Chapter17

CoordinationintheSupplyChainSupplyChainManagement

(3rdEdition)

16-1ObjectivesDescribesupplychaincoordination,thebullwhipeffect,andtheirimpactonperformanceIdentifycausesofthebullwhipeffectandobstaclestocoordinationinthesupplychainDiscussmanagerialleversthathelpachievecoordinationinthesupplychainDescribeactionsthatfacilitatethebuildingofstrategicpartnershipsandtrustwithinthesupplychain2OutlineLackofSupplyChainCoordinationandthe

BullwhipEffectEffectofLackofCoordinationonPerformanceObstaclestoCoordinationintheSupplyChainManagerialLeverstoAchieveCoordinationBuildingStrategicPartnershipsandTrustWithin

aSupplyChainAchievingCoordinationinPractice3LackofSCCoordination

andtheBullwhipEffectSupplychaincoordination–allstagesinthesupplychaintakeactionstogether(usuallyresultsingreatertotalsupplychainprofits)SCcoordinationrequiresthateachstagetakeintoaccounttheeffectsofitsactionsontheotherstagesLackofcoordinationresultswhen:

ObjectivesofdifferentstagesconflictorInformationmovingbetweenstagesisdistorted4BullwhipEffectFluctuationsinordersincreaseastheymoveupthesupplychainfromretailerstowholesalerstomanufacturerstosuppliers(showninFigure16.1)Distortsdemandinformationwithinthesupplychain,wheredifferentstageshaveverydifferentestimatesofwhatdemandlookslikeResultsinalossofsupplychaincoordinationExamples:Proctor&Gamble(Pampers);HP(printers);Barilla(pasta)5TheEffectofLackof

CoordinationonPerformanceManufacturingcost(increases)Inventorycost(increases)Replenishmentleadtime(increases)Transportationcost(increases)Laborcostforshippingandreceiving(increases)Levelofproductavailability(decreases)Relationshipsacrossthesupplychain(worsens)Profitability(decreases)Thebullwhipeffectreducessupplychainprofitabilitybymakingitmoreexpensivetoprovideagivenlevelofproductavailability6ObstaclestoCoordination

inaSupplyChainIncentiveObstaclesInformationProcessingObstaclesOperationalObstaclesPricingObstaclesBehavioralObstacles7IncentiveObstaclesWhenincentivesofferedtodifferentstagesorparticipantsinasupplychainleadtoactionsthatincreasevariabilityandreducetotalsupplychainprofits–misalignmentoftotalsupplychainobjectivesandindividualobjectivesLocaloptimizationwithinfunctionsorstagesofasupplychainSalesforceincentives8InformationProcessingObstaclesWhendemandinformationisdistortedasitmovesbetweendifferentstagesofthesupplychain,leadingtoincreasedvariabilityinorderswithinthesupplychainForecastingbasedonorders,notcustomerdemandForecastingdemandbasedonordersmagnifiesdemandfluctuationsmovingupthesupplychainfromretailertomanufacturerLackofinformationsharing9OperationalObstaclesActionstakeninthecourseofplacingandfillingordersthatleadtoanincreaseinvariabilityOrderinginlargelots(muchlargerthandictatedbydemand)–Figure17.2LargereplenishmentleadtimesRationingandshortagegaming(commoninthecomputerindustrybecauseofperiodiccyclesofcomponentshortagesandsurpluses)10PricingObstaclesWhenpricingpoliciesforaproductleadtoanincreaseinvariabilityofordersplacedLot-sizebasedquantitydecisionsPricefluctuations(resultinginforwardbuying)–Figure17.311BehavioralObstaclesProblemsinlearning,oftenrelatedtocommunicationinthesupplychainandhowthesupplychainisstructuredEachstageofthesupplychainviewsitsactionslocallyandisunabletoseetheimpactofitsactionsonotherstagesDifferentstagesreacttothecurrentlocalsituationratherthantryingtoidentifytherootcausesBasedonlocalanalysis,differentstagesblameeachotherforthefluctuations,withsuccessivestagesbecomingenemiesratherthanpartnersNostagelearnsfromitsactionsovertimebecausethemostsignificantconsequencesoftheactionsofanyonestageoccurelsewhere,resultinginaviciouscycleofactionsandblameLackoftrustresultsinopportunism,duplicationofeffort,andlackofinformationsharing12ManagerialLeversto

AchieveCoordinationAligningGoalsandIncentivesImprovingInformationAccuracyImprovingOperationalPerformanceDesigningPricingStrategiestoStabilizeOrdersBuildingStrategicPartnershipsandTrust13AligningGoalsandIncentivesAlignincentivessothateachparticipanthasanincentivetodothethingsthatwillmaximizetotalsupplychainprofitsAlignincentivesacrossfunctionsPricingforcoordinationAltersalesforceincentivesfromsell-in(totheretailer)tosell-through(bytheretailer)14ImprovingInformationAccuracySharingpointofsaledataCollaborativeforecastingandplanningSinglestagecontrolofreplenishmentContinuousreplenishmentprograms(CRP)Vendormanagedinventory(VMI)15ImprovingOperationalPerformanceReducingreplenishmentleadtimeReducesuncertaintyindemandEDIisusefulReducinglotsizesComputer-assistedordering,B2BexchangesShippinginLTLsizesbycombiningshipmentsTechnologyandothermethodstosimplifyreceivingChangingcustomerorderingbehaviorRationingbasedonpastsalesandsharinginformationtolimitgaming“Turn-and-earn”Informationsharing16DesigningPricingStrategies

toStabilizeOrdersEncouragingretailerstoorderinsmallerlotsandreduceforwardbuyingMovingfromlotsize-basedtovolume-basedquantitydiscounts(considertotalpurchasesoveraspecifiedtimeperiod)StabilizingpricingEliminatepromotions(everydaylowpricing,EDLP)LimitquantitypurchasedduringapromotionTiepromotionpaymentstosell-throughratherthanamountpurchasedBuildingstrategicpartnershipsandtrust–easiertoimplementtheseapproachesifthereistrust17BuildingStrategicPartnershipsandTrustinaSupplyChainBackgroundDesigningaRelationshipwithCooperationandTrustManagingSupplyChainRelationshipsforCooperationandTrust18BuildingStrategicPartnershipsandTrustinaSupplyChainTrust-basedrelationshipDependabilityLeapoffaithCooperationandtrustworkbecause:AlignmentofincentivesandgoalsActionstoachievecoordinationareeasiertoimplementSupplychainproductivityimprovesbyreducingduplicationorallocationofefforttoappropriatestageGreaterinformationsharingresults19TrustintheSupplyChainTable17.2showsbenefitsHistorically,supplychainrelationshipsarebasedonpowerortrustDisadvantagesofpower-basedrelationship:Resultsinonestagemaximizingprofits,oftenattheexpenseofotherstagesCanhurtacompanywhenbalanceofpowerchangesLesspowerfulstageshavesoughtwaystoresist20BuildingTrustintoa

SupplyChainRelationshipDeterrence-basedviewUseformalcontractsPartiesbehaveintrustingmanneroutofself-interestProcess-basedviewTrustandcooperationarebuiltupovertimeasaresultofaseriesofinteractionsPositiveinteractionsstrengthenthebeliefincooperationofotherpartyNeitherviewholdsexclusivelyinallsituations21BuildingTrustintoa

SupplyChainRelationshipInitiallymorerelianceondeterrence-basedview,thenevolvestoaprocess-basedviewCo-identification:idealgoalTwophasestoasupplychainrelationshipDesignphaseManagementphase22DesigningaRelationship

withCooperationandTrustAssessingthevalueoftherelationshipanditscontributionsIdentifyingoperationalrolesanddecisionrightsforeachpartyCreatingeffectivecontractsDesigningeffectiveconflictresolutionmechanisms23AssessingtheValueoftheRelationshipanditsContributionsIdentifythemutualbenefitprovidedIdentifythecriteriausedtoevaluatetherelationship(equityisimportant)ImportanttosharebenefitsequitablyClarifycontributionofeachpartyandthebenefitseachpartywillreceive24IdentifyingOperationalRolesandDecisionRightsforEachPartyRecognizeinterdependencebetweenpartiesSequentialinterdependence:activitiesofonepartnerprecedetheotherReciprocalinterdependence:thepartiescometogether,exchangeinformationandinputsinbothdirectionsSequentialinterdependenceisthetraditionalsupplychainformReciprocalinterdependenceismoredifficultbutcanresultinmorebenefitsFigure17.425EffectsofInterdependenceonSupplyChainRelationships(Figure17.4)Organization’sDependenceHighLowPartner’sDependenceLowHighPartnerRelativelyPowerfulOrganizationRelativelyPowerfulHighLevelofInterdependenceEffectiveRelationshipLowLevelofInterdependence26CreatingEffectiveContractsCreatecontractsthatencouragenegotiationwhenunplannedcontingenciesariseItisimpossibletodefineandplanforeverypossibleoccurrenceInformalrelationshipsandagreementscanfillinthe“gaps”incontractsInformalarrangementsmayeventuallybeformalizedinlatercontracts27DesigningEffectiveConflictResolutionMechanismsInitialformalspecificationofrulesandguidelinesforproceduresandtransactionsRegular,frequentmeetingstopromotecommunicationCourtsorotherintermediaries28ManagingSupplyChainRelationshipsforCooperationandTrustEffectivemanagementofarelationshipisimportantf