Supply Chain Ass Supply Chain Management: Strategy, Planning, and Operation Seventh Edition Chapter 10 Coordination in a Supply Chain Copyright © 2019,

Supply Chain Ass Supply Chain Management: Strategy, Planning, and Operation
Seventh Edition
Chapter 10
Coordination in a Supply Chain

Copyright © 2019, 2016, 2013 Pearson Education, Inc. All Rights Reserved

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Learning Objectives
10.1 Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance.
10.2 Identify obstacles to coordination in a supply chain.
10.3 Discuss managerial levers that help achieve coordination in a supply chain.
10.4 Understand some practical approaches to improve coordination in a supply chain.

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Coordination in the Supply Chain
Extending on the concept of Sales & Operations management, coordination in the supply chain is key
Lack of coordination leads to a degradation of responsiveness and increases costs and inventory in the system
The causes and potential remedies for lack of coordination are discussed in this chapter

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Lack of Supply Chain Coordination and Its Impact on Performance
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

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Bullwhip Effect (1 of 2)
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

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Bullwhip Effect (2 of 2)

Figure 10-1 Demand Fluctuation at Different Stages of a Supply Chain

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The Effect on Performance (1 of 2)
Lack of coordination increases variability and hurts supply chain surplus
Impact on costs
Manufacturing cost
Inventory cost
Replenishment lead time
Transportation cost
Labor cost for shipping and receiving
Level of product availability
Relationships across the supply chain

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The Effect on Performance (2 of 2)
Table 10-1 Impact of the Lack of Coordination on Supply Chain 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

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Summary of Learning Objective 1
Supply chain coordination requires all stages to take actions that maximize total supply chain profits. A lack of coordination results if different stages focus on optimizing their local objectives or if information is distorted as it moves across the supply chain. The phenomenon that fluctuation in orders increases as one moves up the supply chain from retailers to wholesalers to manufacturers to suppliers is referred to as the bullwhip effect. This effect results in an increase in all costs in the supply chain and a decrease in customer service levels. The bullwhip effect moves all parties in the supply chain away from the efficient frontier and results in a decrease of both customer satisfaction and profitability within the supply chain.

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

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Incentive Obstacles
Occur when incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits
Local optimization within functions or stages of a supply chain
Sales force incentives

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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 and not customer demand
Lack of information sharing

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Operational Obstacles (1 of 2)
Occur when placing and filling orders lead to an increase in variability
Ordering in large lots
Large replenishment lead times
Rationing and shortage gaming

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Operational Obstacles (2 of 2)

Figure 10-2 Demand and Order Stream with Orders Every Five Weeks

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Pricing Obstacles (1 of 2)
When pricing policies for a product lead to an increase in variability of orders placed
Lot-size based quantity decisions
Price fluctuations

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Pricing Obstacles (2 of 2)

Figure 10-3 Retailer Sales and Manufacturer Shipments of Soup

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Behavioral Obstacles (1 of 2)
Problems in learning within organizations that contribute to information distortion
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 of the supply chain react to the current local situation rather than trying to identify the root causes
Different stages of the supply chain blame one another for the fluctuations

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Behavioral Obstacles (2 of 2)
No stage of the supply chain learns from its actions over time
A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply chain performance

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Summary of Learning Objective 2
A key obstacle to coordination in the supply chain is misaligned incentives that result in different stages optimizing local objectives instead of total supply chain profits. Other obstacles include lack of information sharing, operational inefficiencies leading to large replenishment lead times and large lots, sales force incentives that encourage forward buying, rationing schemes that encourage inflation of orders, promotions that encourage forward buying, and a lack of trust that makes any effort toward coordination difficult.

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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

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Aligning Goals and Incentives
Align goals and incentives so that every participant in supply chain activities works to maximize total supply chain profits
Align goals across the supply chain
Align incentives across functions
Pricing for coordination
Alter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer)

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Improving Information Visibility and Accuracy
Sharing customer demand data
Implementing collaborative forecasting and planning
Designing single-stage control of replenishment
Continuous replenishment programs (C R P)
Vendor managed inventory (V M I)

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Improving Operations to Synchronize Supply and Demand
Reducing replenishment lead time
Reducing lot sizes
Rationing based on past sales and sharing information to limit gaming

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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
Stabilizing pricing

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Building Strategic Partnerships and Trust
Easier to use levers to achieve coordination if trust and strategic partnerships are built
Sharing accurate information
Lower transaction costs between stages
All parties must believe that the benefits of improved coordination are being shared equally

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Improving Coordination in Practice
Get top management commitment for coordination
Devote resources to coordination
Focus on communication with other stages

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Summary of Learning Objective 3
Managers can improve coordination in the supply chain by aligning goals and incentives across different functions and stages of the supply chain. Other actions that managers can take to improve coordination include sharing of sales information and collaborative forecasting and planning, implementation of single-point control of replenishment, improving operations to reduce lead times and lot sizes, E D L P and other pricing strategies that limit forward buying, and the building of trust and strategic partnerships within the supply chain. Top management commitment, the devotion of resources to coordination, and a focus on communication across the supply chain are important requirements for coordination to improve in practice.

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Some Practical Approaches to Improve Supply Chain Coordination (1 of 2)
Continuous replenishment and vendor-managed inventories
A single point of replenishment
C R P – wholesaler or manufacturer replenishes based on P O S data
V M I – manufacturer or supplier is responsible for all decisions regarding inventory
Substitutes

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Some Practical Approaches to Improve Supply Chain Coordination (2 of 2)
Collaborative planning, forecasting, and replenishment (C P F R)
Sellers and buyers in a supply chain may collaborate along any or all of the following
Strategy and planning
Demand and supply management
Execution
Analysis

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Common C P F R Scenarios
Table 10-2 Four Common C P F R Scenarios

C P F R Scenario Where Applied in
Supply Chain Industries Where Applied

Retail event collaboration Highly promoted channels or categories All industries other than those that practice E D L P

D C replenishment collaboration Retail D C or distributor D C Drugstores, hardware, grocery

Store replenishment collaboration Direct store delivery or retail D C-to-store delivery Mass merchants, club stores

Collaborative assortment planning Apparel and seasonal goods Department stores, specialty retail

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Collaborative Planning, Forecasting, and Replenishment (C P F R) (1 of 2)
Retail event collaboration
D C replenishment collaboration
Store replenishment collaboration
Collaborative assortment planning
Organizational and technology requirements for successful C P F R
Risks and hurdles for a C P F R implementation

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Collaborative Planning, Forecasting, and Replenishment (C P F R) (2 of 2)

Figure 10-4 Collaborative Organizational Structure

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Summary of Learning Objective 4
V M I and C P F R are two practical approaches to improve coordination in the supply chain. Under V M I, the supplier is responsible for managing product inventories at the retailer while ensuring an agreed upon level of service. Under C P F R, supply chain members manage forecasting, planning, and replenishment in a collaborative manner. Partners may set C P F R relationships to collaborate on store events, D C replenishment, store replenishment, or assortment planning. D C replenishment collaboration is often the easiest to implement because it requires aggregate-level data. Store replenishment collaboration requires a higher level of investment in technology and data sharing to be successful.

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Copyright

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Chapter 10 • Coordination in a Supply Chain 251

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Time Time

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Consumer Sales at Retailer

Manufacturer’s Orders with Supplier

Retailer’s Orders to Wholesaler

FIGURE 10-1 Demand Fluctuations at Different Stages of a Supply Chain

to coordinate information exchange with thousands of suppliers and dealers. The fundamental
challenge today is for supply chains to achieve coordination in spite of multiple ownership and
increased product variety.

One outcome of the lack of supply chain coordination is the bullwhip effect, in which
fluctuations in orders increase as they move up the supply chain from retailers to wholesalers
to manufacturers to suppliers, as shown in Figure 10-1. The bullwhip effect distorts demand
information within the supply chain, with each stage having a different estimate of what
demand looks like.

Procter & Gamble (P&G) has observed the bullwhip effect in the supply chain for Pampers
diapers.1 The company found that raw material orders from P&G to its suppliers fluctuated
significantly over time. Farther down the chain, when sales at retail stores were studied, the
fluctuations, while present, were small. It is reasonable to assume that the consumers of diapers
(babies) at the last stage of the supply chain used them at a steady rate. Although consumption of
the end product was stable, orders for raw material were highly variable, increasing costs and
making it difficult to match supply and demand.

HP also found that the fluctuation in orders increased significantly as they moved from the
resellers up the supply chain to the printer division to the integrated circuit division.2 Once again,

1 Lee, Padmanabhan, and Whang (1997).
2 Ibid.

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256 Chapter 10 • Coordination in a Supply Chain

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Week

Orders

Demand

FIGURE 10-2 Demand and Order Stream with Orders Every Five Weeks

Because orders are batched and placed every five weeks, the order stream has four weeks
without orders followed by a large order that equals five weeks of demand. A manufacturer
supplying several retailers that batch their orders faces an order stream that is much more
variable than the demand the retailers experience. If the manufacturer batches its orders to
suppliers, the effect is further magnified. In many instances, there are certain focal-point periods,
such as the first or the last week of a month, when a majority of the orders arrive. This concen-
tration of orders further exacerbates the impact of batching.

LARGE REPLENISHMENT LEAD TIMES Information distortion is magnified if replenishment
lead times between stages are long. Consider a situation in which a retailer has misinterpreted a
random increase in demand as a growth trend. If the retailer faces a lead time of two weeks, it
will incorporate the anticipated growth over two weeks when placing the order. In contrast, if the
retailer faces a lead time of two months, it will incorporate into its order the anticipated growth
over two months (which will be much larger). The same applies when a random decrease in
demand is interpreted as a declining trend.

RATIONING AND SHORTAGE GAMING Rationing schemes that allocate limited production in
proportion to the orders placed by retailers lead to a magnification of information distortion.
This can occur when a high-demand product is in short supply. In such a situation, manufacturers
come up with a variety of mechanisms to ration the scarce supply of product among various
distributors or retailers. One commonly used rationing scheme is to allocate the available
supply of product based on orders placed. Under this rationing scheme, if the supply available is
75 percent of the total orders received, each retailer receives 75 percent of its order.

This rationing scheme results in a game in which retailers try to increase the size of their
orders to increase the amount supplied to them. A retailer needing 75 units orders 100 units in
the hope of getting 75. The net impact of this rationing scheme is to artificially inflate orders for

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Chapter 10 • Coordination in a Supply Chain 257

the product. In addition, a retailer ordering based on what it expects to sell gets less and as a
result loses sales, whereas a retailer that inflates its order is rewarded.

If the manufacturer is using orders to forecast future demand, it will interpret the
increase in orders as an increase in demand even though customer demand is unchanged. The
manufacturer may respond by building enough capacity to be able to fill all orders received.
Once sufficient capacity becomes available, orders return to their normal level because they were
inflated in response to the rationing scheme. The manufacturer is now left with a surplus of
product and capacity. These boom-and-bust cycles thus tend to alternate.

This phenomenon is fairly common in the electronics industry, in which alternating periods
of component shortages followed by a component surplus are often observed. In particular,
memory chip manufacturing experienced a couple of such cycles in the 1990s.

Pricing Obstacles

Pricing obstacles arise when the pricing policies for a product lead to an increase in variability of
orders placed.

LOT SIZE–BASED QUANTITY DISCOUNTS Lot size–based quantity discounts increase the lot size
of orders placed within the supply chain (see Chapter 11) because lower prices are offered for larger
lots. As discussed earlier, the resulting large lots magnify the bullwhip effect within the supply chain.

PRICE FLUCTUATIONS Trade promotions and other short-term discounts offered by a manufac-
turer result in forward buying, by which a wholesaler or retailer purchases large lots during the
discounting period to cover demand during future periods. Forward buying results in large orders
during the promotion period followed by very small orders after that (see Chapter 11), as shown
in Figure 10-3 for chicken noodle soup.

Observe that the shipments during the peak period are higher than the sales during the peak
period because of a promotion offered. The peak shipment period is followed by a period of low

Weeks

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Manufacturer
Shipments

Retailer
Sales

FIGURE 10-3 Retailer Sales and Manufacturer Shipments of Soup
Source: Reprinted by permission of Harvard Business Review.
Adapted from “What Is the Right Supply Chain for Your Product?”
by Marshall L. Fisher, Harvard Business Review (March–April 1997):
83–93. Copyright © 1997 by the Harvard Business School Publishing
Corporation; all rights reserved.

M10_CHOP3952_05_SE_C10.QXD 10/25/11 4:34 PM Page 257

Chapter 10 • Coordination in a Supply Chain 267

if one of the partners changes its scale or technology, the other partner is forced to follow suit or
lose the collaborative relationship. Finally, the implementation of CPFR and the resolution of
exceptions require close interactions between two entities whose cultures may be very different.
The inability to foster a collaborative culture across the partner organizations can be a major
hurdle for the success of CPFR. One of the biggest hurdles to success is often that partners
attempt store-level collaboration, which requires a higher organizational and technology invest-
ment. It is often best to start with an event- or DC-level collaboration, which is more focused and
easier to collaborate on. One of the biggest hurdles for successful CPFR, however, is that demand
information shared with partners is often not used within the organization in an integrated manner.
It is important to have integrated demand, supply, logistics, and corporate planning within the
organization to maximize the benefits of a CPFR effort with a partner.

10.7 ACHIEVING COORDINATION IN PRACTICE

1. Quantify the bullwhip effect. Companies often have no idea that the bullwhip effect
plays a significant role in their supply chain. Managers should start by comparing the variability
in the orders they receive from their customers with the variability in orders they place with their
suppliers. This helps a firm quantify its own contribution to the bullwhip effect. Once its contri-
bution is visible, it becomes easier for a firm to accept the fact that all stages in the supply chain
contribute to the bullwhip effect, leading to a significant loss in profits. In the absence of this
concrete information, companies try to react better to the variability rather than eliminate the
variability itself. This leads companies to invest significant amounts in inventory management
and scheduling systems, only to see little improvement in performance or profits. Evidence of
the size of the bullwhip effect is effective in getting different stages of the supply chain to focus
on efforts to achieve coordination and eliminate the variability created within the supply chain.

2. Get top management commitment for coordination. More than any other aspect of
supply chain management, coordination can succeed only with top management’s commitment.
Coordination requires managers at all stages of the supply chain to subordinate their local
interests to the greater interest of the firm and even the supply chain. Coordination often requires
the resolution of trade-offs in a way that requires many functions in the supply chain to change
their traditional practices. These changes often run counter to approaches that were put in place
when each function focused only on its local objective. Such changes within a supply chain

Customer 1 Team
Demand Planning

Sales
Customer Service/

Logistics

Customer 2 Team
Demand Planning

Sales
Customer Service/

Logistics

Category
Team

• Merchandise
Planning
• Buying

• Replenishment

Manufacturer Organization Retailer Organization

FIGURE 10-4 Collaborative Organizational Structure Source: Adapted
from Voluntary Interindustry Commerce Standards, CPFR: An Overview, 2004.

M10_CHOP3952_05_SE_C10.QXD 10/25/11 4:34 PM Page 267

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