Coordinationin supply chains

Manufacturing cost (increases)Manufacturing cost (increases)

Inventory cost (increases)Inventory cost (increases)

Replenishment lead time (increases)Replenishment lead time (increases)

Transportation cost (increases)Transportation cost (increases)

Labor cost for shipping and receiving (increases)Labor cost for shipping and receiving (increases)

Level of product availability (decreases)Level of product availability (decreases)

Relationships across the supply chain (worsens)Relationships across the supply chain (worsens)

Profitability (decreases)Profitability (decreases)

The bullwhip effect reduces supply chain profitability by making it more The bullwhip effect reduces supply chain profitability by making it more expensive to provide a given level of product availabilityexpensive to provide a given level of product availability

The EffectEffect of Lack of Coordination on PerformanceThe EffectEffect of Lack of Coordination on Performance

Obstacles to Coordination in a Supply ChainObstacles to Coordination in a Supply Chain

• Incentive ObstaclesIncentive Obstacles

• Information Processing ObstaclesInformation Processing Obstacles

• Operational ObstaclesOperational Obstacles

• Pricing ObstaclesPricing Obstacles

• Behavioral ObstaclesBehavioral Obstacles

Incentive ObstaclesIncentive Obstacles

When incentives offered to different When incentives offered to different stages or participants in a supply chain stages or participants in a supply chain lead to actions that increase variability lead to actions that increase variability and reduce total supply chain profits – and reduce total supply chain profits – misalignment of total supply chain misalignment of total supply chain objectives and individual objectivesobjectives and individual objectives

Local optimization within functions or Local optimization within functions or stages of a supply chainstages of a supply chain

Sales force incentivesSales force incentives

Contributing factorsContributing factors Incentives based on sell-in Incentives based on sell-in

leading to forward buyleading to forward buy Counter MeasuresCounter Measures

Focus sales force on Focus sales force on increasing sell-thruincreasing sell-thru

Incentives based on rolling Incentives based on rolling horizonhorizon

Sales force do not compete Sales force do not compete with each other but with the with each other but with the competitioncompetition

Information Processing Obstacles When demand information is distorted When demand information is distorted

as it moves between different stages of as it moves between different stages of the supply chain, leading to increased the supply chain, leading to increased variability in orders within the supply variability in orders within the supply chainchain

Forecasting based on orders, not Forecasting based on orders, not customer demandcustomer demand

Forecasting demand based on orders Forecasting demand based on orders magnifies demand fluctuations magnifies demand fluctuations moving up the supply chain from moving up the supply chain from retailer to manufacturerretailer to manufacturer

Lack of information sharingLack of information sharing

Contributing factorsContributing factors No visibility of end demandNo visibility of end demand Multiple forecastsMultiple forecasts Long lead-timeLong lead-time

Counter MeasuresCounter Measures Access sell-thru or POS dataAccess sell-thru or POS data Direct sales (natural on web)Direct sales (natural on web) Single control of replenishmentSingle control of replenishment Leadtime reductionLeadtime reduction

StateState of Practiceof Practice Sell-thru data in contracts (e.g., HP, Sell-thru data in contracts (e.g., HP,

Apple, IBM)Apple, IBM) CFAR, CPFR, CRP, VMI (P&G and CFAR, CPFR, CRP, VMI (P&G and

Walmart)Walmart) Quick Response Mfg. StrategyQuick Response Mfg. Strategy

Operational Obstacles (Batching)Operational Obstacles (Batching) Actions taken in the course of placing Actions taken in the course of placing

and filling orders that lead to an and filling orders that lead to an increase in variabilityincrease in variability

Ordering in large lots (much larger Ordering in large lots (much larger than dictated by demand)than dictated by demand)

Large replenishment lead timesLarge replenishment lead times

Rationing and shortage gaming Rationing and shortage gaming (common in the computer industry (common in the computer industry because of periodic cycles of because of periodic cycles of component shortages and surpluses)component shortages and surpluses)

Contributing factorsContributing factors High Order CostHigh Order Cost Full TL economiesFull TL economies Random or correlated orderingRandom or correlated ordering

Counter MeasuresCounter Measures EDI & Computer Assisted Ordering EDI & Computer Assisted Ordering

(CAO)(CAO) Discounted on Assorted Truckload, Discounted on Assorted Truckload,

consolidated by 3rd party logisticsconsolidated by 3rd party logistics Regular delivery appointmentRegular delivery appointment Volume and not lot size discountsVolume and not lot size discounts

StateState of Practiceof Practice McKesson, Nabisco, ...McKesson, Nabisco, ... 3rd party logistics in Europe, 3rd party logistics in Europe,

emerging in the U.S.emerging in the U.S. P & GP & G

Operational Obstacles (Rationing Gaming)Operational Obstacles (Rationing Gaming)

Contributing factorsContributing factors Proportional rationing schemeProportional rationing scheme Ignorance of supply conditionsIgnorance of supply conditions Unrestricted orders & free return policyUnrestricted orders & free return policy

Counter MeasuresCounter Measures Allocation based on past sales.Allocation based on past sales. Shared Capacity and Supply InformationShared Capacity and Supply Information Flexibility Limited over time, capacity reservationFlexibility Limited over time, capacity reservation

StateState of Practiceof Practice Saturn, HPSaturn, HP Schedule Sharing (HP with TI and Motorola)Schedule Sharing (HP with TI and Motorola) HP, Sun, SeagateHP, Sun, Seagate

Pricing Obstacles

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

Lot-size based quantity Lot-size based quantity decisionsdecisions

Price fluctuations (resulting Price fluctuations (resulting in forward buying)in forward buying)

Contributing factorsContributing factors High-Low Pricing leading to High-Low Pricing leading to

forward buyforward buy Delivery and Purchase not Delivery and Purchase not

synchronizedsynchronized

Counter MeasuresCounter Measures EDLPEDLP Limited purchase quantitiesLimited purchase quantities Scan based promotionsScan based promotions

StateState of Practiceof Practice P&G (resisted by some retailers)P&G (resisted by some retailers) Scan based promotionScan based promotion

Behavioral Obstacles Problems in learning, often related to Problems in learning, often related to

communication in the supply chain and how the communication in the supply chain and how the supply chain is structuredsupply chain is structured

Each stage of the supply chain views its actions Each stage of the supply chain views its actions locally and is unable to see the impact of its locally and is unable to see the impact of its actions on other stagesactions on other stages

Different stages react to the current local Different stages react to the current local situation rather than trying to identify the root situation rather than trying to identify the root causescauses

Based on local analysis, different stages blame Based on local analysis, different stages blame each other for the fluctuations, with successive each other for the fluctuations, with successive stages becoming enemies rather than partnersstages becoming enemies rather than partners

No stage learns from its actions over time No stage learns from its actions over time because the most significant consequences of because the most significant consequences of the actions of any one stage occur elsewhere, the actions of any one stage occur elsewhere, resulting in a vicious cycle of actions and blameresulting in a vicious cycle of actions and blame

Lack of trust results in opportunism, duplication Lack of trust results in opportunism, duplication of effort, and lack of information sharingof effort, and lack of information sharing

Contributing factorsContributing factors

Lack of trustLack of trust

Local reactionLocal reaction

Counter MeasuresCounter Measures

Building trust and partnershipBuilding trust and partnership

StateState of Practiceof Practice

Wal-Mart and P&G with CPFRWal-Mart and P&G with CPFR

Managerial Levers to Achieve CoordinationManagerial Levers to Achieve Coordination

• Aligning Goals and IncentivesAligning Goals and Incentives

• Improving Information AccuracyImproving Information Accuracy

• Improving Operational PerformanceImproving Operational Performance

• Designing Pricing Strategies to Stabilize OrdersDesigning Pricing Strategies to Stabilize Orders

• Building Strategic Partnerships and TrustBuilding Strategic Partnerships and Trust

Aligning Goals and Incentives

Align incentives so that each participant has an incentive to do Align incentives so that each participant has an incentive to do the things that will maximize total supply chain profitsthe things that will maximize total supply chain profits

Align incentives across functionsAlign incentives across functions

Pricing for coordinationPricing for coordination

Alter sales force incentives from sell-in (to the retailer) to sell-Alter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer)through (by the retailer)

Improving Information Accuracy

Sharing point of sale dataSharing point of sale data

Collaborative forecasting and planningCollaborative forecasting and planning

Single stage control of replenishmentSingle stage control of replenishment

Continuous replenishment programs (CRP)Continuous replenishment programs (CRP)

Vendor managed inventory (VMI)Vendor managed inventory (VMI)

Improving Operational Performance

Reducing replenishment lead timeReducing replenishment lead time Reduces uncertainty in demandReduces uncertainty in demand

EDI is usefulEDI is useful

Reducing lot sizesReducing lot sizes Computer-assisted ordering, B2B exchangesComputer-assisted ordering, B2B exchanges

Shipping in LTL sizes by combining shipmentsShipping in LTL sizes by combining shipments

Technology and other methods to simplify receivingTechnology and other methods to simplify receiving

Changing customer ordering behaviorChanging customer ordering behavior

Rationing based on past sales and sharing information to limit gamingRationing based on past sales and sharing information to limit gaming ““Turn-and-earn”Turn-and-earn”

Information sharingInformation sharing

Designing Pricing Strategies to Stabilize Orders Encouraging retailers to order in smaller lots and reduce forward buyingEncouraging retailers to order in smaller lots and reduce forward buying

Moving from lot size-based to volume-based quantity discounts (consider total purchases Moving from lot size-based to volume-based quantity discounts (consider total purchases over a specified time period)over a specified time period)

Stabilizing pricingStabilizing pricing

Eliminate promotions (everyday low pricing, EDLP)Eliminate promotions (everyday low pricing, EDLP)

Limit quantity purchased during a promotionLimit quantity purchased during a promotion

Tie promotion payments to sell-through rather than amount purchasedTie promotion payments to sell-through rather than amount purchased

Building strategic partnerships and trust – easier to implement these approaches if there is Building strategic partnerships and trust – easier to implement these approaches if there is trusttrust

Supply Chain RelationshipBuilding Strategic Partnerships and Trust in a Supply Chain

Designing a Relationship with Cooperation and TrustDesigning a Relationship with Cooperation and Trust

Managing Supply Chain Relationships for Cooperation and Managing Supply Chain Relationships for Cooperation and TrustTrust

Building Strategic Partnerships and Trust in a Supply Chain

Trust-based relationshipTrust-based relationship

DependabilityDependability

Leap of faithLeap of faith

Cooperation and trust work because:Cooperation and trust work because:

Alignment of incentives and goalsAlignment of incentives and goals

Actions to achieve coordination are easier to implementActions to achieve coordination are easier to implement

Supply chain productivity improves by reducing duplication or allocation of effort to appropriate stageSupply chain productivity improves by reducing duplication or allocation of effort to appropriate stage

Greater information sharing resultsGreater information sharing results

Trust in the Supply Chain

Historically, supply chain relationships are based on Historically, supply chain relationships are based on powerpower or or trusttrust

Disadvantages of power-based relationship:Disadvantages of power-based relationship:

Results in one stage maximizing profits, often at the expense of other stagesResults in one stage maximizing profits, often at the expense of other stages

Can hurt a company when balance of power changesCan hurt a company when balance of power changes

Less powerful stages have sought ways to resistLess powerful stages have sought ways to resist

Building Trust into a Supply Chain Relationship Deterrence-based viewDeterrence-based view

Use formal contractsUse formal contracts

Parties behave in trusting manner out of self-interestParties behave in trusting manner out of self-interest

Process-based viewProcess-based view

Trust and cooperation are built up over time as a result of a series of interactionsTrust and cooperation are built up over time as a result of a series of interactions

Positive interactions strengthen the belief in cooperation of other partyPositive interactions strengthen the belief in cooperation of other party

Neither view holds exclusively in all situationsNeither view holds exclusively in all situations

Building Trust into a Supply Chain Relationship

Initially more reliance on deterrence-based view, then evolves to a Initially more reliance on deterrence-based view, then evolves to a process-based viewprocess-based view

Co-identification: ideal goalCo-identification: ideal goal

Two phases to a supply chain relationshipTwo phases to a supply chain relationship

Design phaseDesign phase

Management phaseManagement phase

Designing a Relationship with Cooperation Designing a Relationship with Cooperation and Trustand Trust

• Assessing the value of the relationship and its contributionsAssessing the value of the relationship and its contributions

• Identifying operational roles and decision rights for each Identifying operational roles and decision rights for each partyparty

• Creating effective contractsCreating effective contracts

• Designing effective conflict resolution mechanismsDesigning effective conflict resolution mechanisms

Assessing the Value of the Relationship and its Contributions

Identify the mutual benefit providedIdentify the mutual benefit provided

Identify the criteria used to evaluate the relationship (equity Identify the criteria used to evaluate the relationship (equity is important)is important)

Important to share benefits equitablyImportant to share benefits equitably

Clarify contribution of each party and the benefits each Clarify contribution of each party and the benefits each party will receiveparty will receive

Identifying Operational Roles and Decision Rights for Each Party

Recognize interdependence between partiesRecognize interdependence between parties

Sequential interdependenceSequential interdependence: activities of one partner precede the other: activities of one partner precede the other

Reciprocal interdependenceReciprocal interdependence: the parties come together, exchange information and : the parties come together, exchange information and inputs in both directionsinputs in both directions

Sequential interdependence is the traditional supply chain formSequential interdependence is the traditional supply chain form

Reciprocal interdependence is more difficult but can result in more Reciprocal interdependence is more difficult but can result in more benefitsbenefits

Effects of Interdependence on Supply Chain Relationships

Org

aniz

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Dep

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Org

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Dep

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HighHigh

LowLow

Partner’s DependencePartner’s Dependence

LowLow HighHigh

Partner Partner Relatively Relatively PowerfulPowerful

Organization Organization Relatively Relatively PowerfulPowerful

High Level of High Level of InterdependenceInterdependence

Effective RelationshipEffective Relationship

Low Level of Low Level of InterdependenceInterdependence

Creating Effective Contracts

Create contracts that encourage negotiation when unplanned Create contracts that encourage negotiation when unplanned contingencies arisecontingencies arise

It is impossible to define and plan for every possible occurrenceIt is impossible to define and plan for every possible occurrence

Informal relationships and agreements can fill in the “gaps” in Informal relationships and agreements can fill in the “gaps” in contractscontracts

Informal arrangements may eventually be formalized in later Informal arrangements may eventually be formalized in later contractscontracts

Designing Effective Conflict Resolution Mechanisms

Initial formal specification of rules and guidelines Initial formal specification of rules and guidelines for procedures and transactionsfor procedures and transactions

Regular, frequent meetings to promote Regular, frequent meetings to promote communicationcommunication

Courts or other intermediariesCourts or other intermediaries

Managing Supply Chain Relationships for Cooperation and Trust

Effective management of a relationship is important for its Effective management of a relationship is important for its successsuccess

Top management is often involved in the design but not Top management is often involved in the design but not management of a relationshipmanagement of a relationship

process of alliance evolutionprocess of alliance evolution

Perceptions of reduced benefits or opportunistic actions can Perceptions of reduced benefits or opportunistic actions can significantly impair a supply chain partnershipsignificantly impair a supply chain partnership