Chapter 4

Supply Chain Coordination and Inventory

Efficiency
Chapter outline

Obstacles to
Bullwhip Effect
Coordination

Managerial Levers to Achieving Coordination

Achieve Coordination in Practice
 Supply chain coordination

• All stages take actions that aligned and

increase total supply chain surplus
• Each stage shares information's and take
into account that affects into its action on
the other stage
Lack of coordination results when
• Objectives of different stages conflict
• Information between stages is delayed or
distorted
 Bullwhip effect

• Bullwhip effect; Is the outcome of lack of

coordination.
• 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.
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
 The effect Lack of Coordination on
Performance
• 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.
True and
False
Obstacles to
Coordination in a Supply
Chain

1. Information Procession
Obstacles
2. Operational Obstacles
3. Pricing Obstacles
4. Incentive Obstacles
5. Béhavioral Obstacles
 1. 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
• When placing and filling orders lead
to an increase in variability
i. Ordering in large lots
ii. Large replenishment lead times
iii. Rationing and shortage gaming
 Brain-Storming
Suppose you are a supply chain manager at a major electronics
retailer. Your store has experienced sudden fluctuations in
customer demand for a popular smartphone model.
Recently, you started placing larger orders than needed, fearing
that the supplier might not deliver everything due to limited
stock.
• Meanwhile, your supplier starts facing inventory issues and
production inefficiencies due to inconsistent order patterns.
[Link] type of supply chain behavior is shown in this scenario?
[Link] does this behavior affect different players in the supply chain
(e.g Supplier, distributor, manufacturer)
Brain- storming………….
3. What are the long-term
consequences of such order
fluctuations on cost, inventory,
and customer satisfaction?
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.
 4. 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
 BEHAVIORAL OBSTACLES

• 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.
• 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.
 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
 1. 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).
 2. Improving Information Accuracy
• Sharing point of sale data.
• Collaborative forecasting and planning.
• Designing single stage of
replenishment
• Continuous replenishment
programs.
• Vendor managed inventory
(VMI).
3. Improving Operational Performance
• Reducing replenishment
lead time
• Reducing lot size
• Rationing based on past
sales and sharing
information to limit gaming
 Continues,,
4. Designing Pricing Strategies to
Stabilize Orders
• Stabilizing pricing
• Eliminate promotion
5. Building Strategic Partnerships and
Trust
▪ Managing Supply Chain Relationships for
Cooperation and Trust.
▪ Alignment of incentives and goals.
▪ Actions to achieve coordination are easier
to implement.
▪ Greater information sharing results.
Building Strategic Partnerships in a Supply
Chain
Building Strategic Partnerships in a Supply Chain requires.

A. Trust-based B. Cooperation
relationship
 Achieving Coordination
in Practice

1. Get top management

commitment for coordination
2. Devote resources to
coordination:
3. Use technology to improve
connectivity in the supply
chain