CHAPTER 8 – COORDINATION IN A SUPPLY CHAIN

Dung H. Nguyen
Faculty of International Economic Relations
University of Economics and Law

‹#› Het begint met een idee

 CONTENTS

 Supply chain coordination

 Bullwhip effect
 Effect of lack of coordination
 Obstacles to coordination in a supply chain
 Managerial levers to achieve coordination
 Continuous replenishment
 Vendor-managed inventory
 Collaborative planning, forecasting, and replenishment
 Coordination in practice
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collaborate -> working together -> objective Vrije Universiteit Amsterdam

coordinate -> organize activities and prople -> working well

 SUPPLY CHAIN COORDINATION

All stages of the chain are aligned to 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:
o Objectives of different stages conflict
o Information moving between stages is delayed or distorted
Objective conflict: marketing want a diverse/ customised products, but operation want to produce standardize only.

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 BULLWHIP EFFECT

Fluctuations in orders increase as they move up the supply chain from

retailers to wholesalers to manufacturers to suppliers

forrester effect:

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BULLWHIP EFFECT

Intentionally blank

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 BULLWHIP EFFECT

Manufacturer’s Orders to Wholesaler’s Orders to Retailer’s Orders to

Consumer Sales
Suppliers Manufacturers Wholesalers

Time Time Time Time

Hockey stick effect: is

characterized by a
sharp rise or fall of data points CAUSES
after a long flat period.

1. Demand forecast updating

2. Order batching
3. Price fluctuations
4. Rationing and shortage gaming
Source: Lee et al. (1997)

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- Price fluctuations: the price offer buy supplier (rebate, promotion,..), depend on marketing strategy.
- Rationing and shortage gaming: some business predict that they can shortage in supply, so thet tend to stock earlier.
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BULLWHIP EFFECT

INITIATIVES

• Information sharing
• Channel alignment
• Pricing stabilization
• Allocation based on past sales records rather than on orders.

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EFFECT OF LACK OF COORDINATION

• Manufacturing cost: increase

• Inventory cost: increase
• Lead time: increase
• Transportation cost: increase
• Labor cost for shipping and receiving: increase
• Level of product availability: decrease
• Relationships across the supply chain: loss of trust

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OBSTACLES TO COORDINATION IN A SUPPLY CHAIN

 Incentive obstacles:
o Local optimization within functions or stages of a supply chain
o Sales force incentives move sell-in --> sale - through

 Information-processing obstacles:
o Forecasting based on orders and not customer demand
o Lack of information sharing
 Operational obstacles:
o Ordering in large lots
o Large replenishment lead times
o Rationing and shortage gaming

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OBSTACLES TO COORDINATION IN A SUPPLY CHAIN

 Pricing obstacles:
o Lot-size–based quantity discounts
o Price fluctuations
 Behavioral obstacles:
o Problems in learning within organizations that contribute to information
distortion

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MANAGERIAL LEVERS TO ACHIEVE COORDINATION

 Aligning goals and incentives

 Improving information visibility and accuracy
 Improving operational performance
 Designing pricing strategies to stabilize orders
 Building strategic partnerships and trust

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ALIGNING GOALS AND INCENTIVES

 Aligning goals across the supply chain

 Aligning incentives across functions
 Pricing for coordination
 Altering sales force incentives from sell-in to sell-through

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IMPROVING INFORMATION VISIBILITY AND ACCURACY

 Sharing customer demand data

 Implementing collaborative forecasting and planning
 Designing single-stage control of replenishment

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IMPROVING OPERATIONAL PERFORMANCE

 Reducing the replenishment lead time

 Reducing lot sizes

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DESIGNING PRICING STRATEGIES TO STABILIZE ORDERS

 Moving from lot-size–based to volume-based quantity discounts

 Stabilizing pricing

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BUILDING STRATEGIC PARTNERSHIPS AND TRUST

 Actions such as information sharing, changing of incentives,

operational improvements, and stabilization of pricing typically help
improve the level of trust
 Require a clear identification of roles and decision rights for all
parties, effective contracts, and good conflict resolution mechanisms

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CONTINUOUS REPLENISHMENT

The practice of partnering between supply chain members that

changes the traditional replenishment process to the replenishment
of products based on actual data.

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VENDOR-MANAGED INVENTORY (VMI)

An approach to inventory and order fulfilment whereby the supplier,

not the customer, is responsible for managing and replenishing
inventory
 Benefits:
o Improve the forecast
o Minimize the impact of demand amplification
o Minimize inventory, but meeting the service level

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VENDOR-MANAGED INVENTORY (VMI)

 Approach:
o Agree a contract
o Share information
o Monitor the process
o Replenish inventory
o Payment
 Problems:
o Unwillingness to share data
o Investment and restructuring costs
o Retailer vulnerability
o Lack of standard procedures
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COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT (CPFR)

A business practice that combines the intelligence of multiple partners

in the planning and fulfillment of customer demand
 Cases of CPFR:
o Retail event collaboration
o DC replenishment collaboration
o Store replenishment collaboration
o Collaborative assortment planning

Source: VICS (2004)

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COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT (CPFR)

Source: Jacobs and Chase (2018)

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CPFR STEPS

1. Creation of a front-end partnership agreement

2. Joint business planning
3. Development of demand forecasts
4. Sharing forecasts
5. Inventory replenishment

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ACHIEVE 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

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 CHAPTER 8 – COORDINATION IN A SUPPLY CHAIN

THANK YOU!

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