Supply Chain Management

Coordination in the Supply Chain

(Ch10)

17-1
 Objectives
LEARNING UNIT 1: INTRODUCTION TO
SUPPLY CHAINS AND THIER MANAGEMENT
RESULTADOS DE APRENDIZAJE:
Classify the roles and stages of supply chains and how
these may improve supply chain network performance.
Evaluate strategies to balance responsiveness and
efficiency under different conditions of supply and
demand uncertainty.

17-2
 Week Outline
Experience the problem of supply chain coordination
and bullwhip effect (Lab simulation)
Describe supply chain coordination, the bullwhip
effect, and their impact on performance
Identify causes of the bullwhip effect and obstacles to
coordination in the supply chain
Describe actions that facilitate the building of strategic
partnerships and trust within the supply chain
Discuss managerial levers that help to achieve
coordination in the supply chain

17-3
 The Beer (Soda) game
Beer Distribution Game, Introduction
The Beer Distribution Game (The Beer Game or Soda
game) is a simulation game created by a group of
professors at MIT Sloan School of Management in early
1960s to demonstrate a number of key principles of supply
chain management
The purpose of the game is to meet customer demand for
cases of beer through a multi-stage supply chain with
minimal expenditure on back orders and inventory
In this LAB we will play an online, single-player-version
of the Beer Game
17 -4
 Transentis Beer Game
There are delays as the stock travels down the supply chain to consumers

There are delays as the order travels up the supply chain to the suppliers

17-5
 Transentis Beer Game
The objective of the game is to ensure that the
consumers demand for beer or soda can be met
directly or at least with as small a delay as possible,
while keeping each players inventory as small as
possible

Goto http://beergame.transentis.com/

17-6
 Transentis Beer Game
Rules: The rules of the game are simple – the game is
played in 24 rounds, in every round of the game you
perform the following four steps:
1. Check deliveries: Check how many units of beer are
being delivered to you from your wholesaler.
2. Check orders: Check how many units of beer your
customers have ordered.
3. Deliver (sell) beer: Deliver as much beer as you can to
satisfy demand – in the game, this step will be performed
for you automatically.
4. Make order decision: Decide how many units of beer
you need to order from your wholesaler to keep your
inventory stocked up and to ensure you have enough beer
to meet future demands.
17-7
 Transentis Beer Game
There are three pitfalls in the beer game that players need
to aware of:
Delays. There is a delay of at least one week in each
direction, i.e. an order will not be delivered for at least two
weeks, even if there is enough stock in the suppliers
inventory.
Inventory Costs. Each unit of beer has associated
inventory cost of $0.50 per week.
Backorder Costs. Backorders are also penalized, each
unit of beer on backorder cost $1 per week. Hence the
target is to keep the backorder at 0.
Your job is to supply beer to consumers while managing
inventory and backorder costs

17-8
 Transentis Beer Game
Performance is measured by managing SC costs:
Individual Supply Chain Cost. the sum of his
inventory and backorder cost over time. The
individual supply chain cost target is to keep the
accumulated cost below $8,300 throughout the game.
Total Supply Chain Cost. The total supply chain cost
target is to keep the accumulated cost below $29,300
throughout the game.

In teams of 3-4 get playing!

17-9
 Transentis Beer Game
Typical Results:

17-10
 What the Beer (Soda) Game
teaches us
Discuss in your group - What frustrated, angered or
confused you? What do you think you needed to know
to make better order and cost management decisions?

Supply Chain Lessons:

1. All stages need visibility of demand and supply
2. Stages need to communicate their stock levels, ability
to fill orders and how quickly they can respond to
changes
3. Stages need to communicate up and down the supply
chain to meet the presenting demand
17-11
 Supply Chain Coordination
Supply chain coordination: When all stages in the
supply chain take actions together (usually results in
greater total supply chain profits)
SC coordination requires that each stage take into
account the effects of its actions on the other stages
Lack of coordination occurs when:
• Objectives of the different SC stages are in conflict or
• Information moving between stages becomes distorted

17-12
 Bullwhip Effect
Order fluctuations increase as they move up the
supply chain from retailers to wholesalers to
manufacturers to suppliers

Distorted demand information within the supply

chain, where different stages have very different
estimates of what demand looks like

Results in a loss of supply chain coordination

17-13
Bullwhip Effect

17-14
 Bullwhip Causes and Responses
Bullwhip cause Description
Price Fluctuations Discounts and promotions
cause consumers to buy
more
Order Batching Ordering large amounts to
avoid stock outs or higher
transport costs
Supply Gaming Supply and demand
mismatch means stores will
order more to stay in stock
Forecast accuracy Poor demand accuracy is
magnified through the
supply chain stages
Response
Use everyday-low pricing to level
demand
More frequent ordering to
maintain target stock levels
Allocate production to stores
based on past sales performances,
sharing sales performance data
ensures more accurate production
Base forecasts and orders on point
of sale data
17-15
 Supply Chain Coordination
WATCH Supply Chain Integration: https://www.youtube.com/watch?v=S_yMW2b0kNk

Supply chain coordination: When all stages in the

supply chain take actions together (usually results in
greater total supply chain profits)
SC coordination requires that each stage take into
account the effects of its actions on the other stages
Lack of coordination occurs when:
• Objectives of the different SC stages are in conflict or
• Information moving between stages becomes distorted

17-16
 The Effect of Poor Coordination
on Performance
Increases Decreases
Manufacturing cost Level of product availability
Inventory cost Relationship quality in SC
Replenishment lead time Profitability
Transportation cost
Labor cost for shipping and
receiving

The bullwhip effect reduces supply chain profitability

by making it more expensive to provide a given level
of product availability
17-17
 Obstacles to Coordination
in a Supply Chain
Incentives Information Operations Pricing
Are offered at Distorted Actions to place Pricing policies that
different stages or to demand and fill orders increase order
different participants information variability
Misaligned and Forecasting based Ordering large lots Lot-size or order
individualized SC on orders size decisions
objectives
Each stage Lack of actual Long Price fluctuations
independently sales and demand replenishment lead
optimizes data times
Sales forces are Lack of Coping with cycles
incentivized to sell information of component
more, not to meet the sharing shortages
actual demand
17-18
 Behavioral Obstacles
Supply chain coordination breaks down when:
• Each stage of the supply chain views its
actions locally
• Different stages react to the current local
situation not to root causes
• Trust is reduced
These result in a vicious cycle of blame,
opportunism, duplication of effort, and lack of
information sharing

17-19
 Trust in the Supply Chain
Historically, supply chain relationships are based
on power or trust
Power-based Perspective Trust-based Perspective
Deterrent - View Process - View
Single-stage profit Uses formal Trust and cooperation
maximizing behaviors contracts are built up over time
Disadvantages firms when the Trust behavior Trust from a series of
balance of power changes comes from self- interactions
interest
Resistance from less powerful Positive interactions
supply chain members strengthen cooperative
behavior

17-20
 Cooperation and Trust Relationships
WATCH Collaboration across the Supply Chain: https://www.youtube.com/watch?v=b7EBvjRtW1Y

Two phases to a supply chain relationship

• Design phase
• Management phase
Design the Relationship
Assessing the value and contributions
Identifying operational roles
Determine decision rights for each
party
Create effective contracts
Include effective conflict resolution
mechanisms
Assess the Relationship
Identify the mutual benefit
Identify the criteria used to evaluate
the relationship (equity is important)
Important to share benefits equitably
Clarify contribution of each party
Identify and clarify the benefits each
party will receive
17-21
 Managerial Levers to
Improve Coordination
WATCH Benefits of Collaboration in Supply Chain: https://www.youtube.com/watch?v=FrZVr6WL-go

Incentives Information Operational Pricing Strategies to

Alignment Accuracy Performance Stabilize Orders
Incentivize a Share point of sale Reduce Small orders with less
maximized total SC data – cloud replenishment lead forward buying
profits (surplus) computing times
Change from sell-in Collaborative Reduce lot sizes – Discounting based on
(distribution or forecasting and improve shipping buyer relationships not
channel focus) to a planning – use big frequency, electronic quantity discounting
sell-through (retailer data ordering, buyer
sales focus) behavior
Align sales incentives Continuous Open information to Reduce promotion
to meet demand replenishment or limit gaming frequency and link to
vendor directed retail sell-through
Provide price Improved control of Real-time decisions Build strategic supply
coordination replenishment and schedules partnerships
17-22
 Achieving Coordination in Practice
Quantify the bullwhip effect
Get top management commitment for coordination
Devote resources to coordination
Focus on communication with other SC stages
Try to achieve coordination throughout the entire
supply chain network
Use technology to improve connectivity in the supply
chain
Share the benefits of coordination equitably

SHORT CASE: Under Armour’s Athletic Supply Chain

17-23
 Summary of Learning Objectives
What are supply chain coordination and the bullwhip
effect, and what are their effects on supply chain
performance?
Supply chain coordination requires all stages to take actions that to
optimize the SC surplus, poor information or data distortion leads to
variability of orders ad sales demand, which is the bullwhip effect.
The bullwhip effect results in an increase in all costs in the supply
chain and a decrease in customer service levels
What are obstacles to coordination in the supply chain?
Obstacles include misaligned incentives, lack of information sharing,
operational inefficiencies, poor sales force incentives and a lack of
trust that makes any effort toward coordination difficult
17-24
 Summary of Learning Objectives
What are the managerial levers that help achieve
coordination in the supply chain?
Levers include sharing of sales information, collaborative
forecasting and planning, implementation of single-point control
of replenishment, improving operations to reduce lead times and
lot sizes, limit forward buying, and the building of trust and
strategic partnerships within the supply chain.
What are actions that facilitate the building of
strategic partnerships and trust in the supply chain?
By designing a relationship where mutual benefits and contracts
are clear, interdependencies are outlined in contracts that can
evolve over time and conflicts are effectively resolved help to
foster trust and coordination
17-25