Chapter 7: Coordination in a

Supply Chain

Assoc. Prof. Nguyen Phuc

Nguyen, Ph.D
 Lack of SC Coordination and the
Bullwhip Effect
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Supply chain coordination – all stages in the supply

chain take actions together (usually results in
greater total supply chain profits)
➢ SC coordination requires that each stage take into
account the effects of its actions on the other
stages
➢ Lack of coordination results when:
➢ Objectives of different stages conflict or
➢ Information moving between stages is distorted

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 Bullwhip Effect
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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, where different stages have very different
estimates of what demand looks like
➢ Results in a loss of supply chain coordination
➢ Examples: Proctor & Gamble (Pampers); HP
(printers); Barilla (pasta)
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Supply chain management- [Link]. Nguyen Phuc Nguyen

Demand at Different Stages

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 The Effect on Performance
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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
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Supply chain management- [Link]. Nguyen Phuc Nguyen

The Effect on Performance

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 Obstacles to Coordination in a
Supply Chain
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Incentive Obstacles
➢ Information Processing Obstacles
➢ Operational Obstacles
➢ Pricing Obstacles
➢ Behavioral Obstacles

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 Incentive Obstacles
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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 – misalignment of
total supply chain objectives and individual
objectives
➢ Local optimization within functions or stages
of a supply chain
➢ Sales force incentives
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 Information Processing Obstacles
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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, not customer
demand
✓ Forecasting demand based on orders magnifies demand
fluctuations moving up the supply chain from retailer to
manufacturer
➢ Lack of information sharing
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 Operational Obstacles
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Occure when placing and filling orders that

lead to an increase in variability
➢ Ordering in large lots (much larger than
dictated by demand)
➢ Large replenishment lead times
➢ Rationing and shortage gaming (common in
the computer industry because of periodic
cycles of component shortages and surpluses)

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Supply chain management- [Link]. Nguyen Phuc Nguyen

Operational Obstacles

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 Pricing Obstacles
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ When pricing policies for a product

lead to an increase in variability of
orders placed
➢ Lot-size based quantity decisions
➢ Price fluctuations (resulting in forward
buying)

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Supply chain management- [Link]. Nguyen Phuc Nguyen

Pricing Obstacles

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 Behavioral Obstacles
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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.
➢ 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. 14
 Managerial Levers to Achieve
Coordination
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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 Accuracy
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Sharing point of sale data

➢ Implementing collaborative forecasting and
planning
➢ Designing single-stage control of replenishment
✓ Continuous replenishment programs (CRP)
✓ Vendor managed inventory (VMI)

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 Improving Operational Performance
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Reducing replenishment lead time

✓ Reduces uncertainty in demand
✓ EDI is useful
➢ Reducing lot sizes
✓ Computer-assisted ordering, B2B exchanges
✓ Shipping in LTL sizes by combining shipments
✓ Technology and other methods to simplify receiving
✓ Changing customer ordering behavior
➢ Rationing based on past sales and sharing
information to limit gaming
✓ “Turn-and-earn”
✓ Information sharing 18
 Designing Pricing Strategies
to Stabilize Orders
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Encouraging retailers to order in smaller lots and

reduce forward buying
➢ Moving from lot size-based to volume-based
quantity discounts (consider total purchases over a
specified time period)
➢ Stabilizing pricing
✓ Eliminate promotions (everyday low pricing, EDLP)
✓ Limit quantity purchased during a promotion
✓ Tie promotion payments to sell-through rather than
amount purchased
➢ Building strategic partnerships and trust – easier to
implement these approaches if there is trust
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 Continuous Replenishment and
Vendor-Managed Inventories
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ A single point of replenishment

➢ CRP – wholesaler or manufacturer replenishes
based on POS data
➢ VMI – manufacturer or supplier is responsible for all
decisions regarding inventory
➢ Substitutes

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 Collaborative Planning, Forecasting,
and Replenishment (CPFR)
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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
➢ Retail event collaboration
➢ DC replenishment collaboration

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 Collaborative Planning, Forecasting,
and Replenishment (CPFR), cont.
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Store replenishment collaboration

➢ Collaborative assortment planning
➢ Organizational and technology requirements
for successful CPFR
➢ Risks and hurdles for a CPFR implementation

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Supply chain management- [Link]. Nguyen Phuc Nguyen

Common CPFR Scenarios

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 Collaborative Planning, Forecasting,
and Replenishment (CPFR), cont.
Supply chain management- [Link]. Nguyen Phuc Nguyen

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 Building Strategic Partnerships
and Trust in a Supply Chain
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Designing a Relationship with Cooperation and

Trust
➢ Managing Supply Chain Relationships for
Cooperation and Trust
➢ Trust-based relationship
✓ Dependability
✓ Leap of faith
➢ Cooperation and trust work because:
✓ Alignment of incentives and goals
✓ Actions to achieve coordination are easier to implement
✓ Supply chain productivity improves by reducing
duplication or allocation of effort to appropriate stage
✓ Greater information sharing results 25
 Building Trust into a
Supply Chain Relationship
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ 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
➢ Neither view holds exclusively in all situations
➢ Initially more reliance on deterrence-based view, then
evolves to a process-based view
➢ Co-identification: ideal goal
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 Designing a Relationship
with Cooperation and Trust
Supply chain management- [Link]. Nguyen Phuc Nguyen

➢ Assessing the value of the relationship and its

contributions
➢ Identifying operational roles and decision rights for
each party
➢ Creating effective contracts
➢ Designing effective conflict resolution mechanisms

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 Effects of Interdependence on
Supply Chain Relationships
Supply chain management- [Link]. Nguyen Phuc Nguyen

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