Coordination in supply chain

Supply chain coordination improves if all stages of the chain take actions that are aligned and increase
total supply chain surplus.

Bullwhip effect: The bullwhip effect distorts demand information within the supply chain, with each
stage having a different estimate of what demand looks like. Here the fluctuations in orders increase
as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers.

Effect on performance due to lack of coordination

1. Manufacturing cost: you might have to increase capacity, or production volumes to deal with
the virtual excess demand because of the bullwhip effect which is going to increase your
manufacturing cost.
2. Inventory cost: To handle the increased virtual variability you have to increase the inventory
thus increasing your inventory cost.
3. Replenishment lead time: May increase due to increase variability.
4. Transportation cost may increase because of high virtual capacity need to be transported.
5. Labour cost for shipment and receiving: Excess virtual demand might lead to the increase in
labour capacity at both the shipment and receiving ends, thus increasing the labour cost.
6. Lack of availability: Larger variations may lead to P and G supplying excessively to some
suppliers thus leading to shortage to others and thus decreasing product availability.
7. Relations across the supply chain: There is a tendency to assign blame to other stages of the
supply chain because each stage thinks it is doing the best it can.

Reasons/Obstacles to coordination

1. Incentives:
1.1 Local optimization within functions: Transportation at FTL can hurt the inventory
management.
1.2 Sales incentives: A sales force incentive based on sell-in thus results in order variability
being larger than customer demand variability because the sales force tends to push
product toward the end of the incentive period.
2. Information processing:
2.1 Forecast is based on orders not on customer demand: Each stage views its primary role
within the supply chain as one of filling orders placed by its downstream partner. Thus,
each stage views its demand as the stream of orders received and produces a forecast
based on this information. In such a scenario, a small change in customer demand
becomes magnified as it moves up the supply chain in the form of customer orders.
2.2 Lack of information sharing: A retailer such as Walmart may increase the size of a
particular order because of a planned promotion. If the manufacturer is not aware of the
planned promotion, it may interpret the larger order as a permanent increase in demand
and place orders with suppliers accordingly. The manufacturer and suppliers thus have
much inventory right after Walmart finishes its promotion. Given the excess inventory, as
future Walmart orders return to normal, manufacturer orders will be smaller than before.
3. Operational:
3.1 Ordering in large lots: Firms may order in large lots because a significant fixed cost is
associated with placing, receiving, or transporting an order. Large lots may also occur if
the supplier offers quantity discounts based on lot size.
 3.2 Large replenishment lead time: If the lead time is more retailer estimation of demand is
for longer period of time thus more is the chance of the error.
3.3 Rationing and Shortage gaming: Rationing scheme is to allocate the available supply of
product based on orders placed. Under this rationing scheme, if the supply available is 75
percent of the total orders received, each retailer receives 75 percent of its order. So,
there is tendency of some suppliers to increase the order quantity in order to cater to the
original demand by 75% of the same. Which sometimes lead to the shortage of other
suppliers. Also, if the manufacturer due to this virtually inflated demand plans to increase
his quantity it might lead to excess production and thus would lead to overstocking.
4. Pricing obstacles:
4.1 Lot-size based quantity discounts increase the lot size of the orders because the lower
sizes are offered for the large orders.
4.2 Price fluctuations: Due to short term discounts or offers, forward buying is done by
suppliers and retailers thus increasing the fluctuations.
5. Behavioural obstacles:
5.1 Short sightedness
5.2 Not enough focus on root cause
5.3 Blame game damages relation
5.4 No learning from mistakes as the consequence of the mistakes can be elsewhere.
5.5 Complete information is not shared because of lack of trust.

Methods to achieve coordination

1. Aligning goals and incentives: The goals should be aligned in a way to achieve total
profitability in terms of supply chain surplus rather than focusing on individual profits. The
incentives can be given on the basis of sell through rather than sell in sales targets.
2. Improving information visibility and accuracy:
2.1 It is beneficial to share detailed point-of-sale (POS) data. Once customer demand data
are shared, different stages of the supply chain must forecast and plan jointly if
complete coordination is to be achieved.
2.2 To facilitate this type of coordination in the supply chain environment, the Voluntary
Interindustry Commerce Standards (VICS) Association set up a Collaborative Planning,
Forecasting, and Replenishment (CPFR).
2.3 Can also go for single stage replenishment by going for techniques like VMI (vendor
managed inventory) or CRPs (Continuous replenishment programmes) where the
replenishment at all stages is done keeping in mind the inventory of the retailers.
3. Improving operational performance:
3.1 Can increase the accuracy of the forecast by reducing the replenishment lead time.
It can be done by using techniques such as cross docking and Electronic data
interchange (EDI) as the majority of time of the firm goes in making a purchase order
scheduling and procurement.
3.2 A reduction in lot size can reduce the amount of fluctuation that can happen between
2 consecutive stages of the supply chain. Managers can reduce lot sizes without
increasing transportation costs by filling a truck using smaller lots from a variety of
products. This also reduces the number of trucks sent to retail outlets while keeping
product variety high. But smaller lots can only be delivered if the fixed costs related
to them can be minimized. For the same the mangers can use computer aided
ordering (CAO) or EDI.
3.3 Rationing can be done on the basis of past sales
 4. Designing pricing strategies to stabilize orders:
4.1 Discounts should be offer over a rolling time horizon to dampen variability.
4.2 By going for EDLP (every day low pricing strategy) rather than promotions or sales to
reduce the bullwhip effect.
5. Building partnership and trust: Stages in a supply chain can eliminate duplicated effort (in
forecasting demand) on the basis of improved trust and a better relationship. This
lowering of transaction cost, along with accurate shared information, helps improve
coordination.

CRP and VMI

1. Continuous replenishment programme (CRP): In CRP the wholesaler or manufacturer replenishes

a retailer regularly based on POS data. CRP may be managed by the supplier, distributor, or a third
party. In CRP, inventory at the retailer is owned by the retailer.
2. VMI (vendor managed inventory): With vendor-managed inventory (VMI), the manufacturer or
supplier is responsible for all decisions regarding product inventories at the retailer. Here the
inventory is owned by the manufacturer. One drawback of VMI arises because retailers often sell
products from competing manufacturers that are substitutes in the customer’s mind. For example,
a customer may substitute detergent manufactured by P&G by detergent manufactured by
Unilever. If the retailer has a VMI agreement with both manufacturers, each manufacturer will
ignore the impact of substitution when making inventory decisions. As a result, inventories at the
retailer will be higher than optimal. In such a setting, the retailer may be better positioned to
decide on the replenishment policy.
3. CPFR (Collaborative planning forecast and replenishment): A business practice that combines the
intelligence of multiple partners in the planning and fulfilment of customer demand.

3.1 Retail event collaboration: Details of the event—such as timing, duration, price point, advertising,
and display tactics—are shared. It is important for the retailer to update this information as changes
occur. Event-specific forecasts are then created and shared. These forecasts are then converted to
planned orders and deliveries. As the event unfolds, sales are monitored to identify any changes or
exceptions, which are resolved through an iterative process between the two parties.
3.2 DC replenishment collaboration: In this scenario, the two trading partners collaborate on
forecasting DC withdrawals or anticipated demand from the DC to the manufacturer. These forecasts
are converted to a stream of orders from the DC to the manufacturer that are committed or locked
over a specified time horizon. This information allows the manufacturer to include anticipated orders
in future production plans and build the committed orders on demand. The result is a reduction in
production cost at the manufacturer and a reduction of inventory and stockouts at the retailer. It
requires collaboration on aggregate data and does not require sharing of detailed POS data
3.3 Store replenishment collaboration: In store replenishment collaboration, trading partners
collaborate on store-level POS forecasts. These forecasts are then converted to a series of store-level
orders, with orders committed over a specified time horizon. This form of collaboration is much harder
to implement than a DC-level collaboration, especially if stores are small.

3.4 Collaborative assortment planning: Fashion apparel and other seasonal goods follow a seasonal
pattern of demand. Thus, collaborative planning in these categories has a horizon of a single season
and is performed at seasonal intervals.

Requirements for implementation of CPFR

 Effective collaboration requires manufacturers to set up cross-functional, customer-specific

teams that include sales, demand planning, and logistics, at least for large customers.
 CPFR technologies have been developed to facilitate sharing of forecasts and historical
information, evaluating exception conditions, and enabling revisions.

Risks and hurdles for CPFR implementation

 Given the large-scale sharing of information, there is a risk of information misuse. Often one
or both of the CPFR partners have relationships with the partner’s competitors.
 Another risk is that if one of the partners changes its scale or technology, the other partner
will be forced to follow suit or lose the collaborative relationship.
 One of the biggest hurdles to success is often that partners attempt store-level collaboration,
which requires a higher organizational and technology investment. It is often best to start with
an event- or DC-level collaboration, which is more focused and easier to collaborate on.