SC Co Ordination- Supply Chai Management

7/27/2019 SC Co Ordination- Supply Chai Management

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2007 Pearson Education 16-1

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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2007 Pearson Education

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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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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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.





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





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



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)




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



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







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



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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SC Co Ordination- Supply Chai Management