Importance of the supply chain coordination

According to the report, The Supply Chain Coordination (SCC) segment is expected to play a key role in the near future as event management and performance management applications emerge as the competitive tools in managing the highly complex supply chains, by reducing the lead time and cost. These applications help companies detect, diagnose, and resolve performance exceptions before they become expensive problems. Currently, customer satisfaction plays a significant role in the business environment. The report also says Overall, the SCC segment is expected to grow at a faster rate than the planning and execution segments during 2007-2013. This issue of coordination is directly in-line with the need for Response Management. I would argue that the main reason companies need to coordinate their supply chains is to coordinate response to change. With growing demand volatilty, shortening product lifecycles and increasingly global supply networks, the need to coordinate an effective response to change has become the new operating imperative. Failure to do so effectively can lead to poor customer satisfaction (and, ultimately revenue loss) and declining operating performance as inefficiencies erode margins and bloat inventories. We are certainly seeing a growing awareness for the critical impact that poor response to change can have. This report, combined with the comments of Steve Hochman at AMR Research in his recent report, continue to validate the growing need for Response Management to cope with todays manufacturing complexities. Coordination in a supply chain means identification and classification of existing interdependencies [7]. McCann and Ferry [8] defines interdependency as when actions taken by one referent system affect the actions or outcomes of another referent system. The more specific the interdependency is identified, the deeper the level would be at which coordination strategy can be executed. Logically, there are three types of interdependencies between tasks and resources: those between tasks, those between resources and those between a task and a resource. Task/task interdependency refers to the interdependency of tasks between and internal

supply chain organizations, such as order prerequisite interdependency or demand interdependency. Task/resource interdependency refers to resource requirement in realizing a task in a supply chain. It highlights the organizations, capacities and material that should be assigned to a particular task. Three task/resource interdependencies: order/organization, order/inventory and order/capacity interdependency are identified and finally, Resource/resource interdependency is the interdependency between resources such as capacity and inventory in supply chain [7]. So According to the co-ordination theory, the activities in an organization can be separated into those that are necessary to achieve the goal of the process (e.g. that directly contribute to the output of the organization) and those that serve primarily to manage various dependencies between activities and resources [9]. CHAPTER SEVENTEEN Discussion Questions

1. What is the bullwhip effect and how does it relate to lack of coordination in a supply chain? The bullwhip effect refers to the fluctuation in orders along the length of the supply chain as orders move from retailers to wholesalers to manufacturers to suppliers. The bullwhip effect relates directly to the lack of coordination (demand information flows) within the supply chain. Each supply chain member has a different idea of what demand is, and the demand estimates are grossly distorted and exaggerated as the supply chain partner is distanced from the customer.

2. What is the impact of lack of coordination on the performance of a supply chain? The impact of lack of coordination is degradation of responsiveness and poor cost performance for all supply chain members. As the bullwhip effect rears its ugly head, supply chain partners find themselves with excessive inventory followed by stockouts and backorders. The fluctuations in inventory result in increased holding costs and lost sales, which in turn spike transportation and material handling costs. Ultimately, the struggle with cost and responsiveness hurts the relationships among supply chain partners as they seek to explain their lack of performance.

3. In what way can improper incentives lead to a lack of coordination in a supply chain? What countermeasures can be used to offset this effect? Incentive obstacles occur in situations when different participants in the supply chain are motivated by self interest. Incentives that focus only on the local impact of an action result in decisions being made that achieve a local optimum but can avoid a global (supply chain) optimum. All supply chain partners must agree on global performance measures and structure rewards such that members are appropriately motivated. Sales force incentives also are responsible for counterproductive supply chain behavior. Commissions that are based on a single short time frame can be gamed by the sales force to maximize commission but these actions inadvertently increase demand variability and exert pressure on the supply chain. Commissions should be structured to provide incentives to consistently sell large volumes of product over a broad time frame to the sell-through point.

4. What problems result if each stage of a supply chain views its demand as the orders placed by the downstream stage? How should firms within a supply chain communicate to facilitate coordination? If each stage of a supply chain views its demand as the orders placed by their downstream counterpart, the bullwhip effect is realized by the supply chain. Each member develops a forecast that is based on something other than the true customer demand and hilarity ensues. Supply chain members should share point-of-sale (POS) data so that all members are aware of the true customer demand for product. The beauty of data sharing requirements is that only aggregate POS data must be shared to mitigate the bullwhip effect; there is no need to share detailed POS data. 5. What factors lead to a batching of orders within a supply chain? How does this affect coordination? What actions can minimize large batches and improve coordination? Order batching is caused by a number of different factors. One mechanism is the price structure of TL and LTL shipment quantities; there is incentive to wait a while to make sure that a TL shipment is achieved. A customers natural tendency to wait for a milestone, either real or perceived, can also cause batching. Customers may wait until Friday, Monday, the last or first day of the month, etc., just because thats when they always have or because that event reminds them to order. Order batching also occurs because customers are aware of an impending price reduction and want to take advantage of it. Batching adversely affects supply chain coordination because the supply chain will be starved for flow, then overwhelmed with demand. A supply chain can reconfigure their transportation and distribution system to allow for shipments to multiple customers on a single truck to achieve TL quantities. The chain can also assign (or encourage) days for placing orders and move from lot-size based to volume based quantity discounts (or abandon discounts and promotions altogether).

6. How do trade promotions and price fluctuations affect coordination in a supply chain? What pricing and promotion policies can facilitate coordination? Trade promotions and price fluctuations make supply chain coordination more difficult. Customers seek to purchase goods for less and engage in forward buying which creates spikes in demand that may exceed capacity. All parties would benefit if the supply chain used every day low pricing (EDLP) to mitigate forward buying and allow procurement, production, and logistics to function at a steadier pace. If price incentives must be offered, the chain is better served by implementing a volume-based quantity discount plan instead of a lot size based quantity discount, i.e., providing incentives to purchase large quantities over a long period of time, perhaps a year.

7. How is the building of strategic partnerships and trust valuable within a supply chain? Cooperation and trust within the supply chain help improve performance for the following reasons: When stages trust each other, they are more likely to take the other partys objectives into consideration when making decisions, thereby facilitating win-win situations. Action-oriented managerial levers to achieve coordination become easier to implement and the supply chain becomes more agile. An increase in supply chain productivity results, either by elimination of duplicated effort or by allocating effort to the appropriate stage. Detailed sales and production information is shared; this allows the supply chain to coordinate production and distribution decisions.

8. What issues must be considered when designing a supply chain relationship to improve the chances of developing cooperation and trust? The issues that supply chain partners must consider when designing their chain include assessing the value of the relationship, the operational roles and decision rights for each, the execution of binding contracts, and establishment of conflict resolution mechanisms. The value of the relationship is assessed by identifying the mutual benefits that it provides and the costs and contributions of each party. The mix of effort and benefit for all parties should be equitable. The roles and decision rights take into account the interdependence between the parties; the nirvana of interdependence is reciprocal interdependence, where parties come together and exchange information and inputs in both directions. This requires more effort than sequential interdependence but the payoff is increased supply chain surplus. Managers can help promote trust by creating contracts that encourage negotiation as unplanned contingencies arise since complete information and consideration of all future contingencies is impossible. The primary contacts from each side are an important starting point in developing a healthy relationship. Effective contract-resolution mechanisms can significantly strengthen any supply chain relationship. Such mechanisms allow parties the opportunity to communicate and work through their differences, in the process building greater trust.

9. What issues must be considered when managing a supply chain relationship to improve the chances of developing cooperation and trust? The following issues merit attention when management endeavors to improve the chances of success in supply chain partnership:

The presence of flexibility, trust, and commitment in both parties helps a supply chain relationship succeed. In particular, commitment of top management on both sides is crucial for success. Good organizational arrangements, especially for information sharing and conflict resolution, improve chances for success. Mechanisms that make the actions of each party and resulting outcomes visible help avoid conflicts and resolve disputes. The more fairly the stronger partner teats the weaker, vulnerable partner, the stronger the supply chain relationship tends to be.

10.What are the different CPFR scenarios and how do they benefit supply chain partners? Collaborative planning, forecasting, and replenishment (CPFR) is defined as a business practice that combines the intelligence of multiple partners in the planning and fulfillment of customer demand. In order to be successful, the two parties must have synchronized their data and established standards for exchanging the information. The four scenarios that sellers and buyers can collaborate along include: Retail event collaboration the identification of specific SKUs that will be involved in sales promotions and sharing of information regarding the timing, duration, pricing, advertising, and display tactics to be deployed. The benefit of retail event collaborations is a reduction in stockouts, excess inventory and unplanned logistics costs. DC replenishment collaboration the forecasting of DC withdrawals or demand from the DC to the manufacturer is converted to a stream of orders that are locked in over a specified time horizon. A successful DC replenishment collaboration reduces production costs at the manufacturer and inventory and stockouts at the retailer. Store replenishment collaboration the forecasting of store-level orders that are committed over a specific time horizon. Such a collaboration results in greater visibility of sales for the manufacturer,

improved replenishment accuracy and product availability, and reduced inventories. Collaborative assortment planning the forecasting (collaborative interpretation) of industry trends, macroeconomic factors, and customer tastes for seasonal goods. This forecast is converted into a planned purchase order at the style/color/size level that is used to produce sample products for a fashion event before final merchandising decisions are made. The manufacturer benefits from this collaboration by having more lead time to purchase raw materials and plan capacity.

Coordination in a supply chain Coordination in a supply chain relies on the information links and decisions that determine the flow of materials and services in order to match supply with demand throughout the supply chain. Traditionally, supply chain coordination has been the core activity of SCM. Without coordination, local sub-optimization of individual members in a supply chain will lead to sub-optimal results for the chain as a whole. To promote the efficiency and effectiveness of the entire supply chain (termed 'global optimization' in your textbook), coordination begins with a thorough understanding of the demand and supply of each member on the chain, resolving boundary issues and prioritization conflicts, and developing mechanisms to cope with perceived change in demand and supply. Obstacles to coordination in a supply chain Coordination in a supply chain is related to how each member in the chain knows about the actual demand and how they might respond to that knowledge. There are always obstacles that hinder effective coordination in a supply chain. Chopra and Meindl (2001) divide these major obstacles into five categories -- incentive obstacles, information processing obstacles, operational obstacles, pricing obstacles and behavioral obstacles. Each of them is briefly explained below. 1. Incentive obstacles -- Local sub-optimization is a common incentive, in which members of a supply chain take actions to benefit themselves but not the entire chain. Another example is that the efficiency of a sales force might be appraised by the quantity of sales as compared with the companies next in the downstream supply chain but not as compared with end-users (final customers). In this case, sales size is hardly related to actual customer demand. 2. Information processing obstacles -- A supply chain with poorly organized or managed information channels leads to deterioration in information quality (e.g. information on customer demand cannot reach members in a supply chain in a

timely manner, or information is not available to some members who might need it). 3. Operational obstacles -- Certain practices such as placing and filing orders may have adverse effects on coordination. For example, orders of larger sizes, larger replenishment lead times, rationing and shortages can all mean orders are unable to reflect true customer demand. 4. Pricing obstacles -- Certain pricing practices and factors that affect pricing are also ways to detach orders from actual demand. For example, a company may overbuy if its supplier offers a discount on a larger lot of orders, or if its demand is exceptionally large, but members in the upstream supply chain can't rely on these sales figures to forecast future demand. 5. Behavioral obstacles -- It is highly likely that members in the supply chain respond to local situations and neglect root causes. They may blame each other for fluctuations in local demand, resulting in loss of trust or even turning themselves into mutual enemies. The bullwhip effect The bullwhip effect is the term used to describe the variability of the order pattern faced by a firm in a supply chain. It refers to the amplification of the order pattern as one moves up the supply chain. In other words, firms at the top of a supply chain face a much higher variance in orders than firms facing retail demand. Needless to say, in the real world, the bullwhip effect means those firms upstream in a supply chain are more likely to suffer from increased costs and poorer services However, the causes of the bullwhip effect can be eliminated by automating the passage of information across the chain. The bullwhip effect is a symptom of a poorly coordinated supply chain. The obstacles to coordination that we discussed in the last section definitely explain the bullwhip effect itself. Maltz (2001) identifies, more precisely, four major causes of the bullwhip effect:

Forecast problems -- Each member of a supply chain receives its customer's orders based on the customer's forecast but not its

actual sales. Secondly, suppliers do their own forecasts for their operations and their suppliers. Forecast errors are amplified with longer lead times. Order size/order cost tradeoff -- Customers tend to place orders of larger sizes as unit prices may thereby decrease, and order review and placement costs are lower as well. If daily demand is accumulated to make up larger weekly orders, daily information will be lost and forecasts will become less accurate. Forward buying -- Customers tend to 'overbuy' when they are offered a discount, especially when prices change frequently. This kind of ordering does not reflect demand that is usually more stable. New product game -- Whenever new products are promoted, they are expected to yield higher profits. However, it is extremely difficult to make accurate forecasts on such profits. Secondly, the technology of production may not yet be stabilized and supplies may be uncertain. Once again, orders will not reflect actual demand.

Maltz argues that all these problems can be solved by improving the information channels in a supply chain. His suggestions are summarized in Table 4.1.