CHAPTER 4

Co-ordination in a Supply Chain

 Course Covered
• 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 coordination.
• Role of IT in coordination, forecasting and
Replenishment
Lack of Supply Chain Co-ordination
and the Bullwhip Effect
• Supply chain coordination improves if all stages of the
chain take action that together to increase total supply
chain profits.
• Supply chain coordination requires each stage of the
supply chain to take into account the impact its actions
have on other stages.
• A lack of coordination occurs either because different
stages of the supply chain have objectives that conflict or
because information moving between stages is delayed and
distorted.
 CONTI..
• Different stages of a supply chain may have conflicting objectives if
each stages has a different owners.
• Information is distorted as it moves across the supply chain because
complete information is not shared between stages.
• This may cause huge changes in the information that is shared at each
stage of the supply chain. As we can say there are thousands of dealers
and suppliers, if information distorts this may increase huge product
verity and it’s amount. [Bullwhip effect]
• One outcome of the lack of supply chain coordination is the bullwhip
effect, in which fluctuation in orders increase as they move up the
supply chain from retailers to wholesalers to manufacturers to
suppliers.
 The Bullwhip Effect
• Fluctuation 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!
 The effect of lack of coordination on
performance
• A supply chain lacks coordination if each stage
optimizes only it’s local objectives, without considering
the impact on the complete chain. Total supply chain
profits are thus less than what could be achieved through
coordination’s.
• Each stage of a supply chain, in trying to optimize its
local objectives, takes actions that end up hurting the
performance of the entire supply chain.
• Lack of coordination also results if information
distortion occurs within the supply chain.
 The effect of lack 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.
 CONTI…

• Manufacturing cost: The lack of coordination increases

manufacturing cost in the supply chain. AAs a result, of the
bullwhip effect, P&G and its suppliers must satisfy a stream of
orders that is much more variable than customer demand.
• Inventory cost: The lack of coordination increases inventory cost
in the supply chain. To handle the increased variability in
demand, P&G has to carry a higher level of inventory than would
be required if the supply chain were coordinated.
As a result, inventory costs in the supply chain increases. The high
levels of inventory also increase the warehousing space required and
thus the warehousing cost incurred.
 CONTI..
• Replenishment Lead Time: Lack of coordination increases
replenishment lead times in the supply chain. The increased variability as
a result of the bullwhip effect makes scheduling at P&G and supplier
plants must more difficult compared to a situation with level demand.
There are times when the available capacity and inventory cannot supply
the order coming in.
• Transportation cost: The lack of coordination increases transportation
cost in the supply chain. The transportation requirements over time at
P&G and its suppliers are correlated with the orders being filled.
As a result of the bullwhip effect, transportation requirements fluctuate
significantly over time. This raises transportation cost because surplus
transportation capacity needs to be maintained to cover high-demand periods.
 CONTI..
• Labor cost for shipping receiving: The lack of coordination
increases labor costs associated with shipping and receiving in
the supply chain. Labor requirements for shipping at P&G and
its suppliers fluctuate with orders.
• The supply chain stages have the option of carrying excess
labor capacity or varying labor capacity in response to the
fluctuation in orders.
• The level of product availability: Lack of coordination hurts
the level of product availability and results in more stock outs
in the supply chain. This increases the likelihood that retailers
will run out of stock resulting in lost sales for the supply chain.
 Obstacles to Coordination in a SC

• Information Processing Obstacles

• Operational Obstacles
• Pricing Obstacles
• Incentive Obstacles
• Behavioral Obstacles
 Information Processing Obstacles

• Independent forecasting at each stage based on

received orders
• Lack of information sharing among the various
stages of the chain
 Potential Remedies
• Sharing point of sale data
• Collaborative forecasting and planning
• Single stage control of replenishment
– Continuous replenishment programs (CRP)
– Vendor managed inventory (VMI)
 Operational Obstacles
• Ordering in 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.
 Potential Remedies
• Reduce replenishment 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
 Pricing Obstacles

• Lot size-based discounts

• Price fluctuations (e.g., due to promotions)
resulting in “forward buying”
 Potential Remedies
• Move from 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
 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)
 Potential Remedies
• Align incentives 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!
 Behavioral Obstacles
• Each stage 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.
 Managerial Levers to achieve
coordination.
• Aligning of goals and incentives
• Improving information accuracy
• Improving operational performance
• Designing pricing strategies to stabilize
orders
• Building strategic partnerships and trust
 Role of IT in Coordination
• Information availability
• To use the visible information to make
decision
 Building Trust into a 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