 17.4)
O
r
g
a
n
i
z
a
t
i
o
n
`
s

D
e
p
e
n
d
e
n
c
e
High
ow
Partner`s Dependence
ow
High
Partner
Relatively
PowerIul
Organization
Relatively
PowerIul
High evel oI
Interdependence
Effective Relationship
ow evel oI
Interdependence
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Creating Effective Contracts
Create contracts that encourage negotiation when
unplanned contingencies arise
It is impossible to deIine and plan Ior every
possible occurrence
InIormal relationships and agreements can Iill in
the 'gaps in contracts
InIormal arrangements may eventually be
Iormalized in later contracts
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esigning Effective ConfIict
ResoIution Mechanisms
Initial Iormal speciIication oI rules and guidelines
Ior procedures and transactions
Regular, Irequent meetings to promote
communication
Courts or other intermediaries
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Managing SuppIy Chain ReIationships
for Cooperation and %rust
EIIective management oI a relationship is
important Ior its success
Top management is oIten involved in the design
but not management oI a relationship
igure 17.5 -- process oI alliance evolution
Perceptions oI reduced beneIits or opportunistic
actions can signiIicantly impair a supply chain
partnership
2007 Pearson Education 16-30
Achieving Coordination in Practice
"uantiIy the bullwhip eIIect
Get top management commitment Ior coordination
Devote resources to coordination
ocus 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 beneIits oI coordination equitably
2007 Pearson Education 16-31
Summary of earning -ectives
What are supply chain coordination and the bullwhip
eIIect, and what are their eIIects on supply chain
perIormance?
What are the causes oI the bullwhip eIIect, and 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 Iacilitate the building oI
strategic partnerships and trust in the supply chain?