coordination in a supply chain

Name: Chaitrali Gijare

Content

1. Introduction

2. Lack of supply chain coordination

3. Bullwhip effect

4. The effect Lack of Coordination on Performance

5. Managerial levels to achieve coordination

6. Continuous Replenishment and Vendor-Managed Inventories

7. Collaborative Planning, Forecasting, and Replenishment

8. Achieving Coordination in Practice

Introduction

• A supply chain is a system of organizations, people, activities,

information, and resources involved in moving a product or service

from supplier to customer.

• Supply Chain coordination aims at improving supply chain

performance by aligning the plans and the objectives of individual

enterprises. It usually focuses on inventory management and

ordering decisions

Lack of supply chain coordination

• Supply chain coordination improves if all stages of the chain take

actions that are aligned and increase total supply chain surplus.

Coordination requires each stage of the supply chain to share

information and take into account the impact its actions on other

stages.

• A lack of coordination occurs either because different stages of the

supply chain have local objectives that conflict or because

information moving between the stages is delayed and distorted.

Example: Ford motor company

The company has thousands of

suppliers, from goodyear to

motorola, and each of these

suppliers has many suppliers in

turn. Not only does each stage focus

on its own objective, but

information often distorted as it

moves across the supply chain

because complete information is not

shared between stages.Go Further

Bullwhip effect

• One outcome of lack of coordination is bullwhip effect. Fluctuation

in orders increase as they move up the supply chain from retailers to

wholesalers to manufacturers to suppliers.

• Demand information is distorted as it travels within the supply

chain, so that different stages have different perspectives and

estimates of the chain demand.

More the supply chains less is the coordination

Example: Procter & Gamble (P&G)

P&G observed the bullwhip effect in thesupply chain for pampers diapers. Thecompany found that raw material ordersfrom P&G to its suppliers fluctuatedsignificantly over time. Farther down thechain, when sales at retail stores werestudied, the fluctuation, though present,were small. It is reasonable to assumethat the consumers of the diapers at thelast stage of the supply chain used themat a steady rate. Although consumptionsof the end product was stable, orders forthe raw material were highly variable,increasing costa, and making it difficultto match the supply and demand.

Example: Hewlett- Packard (HP)

Plastic

Aluminum

Copper

Silicon

Intel chips

Sony CD-ROM

Microsoft

Software

Seagate Hard

drives

Hewlett-Packard

CompUSA

Best Buy

Cdw.com

Ann

Angela

David

Paula

Office deport

Raw material Parts supplier Manufacturer Resellers Consumers

Supplier network

Channel of distribution

The supply chain

Example: Hewlett- Packard (HP)

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.

Once again, although product demand showed

some variability, orders placed with the

integrated circuit division were much more

variable. This made it difficult for HP to fill

orders on time and increased the cost of doing

so.

The effect Lack of Coordination on Performance

• Manufacturing cost: lack of coordination increases manufacturing

cost.

• Inventory cost: the lack of coordination increases inventory cost.

• Replenishment lead time: Lack of coordination increases the

Replenishment lead time.

• Transportation cost: Lack of coordination increases the

transportation cost.

• Labor cost for shipping and receiving: The Lack of coordination

increases labor cost for shipping and receiving.

• Level of product availability: The Lack of coordination decreases

the Level of product availability and results in more stockouts in

supply chain.

• Relationships across the supply chain: lack of coordination has a

negative effect on performance at every stage and thus hurts the

relationships among different stages of the supply chain.

The effect Lack of Coordination on Performance

Cut labor cost

Obstacles to Coordination in a Supply Chain

• Information Processing Obstacles

• Operational Obstacles

• Pricing Obstacles

• Incentive Obstacles

• Behavioral Obstacles

Find your own way

Information Processing Obstacles

• A supply chain with poorly organized or managed information

channels leads to deterioration in information quality

Example: information on customer demand cannot reach members in

a supply chain in a timely manner, or information is not available to

some members who might need it.

Operational Obstacles

• Certain practices such as placing and filing orders may have adverse

effects on coordination.

Example: orders of larger sizes, larger replenishment lead times,

rationing and shortages can all mean orders are unable to reflect true

customer demand.

Pricing Obstacles

• Certain pricing practices and factors that affect pricing are also ways

to detach orders from actual demand.

• Lot size-based discounts

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

buying”

Example: a company may overbuy if its supplier offers a discount on a

larger lot of orders, or if its demand is exceptionally large, but

members in the upstream supply chain can't rely on these sales

figures to forecast future demand.

Incentives 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

Work and earn

Incentive Obstacles

• Example: Mangers at retail store like Kmart make all their

purchasing and inventory decisions to maximize kmart profiles, not

total supply chain profits.

Incentive Obstacles

• Example: Barilla offered its sales force incentives based on the

quantity based in the quantity sold to distributer during four- to six-

week promotion period.to maximize their bonus the sales force

urged distributors to buy more pasta toward the end of the

evaluation period. The sales force offered discounts. This increased

variability in the ordered pattern, with a jump in orders.

Behavioral Obstacles

• It is highly likely that members in the supply chain respond to local

situations and neglect root causes. They may blame each other for

fluctuations in local demand, resulting in loss of trust or even

turning themselves into mutual enemies.

I win you lose

Managerial levels to achieve coordination

1. Aligning goals and incentives

2. Improving information accuracy

3. Improving operational performance

4. Designing pricing strategies to stabilize orders

5. Building strategic partnerships and trust

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)

Example

• When Walmart pays HP for each printer sold and gives HP the

power to make replenishment decisions while limiting the amount of

printer inventory that can be held at a store. This setup improves

coordination because both parties gain if the supply of printers at a

store matches found.

Improving Information Accuracy

1. Sharing point of sale data

2. Collaborative forecasting and planning

3. Single stage control of replenishment

Continuous replenishment programs

Vendor managed inventory (VMI)

Team work. Better forecasting

Improving Operational Performance

1. Reducing replenishment lead time

• Reduces uncertainty in demand

2. Reducing lot sizes

• Computer-assisted ordering, B2B exchanges

• Shipping in sizes by combining shipments

• Technology and other methods to simplify receiving

• Changing customer ordering behavior

• Less-than-truckload

3. Rationing based on past sales and sharing information to limit

gaming

• “Turn-and-earn”

• Information sharing

Example

In japan, Toyota uses a single truck from a supplier to supply multiple

assembly plants, which enables managers to reduce the lot size received

from any one plant. In US, Toyota uses the approach to reduce the lot

sizes it receives from any one supplier.

Designing Pricing Strategies to Stabilize Orders

1. Encouraging retailers to order in smaller lots and reduce forward

buying

2. Stabilizing pricing

• Eliminate promotions (everyday low pricing: EDLP)

3. Building strategic partnerships and trust – easier to implement these

approaches if there is trust

Firms who implemented EDLP

Building Strategic Partnerships and Trust in a

Supply Chain

1. Designing a Relationship with Cooperation and Trust

2. Managing Supply Chain Relationships for Cooperation and Trust

3. Trust-based relationship

• Dependability

• Leap of faith

4. Cooperation and trust work because:

• Alignment of incentives and goals

• Actions to achieve coordination are easier to implement

• Greater information sharing results

Continuous Replenishment and Vendor-Managed

Inventories

• In Continuous Replenishment programs CRPs, the wholesaler or

manufacturer replenishes a retailer regularly based on POS data.

• It ay be managed by the supplier, distributor or a third party.

• CRPs driven by actual withdrawal of inventory from retail

warehouses rather than POS data at the store level.

POS data

POS Data

• Tying CRP systems to warehouse withdrawals is easier to implement, and retailers are often more comfortable sharing data at this level.

• Vendor-Managed Inventories(VMI), VMI systems are part of the ECR (Efficient Consumer Response) initiative to provide the end customer with the greatest value, best service and maximum variety of products. To this end, total supply and demand synchronization is needed throughout the supply chain by means of data interchanges among the parties involved in providing the customer service (Vendor/Supplier, Distributor, and Logistics Operator).

• The information exchanged is subjected to mathematical analyses of varying complexity, allowing accurate demand forecasts to help process orders and ensure delivery of the right amount of product at the right time


Inventories

• VMI requires the retailer to share demand information with the

manufacturer to allow it to make inventory replenishment decisions.

This helps improve manufacturer forecasts and better match

manufacturer production with customer demand. VMI can allow a

manufacturer to increase profit- as well as profits for the entire

supply chain- if both retailer and manufacturer margins are

considered when making inventory decisions.


Inventories

Vendor-Managed Inventories

VMI has implemented with significant success by kmart, fred meyer,

Frito-lay, Campbell soup and P&G

Collaborative Planning, Forecasting, and

Replenishment

CPFR is “ business practice that combines the intelligence of multiple

partners in the planning and fulfillment of customer demand.”

Sellers and buyers in a supply chain may collaborate along any or all of

the following four supply chain activities:

• Execution

• Strategy and planning

• Demand and supply management

• Analysis

Example

A successful CPFR implementation has involved Henkel, a German

detergent manufacture, and Eroski, a Spanish food retailer.

Another successful implementation involved is Johnson & Johnson and

Superdrug

Example

CPFR: Indian Examples

Raheja Group’s HyperCITY


Raheja Group’s HyperCITY

HyperCITY has been among the pioneers in adopting CPFR practices

in India and synchronized the operations in more than 50 of its stores to

improve information flow and coordination through the distribution

channel.


SHOPPERS STOP


According to Arun O. Gupta, chief technology officer SHOPPERS STOP, this steps has resulted in the following benefits:

• Increase of 25-30 percent in food sales

• Decrease in 2 percent in stock levels

• Increase revenue

• Lower inventory-holding cost, positively impacting company profitability

• Higher availability of product

• Improved brand loyalty

• Elimination of expired stocks

• Reduction in write-offs

• Longer shelf life for consumption

• Assured customer retention with improved shopping experience


Godrej Group’s Godrej Consumer Products Limited


Godrej Group’s Godrej Consumer Products Limited

• Through an innovative adaption of the CPFR philosophy to Indian

conditions and naming it as CPFar, it has implemented its IT

initiative “Sampark” to obtain distributor-level inventory details on

daily basis and arrange regular replenishment. This ensures

increased customer service levels while reducing both the inventory

levels and the working capital requirement at the distributor end. At

the same time, it enables improved forecasting and production

planning at the manufacturing levels.

• The company has extended the collaborative arrangements through

backward integration with the suppliers under its project “Sahyog”.

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 entire supply chain network

• Use technology to improve connectivity in the supply chain

• Share the benefits of coordination equitably

References

• Sunil Chopra, Peter Meindl and Dharam Vir Kalra. Supply chain

management. Strategy, planning and operation. Pp: 284-304

• Wikipedia

coordination in a supply chain

Education