Supply Chain Management

(3rd Edition)

Chapter 17
Coordination in the Supply Chain

© 2007 Pearson Education 16-1

 Objectives
 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
 Discuss managerial levers that help achieve
coordination in the supply chain
 Describe actions that facilitate the building of strategic
partnerships and trust within the supply chain

© 2007 Pearson Education 16-2

 Outline
 Lack of Supply Chain Coordination and the
Bullwhip Effect
 Effect of Lack of Coordination on Performance
 Obstacles to Coordination in the Supply Chain
 Managerial Levers to Achieve Coordination
 Building Strategic Partnerships and Trust Within
a Supply Chain
 Achieving Coordination in Practice

© 2007 Pearson Education 16-3

 Lack of SC Coordination
and the Bullwhip Effect
 Supply chain coordination – 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 results when:
– Objectives of different stages conflict or
– Information moving between stages is distorted

© 2007 Pearson Education 16-4

 Bullwhip Effect
 Fluctuations in orders increase as they move up
the supply chain from retailers to wholesalers to
manufacturers to suppliers (shown in Figure 16.1)
 Distorts 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
 Examples: Proctor & Gamble (Pampers); HP
(printers); Barilla (pasta)

© 2007 Pearson Education 16-5

 The Effect of Lack of
Coordination on Performance
 Manufacturing cost (increases)
 Inventory cost (increases)
 Replenishment lead time (increases)
 Transportation cost (increases)
 Labor cost for shipping and receiving (increases)
 Level of product availability (decreases)
 Relationships across the supply chain (worsens)
 Profitability (decreases)
 The bullwhip effect reduces supply chain profitability by making
it more expensive to provide a given level of product availability

© 2007 Pearson Education 16-6

 Obstacles to Coordination
in a Supply Chain
 Incentive Obstacles
 Information Processing Obstacles
 Operational Obstacles
 Pricing Obstacles
 Behavioral Obstacles

© 2007 Pearson Education 16-7

 Incentive Obstacles
 When incentives offered to different stages or
participants in a supply chain lead to actions that
increase variability and reduce total supply chain
profits – misalignment of total supply chain
objectives and individual objectives
 Local optimization within functions or stages of a
supply chain
 Sales force incentives

© 2007 Pearson Education 16-8

 Information Processing Obstacles
 When demand information is distorted as it moves
between different stages of the supply chain,
leading to increased variability in orders within
the supply chain
 Forecasting based on orders, not customer
demand
– Forecasting demand based on orders magnifies demand
fluctuations moving up the supply chain from retailer
to manufacturer
 Lack of information sharing

© 2007 Pearson Education 16-9

 Operational Obstacles
 Actions taken in the course of placing and filling
orders that lead to an increase in variability
 Ordering in large lots (much larger than dictated
by demand) – Figure 17.2
 Large replenishment lead times
 Rationing and shortage gaming (common in the
computer industry because of periodic cycles of
component shortages and surpluses)

© 2007 Pearson Education 16-10

 Pricing Obstacles
 When pricing policies for a product lead to an
increase in variability of orders placed
 Lot-size based quantity decisions
 Price fluctuations (resulting in forward buying) –
Figure 17.3

© 2007 Pearson Education 16-11

 Behavioral Obstacles
 Problems in learning, often related to communication in the supply chain
and how the supply chain is structured
 Each stage of the supply chain views its actions locally and is 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
 Based on local analysis, different stages blame each other for the
fluctuations, with successive stages becoming enemies rather than partners
 No stage learns from its actions over time because the most significant
consequences of the actions of any one stage occur elsewhere, resulting in
a vicious cycle of actions and blame
 Lack of trust results in opportunism, duplication of effort, and lack of
information sharing

© 2007 Pearson Education 16-12

 Managerial Levers to
Achieve Coordination
 Aligning Goals and Incentives
 Improving Information Accuracy
 Improving Operational Performance
 Designing Pricing Strategies to Stabilize Orders
 Building Strategic Partnerships and Trust

© 2007 Pearson Education 16-13

 Aligning Goals and Incentives
 Align incentives so that each participant has an
incentive to do the things that will maximize total
supply chain profits
 Align incentives across functions
 Pricing for coordination
 Alter sales force incentives from sell-in (to the
retailer) to sell-through (by the retailer)

© 2007 Pearson Education 16-14

 Improving Information Accuracy
 Sharing point of sale data
 Collaborative forecasting and planning
 Single stage control of replenishment
– Continuous replenishment programs (CRP)
– Vendor managed inventory (VMI)

© 2007 Pearson Education 16-15

 Improving Operational Performance
 Reducing replenishment lead time
– Reduces uncertainty in demand
– EDI is useful
 Reducing lot sizes
– Computer-assisted ordering, B2B exchanges
– Shipping in LTL sizes by combining shipments
– Technology and other methods to simplify receiving
– Changing customer ordering behavior
 Rationing based on past sales and sharing information to limit gaming
– “Turn-and-earn”
– Information sharing

© 2007 Pearson Education 16-16

 Designing Pricing Strategies
to Stabilize Orders
 Encouraging retailers to order in smaller lots and reduce
forward buying
 Moving from lot size-based to volume-based quantity discounts
(consider total purchases over a specified time period)
 Stabilizing pricing
– Eliminate promotions (everyday low pricing, EDLP)
– Limit quantity purchased during a promotion
– Tie promotion payments to sell-through rather than amount purchased
 Building strategic partnerships and trust – easier to implement
these approaches if there is trust

© 2007 Pearson Education 16-17

 Building Strategic Partnerships
and Trust in a Supply Chain
 Background
 Designing a Relationship with Cooperation and
Trust
 Managing Supply Chain Relationships for
Cooperation and Trust

© 2007 Pearson Education 16-18

 Building Strategic Partnerships
and Trust in a Supply Chain

 A trust-based relationship between two stages of a supply chain includes

– Dependability
– Leap of faith
 Trust involves a belief that each stage is interested in the others' welfare and
will not take actions without considering their impact on the other stages.
 Cooperation and trust work within the supply chain help improve performance
for the following reasons:
– Alignment of incentives and goals
– Actions to achieve coordination are easier to implement
– Supply chain productivity improves by reducing duplication or allocation
of effort to appropriate stage.
 Greater information sharing results, the supply chain is better able to match
supply and demand, resulting in better coordination.
© 2007 Pearson Education 16-19
  Table 17.2 shows benefits of trust are highlighted
 Historically, supply chain relationships are based on
either power or trust.
 Disadvantages of power-based relationship:
– Results in one stage maximizing profits, often at the
expense of other stages
– Can hurt a company when balance of power changes
– Less powerful stages have sought ways to resist
© 2007 Pearson Education 16-20
 Building Trust into a
Supply Chain Relationship
 There are two views regarding how cooperation and trust can be built into any 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
 In most effective partnerships, a combination of the two approaches is used.
 An example is the situation in which suppliers sign an initial contract containing
contingencies with manufacturers and then the manufacturers never want to refer to the
contract again. Their hope is that all contingencies can be resolved through negotiation in a
way that is best for the supply chain.

© 2007 Pearson Education 16-21

 Building Trust into a
Supply Chain Relationship
 Initially more reliance on deterrence-based view, then
evolves to a process-based view
 Co-identification(each party considers the other
party's objective as its own.): ideal goal
 Two phases to a supply chain relationship
– Design phase(ground rules are established and the
relationship is initiated)
– Management phase(interactions based on the ground rules
occur and the relationship as well as the ground rules
evolve)

© 2007 Pearson Education 16-22

 Designing a Relationship
with Cooperation and Trust
The key steps in designing effective supply chain
partnerships are as follows:
a) Assessing the value of the relationship
b) Identifying operational roles and decision rights
for each party
c) Creating effective contracts
d) Designing effective conflict resolution
mechanisms

© 2007 Pearson Education 16-23

 a)Assessing the Value of the
Relationship
 Identify the mutual benefit that the relationship
provides.
 Identify the criteria used to evaluate the
relationship (equity is important)
 Important to share benefits equitably
 Clarify contribution of each party and the benefits
each party will receive.

© 2007 Pearson Education 16-24

 b)Identifying Operational Roles and
Decision Rights for Each Party

 Recognize interdependence between parties

– Sequential interdependence: activities of one partner
precede the other
– Reciprocal interdependence: the parties come together,
exchange information and inputs in both directions
 Sequential interdependence is the traditional
supply chain form
 Reciprocal interdependence is more difficult but
can result in more benefits
 Figure 17.4

© 2007 Pearson Education 16-25

 Effects of Interdependence on Supply Chain Relationships
(Figure 17.4)

Partner High Level of

Organization’s Dependence

Relatively Interdependence
High
Powerful Effective Relationship

Organization
Low Level of Relatively
Low Interdependence
Powerful

Low High
Partner’s Dependence
© 2007 Pearson Education 16-26
 c) Creating Effective Contracts
 Create contracts that encourage negotiation when
unplanned contingencies arise.
 It is impossible to define and plan for every
possible occurrence.
 Informal relationships and agreements can fill in
the “gaps” in contracts.
 Informal arrangements may eventually be
formalized in later contracts.

© 2007 Pearson Education 16-27

 d) Designing Effective Conflict
Resolution Mechanisms
 Initial formal specification of rules and guidelines
for procedures and transactions. It facilitates the
sharing of information among the partners in the
supply chain.
 To facilitate communication, frequent meetings
should be held between managers and staff
assigned to the partnership
 The help of a court or an intermediary can also be
sought to interpret the contract.

© 2007 Pearson Education 16-28

 Managing Supply Chain Relationships
for Cooperation and Trust
 Effective management of a relationship is important
for its success
 Top management is often involved in the design but
not management of a relationship
 Perceptions of reduced benefits or opportunistic
actions can significantly affect a supply chain
partnership

© 2007 Pearson Education 16-29

 Figure 17.5 -- process of alliance
evolution

© 2007 Pearson Education 16-30

 Achieving Coordination in Practice
 Quantify the bullwhip 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 equitably

© 2007 Pearson Education 16-31

 Summary of Learning Objectives
 What are supply chain coordination and the bullwhip
effect, and what are their effects on supply chain
performance?
 What are the causes of the bullwhip effect, and what
are obstacles to coordination in the supply chain?
 What are the managerial levers that help achieve
coordination in the supply chain?
 What are actions that facilitate the building of
strategic partnerships and trust in the supply chain?

© 2007 Pearson Education 16-32