Riphah School of Leadership

Riphah International University

Islamabad
Dr. Shahzad Ahmad Khan
Assistant Professor
In-charge Undergraduate FMS
Email: shahzad.ahmad@riphah.edu.pk
Supply Chain Management

CHAPTER :10
Coordination in Supply Chain
 Learning Objectives
1. Describe supply chain coordination and the
bullwhip effect, and their impact on supply chain
performance.
2. Identify obstacles to coordination in a supply
chain and managerial levers that help achieve
coordination in a supply chain.
3. Understand the different forms of collaborative
planning, forecasting, and replenishment
possible in a supply chain.
 Lack of Supply Chain Coordination
and the Bullwhip Effect
• Supply chain coordination – all stages of the
chain take actions that are aligned and increase
total supply chain surplus
• Requires that each stage share information and
take into account the effects of its actions on the
other stages
• Lack of coordination results when:
– Objectives of different stages conflict
– Information moving between stages is delayed or
distorted
 Bullwhip Effect
• Fluctuations in orders increase as they
move up the supply chain from retailers
to wholesalers to manufacturers to
suppliers
• Distorts demand information within the
supply chain
• Results from a loss of supply chain
coordination
 Information Coordination: The Bullwhip Effect
Consumer Sales at Retailer Retailer's Orders to Wholesaler
1000 1000
Consumer demand

900 900

Retailer Order
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Wholesaler's Orders to Manufacturer Manufacturer's Orders with Supplier

Manufacturer Order
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Wholesaler Order

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Demand at Different Stages
 The Effect on Performance
• Supply chain lacks coordination if each
stage optimizes only its local objective
• Reduces total profits
• Performance measures include
– Manufacturing cost
– Inventory cost
– Replenishment lead time
– Transportation cost
– Labor cost for shipping and receiving
– Level of product availability
– Relationships across the supply chain
 The Effect on Performance

Performance Measure Impact of the Lack of Coordination

Manufacturing cost Increases
Inventory cost Increases
Replenishment lead time Increases
Transportation cost Increases
Shipping and receiving cost Increases
Level of product availability Decreases
Profitability Decreases

Table 10-1
 Obstacles to Coordination
in a Supply Chain
Any factor that leads to either local optimization by different stages of
the supply chain or an increase in information delay, distortion and
variability within the supply chain, is an obstacle to coordination.

• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles
 Incentive Obstacles
• Sales force incentives based on the amount of sells
during an evaluation period in a month or quarter.

• “Sell-in” rather than “sell-through” based evaluation.

• Local optimization within functions or stages of the

supply chain (e.g., the shipping department trying to control the
transportation cost by reducing the frequency of the shipments,
ignoring the impact of this decision on the inventory costs and the
customer service)
 Managerial Levers
• Align incentives across functions
• Alter sales force incentives from sell-in to sell-
through

• Pricing for coordination, e.g.,

– Buy-back contracts
– Quantity-flexibility contracts

• Build strategic partnerships and trust!

 Information Processing Obstacles
• Independent forecasting at each stage based on
received orders

• Lack of information sharing among the various

stages of the chain
 Managerial Levers
• Sharing POS data
• Collaborative forecasting and planning
• Single stage control of replenishment
– Continuous replenishment programs (CRP)
– Vendor managed inventory (VMI)
 Operational Obstacles
• Ordering in large lots in order to reduce the fixed costs
associated with order placement and transportation.

• Large replenishment lead times that expose the company to

higher levels of variability, and raise the need for higher
levels of safety stock.

• Rationing and shortage gaming: Ordering larger quantities

than necessary, in order to eventually get what you need.
 Managerial Levers
• Reduce replenishment lead times, by taking advantage of
modern IT capabilities
– Computer-assisted ordering
– EDI

• Reduce lot sizes

– Computer-assisted ordering
– Shipping in LTL sizes by combining shipments
– Exploit technology and other methods to simplify receiving

• Ration based on past sales and information sharing to limit

gaming
 Pricing Obstacles
• Lot size-based discounts

• Price fluctuations (e.g., due to promotions) resulting in

“forward buying”
Managerial Levers
• Move from lot size-based to volume-based quantity
discounts
• Stabilize pricing
– Eliminate promotions and Charging EDLP
– Limit quantity purchased during a promotion
– Alter sales force incentives from sell-in (to the retailer) to sell-
through (by the retailer)
 Behavioral Obstacles
• Each stage of the supply chain views its actions locally, being 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

• Eventually, stages start blaming each other for the experienced

problems, becoming enemies rather than partners

• Lack of trust results in opportunism, duplication of effort and lack of

information sharing

• From a more pragmatic standpoint, it is generally hard to trace the

consequences of certain actions because they will occur in some
other stage(s) of the supply chain.
 Building Trust into a 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
 Collaborative Planning, Forecasting,
and Replenishment (CPFR)
“A business practice that combines the intelligence of multiple
partners in the planning and fulfillment of consumer demand”

• Sellers and buyers in a supply chain may

collaborate along any or all of the following
1. Strategy and planning
2. Demand and supply management
3. Execution
4. Analysis
• Retail event collaboration
• DC replenishment collaboration
Collaborative Planning, Forecasting,
and Replenishment (CPFR)

• Store replenishment collaboration

• Collaborative assortment planning
• Organizational and technology
requirements for successful CPFR
• Risks and hurdles for a CPFR
implementation
Collaborative Planning, Forecasting,
and Replenishment (CPFR)

Figure 10-4
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
 Information Infrastructure: Required
Technologies
• Basic EDI & ERP communication system
• Perpetual inventory system
• Technology to share forecast information
• Technology to transfer promotional and one time
orders (Straight Re-buy)
• Sales incentives will have to be transferred from
shipment driven to consumption driven (EDLP
between supplier and retailer)
Summary of Learning Objectives

1. Describe supply chain coordination and the

bullwhip effect, and their impact on supply
chain performance
2. Identify obstacles to coordination in a supply
chain and managerial levers that help achieve
coordination in a supply chain
3. Understand the different forms of CPFR
possible in a supply chain
Thanks