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Coordination in a supply chain
Contents Lack of supply chain coordinates and bullwhip effect Effect of lack of coordinates on performance Obstacles of coordinates in a supply chain Managerial levers to achieve coordination Building strategic partnership and trust with a supply chain Achieving coordination in practice .
Lack of coordination occurs when different stages of supply chain have objectives that conflict or information moving between the stages is delayed and distorted. Supply chain coordination requires each stage of the supply chain to take into account impact of its action on other stages.Lack of supply chain coordination Supply chain coordination improves if all stages of chain takes actions together that results in greater profits. .
For different variety of models it becomes difficult to coordinate information exchange with 1000s of suppliers and dealers. resulting in actions that often diminish total supply chain profits. Each stage tries to maximize its own profits.Lack of supply chain coordination Different stages of a supply chain may have conflicting objectives if each stage has different owner. Example : Ford Motor Company has 1000s of suppliers and these suppliers have many suppliers in turn. . Information is not shared completely between all the stages.
Bullwhip effect distorts demand information within the supply chain with each stage having different estimate of what demand looks like. As a result there is a loss of supply chain coordination. . The raw material order from P&G to its suppliers fluctuated significantly over time. As sales at retail store were studied.Bullwhip Effect Fluctuation in orders increase as they move up the supply chain from retailer to wholesalers to manufacturers to suppliers. Example : Proctor & Gamble (P&G) observed bullwhip effect in supply chain of diapers.
It also occurs when information distortion occurs within supply chain. Thus profits are less than what could be achieved through coordination. . Each stage of supply chain takes action to optimize local objective that end up hurting performance of the entire supply chain.Effects on performance of lack of coordination Supply chain lacks coordination if each stage optimizes only its local objective without considering impact on complete chain.
Inventory Cost It increases due to bullwhip effect in supply chain. To respond need to build excess capacity or holding excess inventory is required. High level of inventory also increases the warehousing space required and thus warehousing cost increases.Effects on performance of lack of coordination Manufacturing Cost It increases due to bullwhip effect in supply chain. Due to bullwhip effect. To handle increased variability in demand. . its supplier must satisfy stream of orders more variable than customer demand.
Due to increased variability as a result of bullwhip effect it makes scheduling much more difficult compared to situation with level demand.Effects on performance of lack of coordination Replenishment Lead Time Bullwhip effect increases replenishment lead time. Increases transportation cost. Transportation requirement fluctuates significantly over time because surplus transportation capacity needs to be maintained to cover high demand period. Labor requirement for shipping and its supplier fluctuate with orders . Transportation Cost Labor Cost for Shipping and Receiving Bullwhip effect increases labor costs associated with shipping and receiving in the supply chain.
Bullwhip effect can lead to loss of trust between different stages of the supply chain and makes coordination efforts more difficult. Profitability Relationship across supply chain worsens Bullwhip effect has negative effect on performance at every stage and hurts the relationships between different stages of the supply chain. .Effects on performance of lack of coordination Level of Product Availability Bullwhip effect hurts level of product available and results in more stock out in the supply chain. Bullwhip effect decreases the profitability in the supply chain due to lack of coordination.
. If managers in supply chain are able to identify key obstacle they can then take suitable actions to help to achieve coordination. distortion and variability within the supply chain is an obstacle to coordination.Obstacles to coordination in a supply chain Any factor that leads to either local optimization by different stages of supply chain. or an increase in information delay.
Obstacles to coordination in a supply chain Incentive Obstacles Local Optimizati on within functions or stages of supply chain Information processing Obstacles Forecastin g based on Orders and Not Customer Demand Operational Obstacles Pricing Obstacle s Lot Size Based Quantity Discount Behavioral Obstacles Ordering in Large Lots Large replenishm ent lead times Rationing and shortage gaming Sales force incentives Lack of Informatio n Sharing Price Fluctuatio n .
It is natural for any participant in the supply chain to take actions that optimize performance measures along which they are evaluated. .Incentive Obstacles It occurs when incentives offered to different stages or participants in a supply chain leads to action that increases variability and reduce total supply chain profit. Local Optimization within functions or stages of supply chain Incentives that focus only on the local impact of action results in decision that do not maximize total supply chain profits.
Sales force incentives are based on the amount the sales force sells during a evaluation period of month or quarter. . A sales force incentives based on sell in results in order variability being larger than customer demand variability.Incentive Obstacles Sales force incentives Improperly structured sales force incentives are a significant obstacles to coordination in a supply chain.
Information Processing Obstacles It occurs when demand information is distorted as it moves between different stages of a supply chain. Forecasting based on orders & not customer demand When stages within supply chain makes . leading to increased variability in orders within supply chain.