Supply Chain Coordination

Supply chain coordination

• All stages of the chain take actions that are aligned and increase total supply chain surplus
• Each stage needs to share information and take into account the effects of its actions on the other stages

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When does a lack of coordination result?

• Objectives of different stages conflict (they think they’re competing)

• Information moving between stages is delayed or distorted

The Bullwhip Effect

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• Results from a loss of supply chain coordination
• Fluctuations in orders (variability) increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers (thus, the planning becomes more difficult)
• Distorts demand information within the supply chain

How did the name “bullwhip” come about?

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e.g. P&G diapers

Impact of lack of coordination on various performance measures

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Why don’t we have coordination in SC’s?

• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles

Incentive obstacles

Occur when incentives offered to participants in a supply chain lead to actions that reduce total supply chain profits

• Local optimization within functions or stages
• Salesforce incentives

Local optimization within functions or stages

Incentives that focus on the local impact of an action

*Could be a trap – lead to increased inventory, for example

Example: compensation of a transportation manager is linked to the average transportation cost per unit

Salesforce incentives

Based on exceeding sales thresholds during an evaluation period

Sales for a manufacturer measured based on the quantity sold to distributors or retailers (sell‐in), not the quantity sold to final customers (sell‐through)

Sales Force Incentives Gone Wrong (at Barilla)

Barilla offered its sales force incentives based on the quantity sold to distributors during a 4-6 week period. Barilla sales force urged distributors to buy more pasta toward the end of the evaluation period by offering discounts. Distributors were not selling as much to retailers. Order sizes from distributors fluctuated by a factor of 70 from one week to the next.

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Information‐Processing Obstacles

When demand information is distorted as it moves between different stages of the supply chain

• Forecasting based on orders and not customer demand
• Lack of information sharing

Forecasting based on orders and not customer demand

Retailers are in direct touch with the customer; manufacturers get data from orders.

Example: Because of a random spike in demand, the retailer becomes optimistic and order more than the observed spike. The wholesaler only observes the exaggerated order and cannot see the reason for retailer’s (false) optimism.

Lack of information sharing

Example: retailer plans a promotion and increases the size of its order; however, the supplier is not aware of the promotion and interprets that as a permanent increase in demand.

Operational Obstacles

Occur when actions taken in the course of placing and filling orders lead to an increase in variability

• Ordering in large lots
• Large replenishment lead times
• Rationing and shortage gaming

Ordering in large lots

Firms may order in large lots because a significant fixed cost is associated with placing, receiving, or transporting an order

This leads to increased variability

Synchronization of orders further exaggerates the impact of batching

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Large replenishment lead times

Example: a retailer has misinterpreted a random increase in demand as a growth trend; a longer lead time magnifies the impact of this misinterpretation

Rationing and shortage gaming

Rationing schemes that allocate limited production in proportion to the orders placed by retailers

Example: If supply is short by 25%, each retailer receives 75% of its order. As a result, retailers inflate their orders to increase the amount supplied to them. For example, they might order 150 since they know they really need 100. This distorts the manufacturer’s forecast.

Pricing Obstacles

When pricing policies for a product lead to an increase in variability of orders placed

• Lot‐size‐based quantity discounts
• Price fluctuations

Lot‐size‐based quantity discounts

Result in ordering in large lots

Increased variability

Price fluctuations

Trade Promotions and other short‐term discounts offered by a manufacturer result in forward buying by retailers or distributors (demand goes up then down)

Example: Campbell’s Chicken Noodle Soup over a one year period

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Behavioral Obstacles

Each stage of the supply chain…

• Is unable to see the impact of its actions on other stages
• Reacts to the current local situation rather than trying to identify the root causes
• Blames other stages for the fluctuations
• Does not learn from its actions over time because the consequences occur elsewhere
• Does not trust other stages

*Don’t see the challenges other groups face!

Managerial Levers to Achieve Coordination

• Aligning goals and incentives
• Improving information accuracy
• Improving operational performance
• Designing pricing strategies to stabilize orders
• Building strategic partnerships and trust

Aligning Goals and Incentives

• Aligning goals across the supply chain
• Aligning incentives across functions
• Altering sales force incentives from sell‐in (to the retailer) to sell‐through (by the retailer)

Aligning goals across the supply chain