Supply chain coordination

Supply chain coordination

• 1.
  The Bullwhip Effectand the Need for Coordination in Supply Chains (based on Chpt. 16 of Chopra and Meindl)
• 2.
  The Bullwhip EffectFluctuation in orders increase as they move up the supply chain (see Fig.16.1) Demand information is distorted as it travels within the supply chain, so that different stages have different perspectives and estimates of the chain demand Examples: Proctor & Gamble Pampers diapers HP printers Trying to run each stage of the SC based on this partial distorted demand information can have dire consequences for all parties involved!
• 3.
  The effect oflack of coordination on performance Manufacturing cost  Inventory cost  Replenishment lead time  Transportation cost  Labor cost for shipping and receiving  Level of product availability  Relationships across the supply chain #@#*&@*! Profitability  Remark: All of the above essentially result from the increased variability experienced by certain parts of the supply chain, due to information distortion and lack of coordination.
• 4.
  Obstacles to Coordinationin a SC Information Processing Obstacles Operational Obstacles Pricing Obstacles Incentive Obstacles Behavioral Obstacles
• 5.
  Information Processing ObstaclesIndependent forecasting at each stage based on received orders Lack of information sharing among the various stages of the chain
• 6.
  Potential Remedies Sharingpoint of sale data Collaborative forecasting and planning Single stage control of replenishment Continuous replenishment programs (CRP) Vendor managed inventory (VMI)
• 7.
  Operational Obstacles Orderingin large lots in order to reduce the fixed costs associated with order placement and transportation. Large replenishment lead times that expose the company to higher levels of variability, and raise the need for higher levels of safety stock. Rationing and shortage gaming: Ordering larger quantities than necessary, in order to eventually get what you need.
• 8.
  Potential Remedies Reducereplenishment lead times, by taking advantage of modern IT capabilities Computer-assisted ordering EDI Reduce lot sizes Computer-assisted ordering Shipping in LTL sizes by combining shipments Exploit technology and other methods to simplify receiving Ration based on past sales and information sharing to limit gaming
• 9.
  Pricing Obstacles Lotsize-based discounts Price fluctuations (e.g., due to promotions) resulting in “forward buying”
• 10.
  Potential Remedies Movefrom lot size-based to volume-based quantity discounts (consider total purchases over a specified period) Stabilize pricing Eliminate promotions (EDLP) Limit quantity purchased during a promotion
• 11.
  Incentive Obstacles E.g.,sales force incentives based on the amount of sells during an evaluation period in a month or quarter. “ Sell-in” rather than “sell-through” based evaluation. Local optimization within functions or stages of the supply chain (e.g., the shipping department trying to control the transportation cost by reducing the frequency of the shipments, ignoring the impact of this decision on the inventory costs and the customer service)
• 12.
  Potential Remedies Alignincentives across functions Alter sales force incentives from sell-in to sell-through Pricing for coordination, e.g., Buy-back contracts Quantity-flexibility contracts Build strategic partnerships and trust!
• 13.
  Behavioral Obstacles Eachstage of the supply chain views its actions locally, being 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 Eventually, stages start blaming each other for the experienced problems, becoming enemies rather than partners Lack of trust results in opportunism, duplication of effort and lack of information sharing From a more pragmatic standpoint, it is generally hard to trace the consequences of certain actions because they will occur in some other stage(s) of the supply chain.
• 14.
  Building Trust intoa Supply Chain 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