SC Co Ordination- Supply Chai Management

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    Chapter 17

    Coordination in the Supply Chain

    Supply Chain Management

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    Supply Chain Coordination

    Supply Chain Coordination happens when all stages in the

    supply chain take actions collectively resulting in higher total

    supply chain profitability

    Supply chain coordination requires that each stage takes intoaccount the effects of its actions on the other stages

    Lack of coordination results when:

    Objectives of different stages conflict

    Information flow between stages is delayed and distorted

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    Bullwhip Effect

    Bullwhip Effect (or Whiplash effect):

    Fluctuations in orders increase as they move up the supply chain fromretailers to wholesalers to manufacturers to suppliers

    Uncertain demand information within the supply chain where each stage hasdifferent demand estimates (addition of buffers) and results in loss of supplychain coordination

    Happens due to customer demand fluctuations and inaccurate forecasts

    Example: Effect on Textile industry in 2004-2006

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    The Effect of lack of coordination (Bullwhip effect)

    on supply chain performance

    Manufacturing cost increasesIncreased demand variability leads to buildingexcess capacity or higher inventory thereby increasing manufacturing cost

    Inventory cost increasesHigher inventory levels lead to higher inventoryholding costs

    Warehousing cost increases -Higher inventory levels increase warehousingspace required thereby increasing warehousing cost

    Replenishment lead time increases -High demand variability makes productionscheduling and inventory planning difficult which increases replenishment lead

    time

    Transportation cost increasesSince the demand varies, transportationrequirements also fluctuate which increases transportation cost

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    The Effect of lack of coordination (Bullwhip effect)

    on supply chain performance continued

    Labour cost for shipping and receiving increasesDemandfluctuations lead to variation in labour requirements which increaseslabour cost

    Level of product availability decreasesHigh demand variabilitymakes product supply on time difficult and may result in stock outs

    Relationships across the supply chain worsensPoor performance atevery stage impacts the interaction between stages negatively

    Profitability decreasesReduced supply chain profitability as its moreexpensive to provide a given level of product availability

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    Obstacles to Coordination

    in a Supply Chain

    Incentive Obstacles:

    Happens when incentives offered to different stages in a supply chain

    increase variability and reduce total supply chain profits

    Local optimization within functions or stages of a supply chain:

    Logistics department will aim at reducing transport cost even

    though it would increase inventory cost or impact customer service

    Sales force incentivesIncentives are based on quantities sold to

    distributors or retailers (Sell-In) and not on quantities sold to end

    consumers (Sell-Through). This leads to order fluctuations

    especially during promotions or special offers.

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    Obstacles to Coordination

    in a Supply Chain continued

    Information Processing Obstacles:

    Occurs when demand information is unclear between different stages of thesupply chain leading to increased order variation

    Forecasting based on orders, not actual customer demand: Example: A random increase in customer demand at Big Bazaar would

    lead to placing high orders with manufacturer. The manufacturer placeseven higher orders with supplier (assuming it as a growth trend).

    This will lead to build-up of inventories at each stage.

    Lack of information sharing: Example: A Levis store increases orders of a particular product category

    due to a special promotion. If the manufacturer is not aware of thispromotion, they might presume a growth trend and place higher orderswith suppliers as a result.

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    Obstacles to Coordination

    in a Supply Chain continued

    Operational obstacles: Happens when actions taken during placing and filling orders lead to an increase

    in variability

    Ordering in large lotsExample: MegaMart orders lot sizes for belts much larger

    than what is essentially required in order to utilize economies of scale.

    Large replenishment lead times -Example: Shoppers Stop have a lead time of 15

    days for luxury watches and have misjudged a random increase as a steady growth

    trend. They will include anticipated growth over 15 days into its orders leading to an

    inventory overload.

    Rationing and shortage gaming -Rationing schemes that allocate limitedproduction in proportion to orders placed by retailers. Especially done for high-

    demand products which are in short supply. Retailers will place higher orders than

    what is actually required to increase the amount supplied to them.

    Example: For Lenovo, due to alternate phases of memory chip shortages and

    surpluses, inventory level fluctuations have a massive impact.

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    Obstacles to Coordination

    in a Supply Chain continued

    Pricing obstacles:

    Occurs when pricing policies for a product lead to an increase in

    variability of orders placed

    Lot-size based quantity decisions Quantity discounts based on

    economies of scale increases lot size of orders which raises the

    variability up the supply chain

    Price fluctuations Trade promotions and other short-term

    discounts offered by a manufacturer lead to wholesaler/retailer

    buying large quantities which covers even future demand. This

    results in higher production and shipments during promotions

    followed by a sudden decrease thereafter.

    Example: HULs trade promotion for Surf Excel at Big Bazaar

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    Obstacles to Coordination

    in a Supply Chain continued

    Behavioral Obstacles:

    Related to problems in learning, communication between the supply

    chain stages and how the supply chain is structured

    Each stage of the supply chain views only its own actions and doesnot observe the impact of its actions on other stages

    Different stages blame each other for the fluctuations, rather thantrying to identify the root causes and learning from errors

    Lack of trust results in selfish opportunism, duplication of effort andinadequate information sharing

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    Managerial Levers to Achieve

    Coordination

    Aligning Goals and Incentives:

    Align goals and incentives so that each participant works towards

    maximizing total supply chain profits

    Align incentives across functionsAll facility, transportation andinventory decisions must be evaluated based on their effect on overall

    profitability

    Pricing for coordination Use lot size based discounts and suitable

    contracts to ensure product availability throughout the supply chain

    Alter sales force incentives -From Sell-In (sale by manufacturer to retailer)

    to Sell-Through (sale by retailer to end consumer)

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    Managerial Levers to Achieve

    Coordination continued

    Improving Information Accuracy:

    Sharing POS data Shared POS data across the supply chain

    means each stage will forecast demand based on actual sales

    data

    Collaborative forecasting and planningEach stage must

    forecast and plan jointly so that complete benefits of POS data

    can be realized

    Single stage control of replenishment - Since key

    replenishment happens at the retailer, only this data must be

    considered for replenishment across the supply chain

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    Improving Operational Performance:

    Reducing replenishment lead time:

    Reduces uncertainty in demand because multiple orders can be placed with higheraccuracy of forecasts

    Orders through Internet (E-commerce), Flexible manufacturing, Advance ShippingNotice (ASN), Cross-docking techniques can significantly reduce lead times

    Reducing lot sizes:

    Reduces amount of fluctuations between any 2 stages

    Computer-assisted ordering reduces fixed ordering costs

    TL shipping by combining shipments of a variety of products 7-Eleven combinestemperature dependent products into a TL ; Milk Runs

    Changing customer ordering to ensure evenly distributed orders over time

    Rationing based on past sales and sharing information:

    Turn-and-Earn Allocate stock based on past actual retailer sales rather than currentorders. Example - Automobile industry

    Information sharing.Example - Retailers' Pre-ordering in Puma and Reebok

    Managerial Levers to Achieve

    Coordination continued

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    Managerial Levers to Achieve

    Coordination continued

    Designing Pricing Strategies to Stabilize Orders:

    Moving from Lot-size based to Volume based quantity discounts:

    Since Volume-based quantity discounts consider total purchases over aspecific time-frame rather than a single lot, this ensures smaller lot sizes

    Stabilizing pricing:Attempt to eliminate promotions and implement EDLP

    Limit quantity purchased during a promotion

    Tie promotion payments to Sell-Through rather than Sell-In

    Building strategic partnerships and trust:

    Easier to implement these approaches if there is trust

    Sharing of accurate information results in better matching of supply

    and demand

    Avoids duplicated efforts and leads to lower overall costs

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    Continuous Replenishment Program (CRP)

    Bullwhip effect can be reduced by assigning replenishment responsibility to a single

    entity

    Single point of replenishment decisions ensures visibility and a common forecast

    across the supply chain

    Continuous Replenishment Program (CRP):

    Based on Pull process

    Wholesaler or Manufacturer replenishes a retailer regularly based on POS data or

    inventory consumption from retailer warehouse

    IT systems linked across the supply chain provides the information infrastructure

    Inventory at retailer is owned by the retailer

    Advantages Reduces inventory levels, decreased stock-outs, improves customer

    service levels, higher warehouse efficiency

    Examples: Wal-Mart, Dell, Hyper City retail

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    Vendor-Managed Inventory (VMI)

    Vendor-Managed Inventory (VMI) is an integrated approach where inventory at the

    distributor/retailer is monitored and managed by the manufacturer/supplier

    Control of replenishment decision moves to Manufacturer instead of Retailer

    In many instances, inventory is owned by supplier/manufacturer until its sold by retailer

    Requires retailer to share customer demand information with manufacturer for making

    inventory replenishment decisions

    Example: Wal-Mart and P&G - Have a VMI program for over 10 years

    Customer Service levels increased significantly

    Turnover doubled

    Wal-Marts operating costs reduced drastically

    P&Gs market share grew (because Wal-Mart gave it preferred shelf space)

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    Collaborative Planning, Forecasting

    and Replenishment (CPFR)

    A business practice in which buyer and supplier integrate plans, forecasts

    and delivery schedules to ensure smooth flow of products across the supply

    chain

    Examples: Sears and Michelin tyres ; Wal-Mart and P&G have collaboration

    for the following activities:

    Strategy and Planning Overall scope of the collaboration, responsibilities,

    identify product promotions, new product launches and store openings/closings.

    Demand and Supply management Sales forecasting, future product ordering,

    inventory levels and replenishment lead times.

    Execution Receipt of Actual orders and Order Fulfillment through production,

    shipping, receiving and stocking products.

    Analysis Identifying exceptions (gap in forecasts), assessing performance and past

    trends.

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