LACK OF SUPPLY CHAIN COORDINATION AND THE BULLWHIP
EFFECT
Supply chain coordination – all stages in the inventory network make
moves together (normally brings about more prominent absolute store
network benefits)
SC coordination necessitates that each stage consider the impacts of its
activities on different stages
Lack of coordination results when:
– Objectives of various stages struggle or
– Information moving between stages is mutilated
Bullwhip Effect
Fluctuations in orders increment as they climb the store network from
retailers to wholesalers to makers to providers (appeared in Figure)
Distorts request data inside the store network, where various stages
have altogether different appraisals of what request resembles
Results in a deficiency of store network coordination
Examples: Proctor &Gamble (Pampers); HP (printers); Barilla (pasta)
THE EFFECT OF LACK OF COORDINATION ON PERFORMANCE
Manufacturing cost (increases)
Inventory cost (increases)
Replenishment lead time (increases)
Transportation cost (increases)
Labor cost for shipping and receiving (increases)
Level of product availability (decreases)
Relationships across the supply chain (worsens)
Profitability (decreases)
OBSTACLES TO COORDINATION IN A SUPPLY CHAIN
Incentive Obstacles
Information Processing Obstacles
Operational Obstacles
Pricing Obstacles
Behavioral Obstacles
Incentive Obstacles
When incentives offered to different stages or participants in a supply
chain lead to actions that increase variability and reduce total supply
chain profits – misalignment of total supply chain objectives and
individual objectives
Local optimization within functions or stages of a supply chain
Sales force incentives
Information Processing Obstacles
When demand information is distorted as it moves between different
stages of the supply chain, leading to increased variability in orders
within the supply chain
Forecasting based on orders, not customer demand
o Forecasting demand based on orders magnifies demand
fluctuations moving up the supply chain from retailer to
manufacturer
Lack of information sharing
Operational Obstacles
Actions taken in the course of placing and filling orders that lead to an
increase in variability
Ordering in large lots (much larger than dictated by demand)
Large replenishment lead times
Rationing and shortage gaming (common in the computer industry
because of periodic cycles of component shortages and surpluses)
Pricing Obstacles
When pricing policies for a product lead to an increase in variability of
orders placed
Lot-size based quantity decisions
Price fluctuations (resulting in forward buying)
Behavioral Obstacles
Problems in learning, often related to communication in the supply chain
and how the supply chain is structured
Each stage of the supply chain views its actions locally and is unable to
see the impact of its actions on other stages
Different stages react to the current local situation rather than trying to
identify the root causes
Based on local analysis, different stages blame each other for the
fluctuations, with successive stages becoming enemies rather than
partners
No stage learns from its actions over time because the most significant
consequences of the actions of any one stage occur elsewhere, resulting
in a vicious cycle of actions and blame
Lack of trust results in opportunism, duplication of effort, and lack of
information sharing
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
Align incentives so that each participant has an incentive to do the things
that will maximize total supply chain profits
Align incentives across functions
Pricing for coordination
Alter sales force incentives from sell-in (to the retailer) to sell-through
(by the retailer)
Improving Information Accuracy
Sharing point of sale data
Collaborative forecasting and planning
Single stage control of replenishment
o Continuous replenishment programs (CRP)
o Vendor managed inventory (VMI)
Improving Operational Performance
Reducing replenishment lead time
o Reduces uncertainty in demand
o EDI is useful
Reducing lot sizes
o Computer-assisted ordering, B2B exchanges
o Shipping in LTL sizes by combining shipments
o Technology and other methods to simplify receiving
o Changing customer ordering behavior
Rationing based on past sales and sharing information to limit gaming
o “Turn-and-earn”
o Information sharing
Designing Pricing Strategies to Stabilize Orders
Encouraging retailers to order in smaller lots and reduce forward buying
Moving from lot size-based to volume-based quantity discounts
(consider total purchases over a specified time period)
Stabilizing pricing
o Eliminate promotions (everyday low pricing, EDLP)
o Limit quantity purchased during a promotion
o Tie promotion payments to sell-through rather than amount
purchased
Building Strategic Partnerships and Trust in a Supply Chain
Background
Designing a Relationship with Cooperation and Trust
Managing Supply Chain Relationships for Cooperation and Trust
Trust-based relationship
o Dependability
o Leap of faith
Cooperation and trust work because:
o Alignment of incentives and goals
o Actions to achieve coordination are easier to implement
o Supply chain productivity improves by reducing duplication or
allocation of effort to appropriate stage
– Greater information sharing results
