Lecture

COORDINATION
6 AND ECONOMIES
OF SCALE
10
COORDINATION IN
A SUPPLY CHAIN

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COORDINATION IN A SUPPLY CHAIN
Introduction

• What could be the importance of

communication in the supply chain?

• What could be barriers in bringing

together the different players in a
supply chain?

• How can you coordinate the supply

chain?

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COORDINATION IN A SUPPLY CHAIN
Coordination in the supply chain
• Supply coordination requires each stage of the supply
chain to share information!

• Lack of coordination results in bullwhip effect:

upstream downstream

Bullwhip effect: Small variations downstream can result in

big variations upstream!

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COORDINATION IN A SUPPLY CHAIN
Coordination in the supply chain
• Lack of coordination has following effects on:
– Manufacturing costs: higher, build up excess capacity
– Inventory costs: higher, build-up excess stocks
– Transportation costs: higher, fluctuations result in surplus
– Labor cost logistics: higher, fluctuations result in surplus
– Product availability: lower, resulting in lost sales
– Replenishment lead time: longer, build-up excess capacity
– Relationship across the supply chain: have negative impact
because of increasing costs and decreasing service

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COORDINATION IN A SUPPLY CHAIN
Obstacles to coordination
• Major obstacles in coordination are:
– Incentive obstacles
– Information obstacles
– Operational obstacles
– Pricing obstacles
– Behavioral obstacles

Will be explained in next slides…

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COORDINATION IN A SUPPLY CHAIN
Obstacles to coordination & information
• Incentives obstacles:
– Local optimization within functions or stages
– Sales force incentives

• Information processing obstacles:

– Forecasting based on orders and not on customer
demand
– Lack of information sharing

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COORDINATION IN A SUPPLY CHAIN
Obstacles to operations & pricing
• Operational obstacles:
– Ordering in large lots
– Large replenishment lead times
– Rationing and shortage gaming

• Pricing obstacles:
– Lot size-based quantity discounts
– Price fluctuations

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COORDINATION IN A SUPPLY CHAIN
Obstacles to behavior
• Behavioral obstacles:
– Each stage sees only own stage and not the impact on
the rest
– Different stages reacting to current local situation
rather than trying to identify the root cause
– Based on local view different stages blame each other
becoming enemies
– Not learning from own actions resulting in a vicious
circle
– Lack of trust among supply chain partners resulting in
less/no information is shared

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COORDINATION IN A SUPPLY CHAIN
How to achieve coordination
• Managers can take following actions to improve the
coordination in the supply chain:
– Aligning of goals and incentives
– Improving information visibility and accuracy
– Improving operational performance
– Designing pricing strategies to stabilize orders
– Building strategic partnerships and trust

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COORDINATION IN A SUPPLY CHAIN
How to achieve coordination
• Aligning of goals:
– Aligning goals across the supply chain
– Aligning incentives across functions
– Pricing for coordination
– Altering sales force incentives from sell-in to sell-
through

• Improving information visibility and accuracy

– Sharing point-of-sale data
– Implementing collaborative forecasting and planning
– Designing single-stage control of replenishment

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COORDINATION IN A SUPPLY CHAIN
How to achieve coordination
• Improving operational performance
– Reducing replenishment lead-time and lot sizes
– Ration based on past sales and sharing information to
limit gaming

• Designing pricing strategies to stabilize orders

– Moving from lot size-based to volume based quantity
discounts
– Stabilize pricing

• Building strategic partners and trust

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COORDINATION IN A SUPPLY CHAIN
Continuous replenishment
• Continuous replenishment programs (CRP): the
wholesaler continuously replenishes the retailer
based on POS data.

• In most instances CRP systems are driven by actual

with drawls of inventory from retailer warehouse
(instead of POS-data).

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COORDINATION IN A SUPPLY CHAIN
Vendor managed inventories
• Vendor managed inventory (VMI), the manufacturer
or supplier is responsible for all decisions regarding
product inventories at the retailer.

• Control of replenishment moves to supplier.

Inventory is owned by supplier till this is sold by
retailer.

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COORDINATION IN A SUPPLY CHAIN
Collaborating in the supply chain
• Collaborative planning, forecasting and replenishment
(CPFR) is where two parties have synchronized their
data and established standards for exchanging
information.

• Sellers and buyers may collaborate on:

– Strategy and planning
– Demand and forecasting management
– Execution
– Analysis

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COORDINATION IN A SUPPLY CHAIN
Four scenarios of collaboration
• Four common scenarios for CPFR deployment are:
– Retail event collaboration
– DC replenishment collaboration
– Store replenishment collaboration
– Collaborative assortment planning

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COORDINATION IN A SUPPLY CHAIN
Successful organisation of CPFR
• Organization and technology requirements for
successful CPFR:
– Cross functional, customer specific teams
– Including sales, demand planning and logistics

• Risks and hurdles:

– Relationships with competitors of partners
– Necessity to follow IT scale/technology of partner
– Difference in organizational culture

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COORDINATION IN A SUPPLY CHAIN
Achieving coordination in practice
• Achieving coordination in practice:
– Quantify the bull-whip effect
– Get top management commitment for coordination
– Devote resources to coordination
– Focus 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 benefits of coordination quitably

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 ECONOMIES OF

11 SCALE: CYCLE
INVENTORY

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MANAGING ECONOMIES OF SCALE
Introduction

• What do we want to make use of

economies of scale?

• What is the effect to inventory in the

supply chain?

• What are the advantages and

disadvantages?

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MANAGING ECONOMIES OF SCALE
The role of cycle inventory
• Cycle inventory exists because producing or
purchasing in larger lots create economies of scale
and lowering costs.

• A lot or batch size is the quantity that a stage of a

supply chain can produce or purchase at a time

• Cycle inventory is the average inventory in a supply

chain

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MANAGING ECONOMIES OF SCALE
Introduction
• Inventory profile of jeans at Jean-Mart
Inventory
Q
D

Cycle Q
inventory 2

Time

Cycle inventory = Q / 2
Average flow time = Q / 2 * D 1.000 / (2 * 100) = 5

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MANAGING ECONOMIES OF SCALE
Cycle inventory related costs
• Costs related to inventory ordering and holding:
– Inventory holding costs
• Cost of capital
• Obsolesce (or spoilage) costs
• Handling costs
• Occupancy costs
• Miscellaneous costs
– Ordering costs
• Buyer time
• Transportation costs
• Receiving costs
• Other costs

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MANAGING ECONOMIES OF SCALE
Economies of scale
• When planning a purchase or a production the firm
wants to optimize for the costs

• Illustration: Economic Order Quantity:

Total costs
Holding costs

Ordering costs

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MANAGING ECONOMIES OF SCALE
Aggregating replenishment orders
• Aggregating replenishment across products, retailers
or suppliers in a single order allows for a reduction in
lot size for individual products because fixed order
costs and transportation costs are spread across
multiple products, retailers, or suppliers.

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MANAGING ECONOMIES OF SCALE
Impact of quantity discounts
• Manufacturers of commodity products (price set by
market) with large fixed costs per lot can use lot size-
based quantity discounts to maximize supply chain
profits.

• Lot size based discounts, however, increase cycle

inventory in the supply chain.

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MANAGING ECONOMIES OF SCALE
Managing multi-echelon cycle inventory
• A multi-echelon supply chain has multiple stages and
possible many players at each stage.
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5

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MANAGING ECONOMIES OF SCALE
Managing multi-echelon cycle inventory
• Unsynchronized multilevel cycle inventory.

Average stock = Q/2

Q Time

Average stock = Q/2

Time
2Q

Average stock = Q/2 + Q/2

Time

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MANAGING ECONOMIES OF SCALE
Managing multi-echelon cycle inventory
• Synchronized multilevel cycle inventory.

Average stock = Q/10

Q Time

Average stock = Q/2

Time
2Q

Average stock = Q/10 + Q/2

Time

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MANAGING ECONOMIES OF SCALE
Managing multi-echelon cycle inventory
• Synchronized replenishment cycle inventory

Distributor is replenished
every 3 weeks

Retailer is replenished
every 1 week

Retailer is replenished
every 2 weeks

Retailer is replenished
every 3 weeks

Replenish- Cross From

ment docking inventory
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