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Eighth AIMS International Conference on Management January 1-4, 2011

An approach for supply chain coordination mechanism

Pradeep Kumar Behera


pradeepbhr@gmail.com
Department of Management Studies
Indian School of Mines, Dhanbad
Kampan Mukherjee
kampan_m@hotmail.com
Department of Management Studies
Indian School of Mines, Dhanbad
1. Introduction
In today’s uncertain environment, it’s no longer competition between the companies, but between the supply
chains (SC). The SC consists of numerous activities, different functions: logistics, inventory, forecasting, and
production planning, different interfaces: procurement-production, production-inventory, production-
distribution, intra- & inter organizational relationships and performance. The SC members can’t compete
independently by handling different activities, functions and interfaces. So, a coordination system is necessary
for achieving better efficiency and effectiveness in the whole SC.
It seems to be very difficult to define coordination precisely. But the most commonly accepted definition is
“the act of managing dependencies between entities and the joint effort of entities working together towards
mutually defined goals”(Malone & crowston, 1994).According to Ballou et al. (2000), coordination is the
central lever of SCM. SC coordination as a vehicle to redesign decision rights, workflow, and resources between
SC members for better performance (Lee, 2000). SC coordination is a strategic response to the challenges that
arise from the dependencies of SC members (Xu and Beamon, 2006). The concept of coordination may guide
SC members to work coherently to identify inter-dependencies between each other, to mutually define goals and
to fairly share risks & rewards (Arshinder et al., 2006).
In this paper, we are offering a review on different SC coordination classification in section 2. An n attempt
has been made to identify different Coordination mechanism and also propose a classification on SC
coordination mechanisms in section 3.In section 4, we propose a structure for describing coordination
mechanisms and finally, in section 5, we present some scope of future research work and concluding remarks.

2. Literature review
According to Olson & Walker (1995), types of Coordination are structured or unstructured and formal or
informal, depending on the extent to which firms use formal design of roles and mechanisms to synchronize
activities and flows within SC (Lusch and Brown 1996; poppo and Zenger 2002). But Thompson (1967) focuses
on standardization of tasks and mutual adjustment between SC members to attain coordination. He emphasizes
on the norms which define and identify each SC member’s task, including inputs, outputs, processes, and skills,
and indicates the need for mutual adjustments. Mainly there are three types of coordination mechanism:
Standardization, plan, and mutual adjustment based on the type of interdependence (Thompson, 1967). Later on,
Ven de Ven, Delbecg and Koeing (1976) Extends Thompson’s framework by adding “team arrangement” as
fourth type of interdependency.
Whang (1995) proposes there are three organizational perspectives of coordination: single-person, team-based,
and nexus-of-contract. The single-person perspective assumes that a system is managed by a single-decision-
maker, who has access to all the information and makes system optimal decisions. Applicability of this approach
in industry is questionable (Whang, 1995). On the other hand, team-based approach is a cooperative effort
among SC members, who have limited information and therefore work together, communicate, and coordinate
their activities to achieve system optimization. This approach is more practical approach for industries. The third
approach, nexus-of-contract (based on agency theory from Jensen and Meckling, 1976), focuses on eliminating
the sub-optimization tendency of self-interested SC members by aligning their incentives with those of the
system with contract. Whang (1995) also discussed functional, cross-functional, and inter-organizational
coordination as illustrating different levels of coordination.
Classifying coordination mechanisms as tools requires understanding the specific coordination problem and its
proposed solution. Due to unique nature of each problem, classifying the various coordination mechanisms is a
complex and difficult task. To make progress in this area of classification, Durglas J. Thomas et al. (1996)
define three categories of operational coordination: buyer-vendor coordination, production-distribution
coordination, and inventory-distribution coordination.

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Eighth AIMS International Conference on Management January 1-4, 2011

Sahin and Robinson (2002) propose coordination as broadly two organizational approaches: centralized
decision-making (equivalent to Whang’s (1995) single-person approach) and decentralized decision-making
(equivalent to Whang’s (1995) team-based approach). He identifies price, non-price, buy-back, return policies,
quantity flexibility, and allocation rules are the major categories of SC coordination mechanisms. But Fugate et
al. (2005) adopts their classification into three major categories: price, non-price, and flow coordination
mechanisms which are shown in Table-1.

Table-1 SC coordination classification by Fugate et al. (2005)

Price coordination Non-price coordination Flow coordination

Quality discounts Quantity flexibility Quick response


Two-part tariffs Allocation rules Postponement
Buy-back/Returns policy Exclusive dealings Vendor Managed Inventory
Exclusive territories Efficient Consumer Response
Promotional allowances / Collaborative Planning
Cooperative advertising Forecasting & Replenishment
Source : Fugate et al.(2005)

On the basis of extent of coordination and degree of importance of coordination mechanisms, Arshinder et al.
(2007) identifies four different categories of coordination mechanisms: SC contracts, information technology,
information sharing, and collaborative initiatives which are shown in Table-2.

Table-2 SC coordination mechanism classification by Arshinder et al. (2007)

Information Collaborative
Supply chain contracts Information sharing
technology initiatives
Buyback contracts Internet AOI ECR
Revenue sharing contracts Email Inventory level CRP
Quantity flexibility contracts EDI Sales data VMI
Quantity discount contracts ERP Sales forecast CP, CF and CR
Hardware Order status Trust
Ease of implementation
Production schedule Commitment
Capacity Collaborative design
Product quality
Lead time
EDI, Electronic Data Exchange; ERP, Enterprise Resource Planning; ECR, Efficient Consumer response;
Collaborative CP, Collaborative Planning; CF, Collaborative Forecasting; CR, Collaborative
Replenishment; VMI; Vendor Managed Inventory; AOI, Advanced Order Information

Source: Arshinder et al. (2007)

Arshinder et al. (2008) attempted for classification of SC coordination on the basis of: roles of coordination in
SC and its various models, coordination across different functions (logistics, inventory, forecasting, and product
design) and at different interfaces (procurement-production, production-inventory, production-distribution, and
distribution-inventory), coordination mechanisms (Arshinder et al., 2007), and empirical case studies in SC
coordination which are shown in Table-3.

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Eighth AIMS International Conference on Management January 1-4, 2011

Table-3 SC coordination classification by Arshinder et al. (2008)

Source: Arshinder et al. (2008)

3. Classification SC coordination mechanisms

As Malone and Crowston (1994) define coordination as the act of managing dependencies between entities;
interdependence is a precursor to coordination. Heide(1994) and Frazier(1999) define two primary attributes of
organizational interdependencies; symmetric or asymmetric and cooperative(win-win situation) or competitive
(win-lose situation). Interdependence is called symmetric when one organization has approximately the same
degree of influence on the other organization’s beliefs, attitudes, and behaviors.
Morton Deutsch (2000) also makes the distinction between competitive and cooperative approaches.
According to Deutsch, the most important factors that determine whether an individual will approach a conflict
cooperatively or competitively are the nature of the dispute and the goals each side seeks to achieve. Often the
two sides' goals are linked together, or interdependent. The parties' interaction will be shaped by whether this
interdependence is positive or negative, according to Deutsch:
i. Goals with positive interdependence are tied together in such a way that the chance of one side
attaining its' goal is increased by the other side's attaining its goal. Positively interdependent goals
normally result in cooperative approaches to negotiation, because any participant can "attain his goal if,
and only if, the others with whom he is linked can attain their goals."
ii. On the other hand, negative interdependence means the chance of one side attaining its goal
is decreased by the other's success. Negatively interdependent goals force competitive situations,
because the only way for one side to achieve its goals and "win" is for the other side to "lose."

In the symmetric interdependence (equal degree of influence), coordination mechanism selection is a mutual
adjustment process in which each firm faces nearly identical risk costs. In case of asymmetric
interdependence(unequal degree of influence), the less dependent firm (more powerful firm) develops rules and
expert authority to less powerful firm to maximise its own benefits, which results in higher risk cost to the less
powerful firm. In the cooperative interdependence (high level of win-win situation), each firm create win-win
situation and risk is shared among them. In the competitive interdependence (low level of win-win situation),
each firm achieve benefits at the expense of other firm’s benefits. Therefore, there is a matrix of
interdependence between degrees of influence Vs level of win-win situation as shown in the Table-4.

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Eighth AIMS International Conference on Management January 1-4, 2011

Table-4 Interdependence matrix

High
Level of win-win situation
Asymmetric & symmetric &
cooperative cooperative

Asymmetric & symmetric &


Low competitive competitive

unequal Equal

Degree of influence

Now we have four broad categories of interdependence: symmetric & cooperative, Asymmetric & cooperative,
Asymmetric & competitive and symmetric & competitive which are clearly defined by Lei Xu et al. (2006)
which is shown in Table-5.Also he define different attributes to describe SC coordination; Resource sharing
(Strategic, operational , tactical and no resource sharing), decision style (centralize or decentralize), level of
control (high or low), and risk or reward sharing (fair or unfair).

Table-5 Different types of interdependence by Lei Xu et al. (2006)

Description
Interdependence
Symmetric and cooperative Facilitates coordination with strategic or tactical resource sharing.
Fair risk and reward sharing lead to reduced risk costs. The
decision style tends to be decentralized.

Asymmetric and Cooperative Prefers coordination with operational or no information sharing,


since for the less powerful firm, its risk costs will be high. Risk and
reward sharing can be unfair, where more powerful firms receive
more benefits. The decision style may be centralized, in which the
smaller firms will attempt to satisfy the more powerful firm's
requirement
Asymmetric and competitive The less dependent firm will have the power to develop rules and
expert authority. Therefore, the more powerful firm can select the
coordination mechanism to exploit its asymmetric power to
maximize its own benefits, which results in higher risk costs for
the less powerful firm.
Symmetric and competitive No resource sharing.
Source: Lei Xu et al. (2006)

Before classifying all the coordination mechanisms, here is an attempt to describe all the coordination
mechanism in terms of different attributes defined by Lei Xu et al. (2006) as shown in Table-6:

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Eighth AIMS International Conference on Management January 1-4, 2011

Table-6 SC coordination attribute matrix

risk/reward sharing
Attributes

Resource sharing
Level of control
Decision style

dependency
Degree of

Degree of
Schemes

Asymmetric &
Revenue sharing Decentralized Low Fair Tactical
Cooperative
very less
Asymmetric &
Buy back Centralized High Unfair resource
Cooperative
sharing

Asymmetric &
Quantity discount Decentralized High Unfair Tactical
Competitive

High Asymmetric &


Quantity flexibility Decentralized Fair Tactical
Competitive
Asymmetric &
Back up Agreements Decentralized High Fair Tactical
Competitive

Asymmetric &
Two par tariff Decentralized High Unfair Tactical
Competitive

very less
Asymmetric &
Price discount Centralized High Unfair resource
Competitive
sharing
Asymmetric &
Sales rebate Centralized High Fair Operational
Cooperative
very less
Advance discount Asymmetric &
Decentralized Low Fair resource
booking Competitive
sharing
Asymmetric &
Allocation contracts Centralized High Unfair Operational
Competitive
Symmetric &
Collaborative design Decentralized Low Fair Strategic
Cooperative
Symmetric &
Quick response Centralized Medium Unfair Operational
Cooperative
Symmetric &
Postponement Decentralized Medium Unfair Operational
Cooperative
Efficient Consumer Symmetric &
Decentralized Low Fair Operational
Response (ECR) Cooperative
Vendor managed Symmetric &
Decentralized Medium Fair Tactical
inventory (VMI) Cooperative

Collaborative planning
Symmetric &
forecasting & Decentralized Low Fair Strategic
Cooperative
replenishment (CPFR)

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Eighth AIMS International Conference on Management January 1-4, 2011

Revenue sharing:
 Decision style: Ordering quantity is decided by the buyer independently, so decision style is
decentralised.

 Level of control: There is a low level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: To fight against uncertainty of demand, buyer and vendor share risk
mutually and they share percentage of revenue generated by retailer, so risk sharing is fair.

 Resource sharing: Inventory and production level data is shared by the retailer to the manufacturer.

 Degree of dependency: The buyer and vendor have not similar influence on each other but make
decision in win-win condition. (asymmetric and cooperative)

Buy back:
 Decision style: demand is uncertain and price dependent. Manufacturer makes decision taking into
account of self interest behaviour of the retailers. Manufacturer decides the purchasing price of unsold
goods. So decision style is centralized.

 Level of control: For maximising profit, the manufacturer induces the retailers to place larger order.
Again manufacturer monitoring strictly on the unsold goods over retailers so that retailer can’t cheat
them. So overly there manufacturer has high level of control on the retailers.

 Degree of risk/reward sharing: As long lead time and selling seasons are short, manufacturer induces
the retailers for larger orders by offering the repurchase of unsold goods from the retailers. That means
the retailer take all the risk of unsold goods and so the risk sharing is unfair between the manufacturer
& retailer.

 Resource sharing: Only the no. of unsold items has to inform the retailer to the manufacturer. So there
is very few information is shared among retailer and manufacturer.

 Degree of dependency: As the retailers are attracted / induced by the repurchase of unsold goods by the
manufacturer, order larger quantity. Again the manufacturer decides the price of unsold goods. So the
retailer dependent on the manufacturer related to these issues. But the manufacturer can alter the price
of unsold goods for maximising their profits. But the wholesale price is decided by both the parties i.e.
Manufacturer and retailer in a win-win situation. So degree of dependency is asymmetric and
cooperative in nature.

Quantity discount:
 Decision style: As this contract allows a joint optimal-order quantity between buyer and vendor, so
decision style is decentralised.

 Level of control: Manufacturer induces the buyer to order global optimal quantity, by offering a price
discount, so there is a high level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: As vendor takes risk by offering, so risk sharing is unfair.

 Resource sharing: Inventory level data is shared by the retailer to the manufacturer.

 Degree of dependency: The retailer dependent on manufacturer to get discount. But the manufacturer
less dependent on retailer. (asymmetric and competitive)

Quantity flexibility:
 Decision style: Ordering quantity is decided by the buyer and vendor jointly, so decision style is
decentralised.

 Level of control: There is a low level of control of manufacturer over the buyer.

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Eighth AIMS International Conference on Management January 1-4, 2011

 Degree of risk/reward sharing: To fight against uncertainty of demand, buyer and vendor share risk
mutually, so risk sharing is fair.

 Resource sharing: Inventory and production level data is shared by the retailer to the manufacturer.

 Degree of dependency: The buyer and vendor have not similar influence on each other but make
decision in win-lose situation. (asymmetric and competitive)

Back-up agreement:
 Decision style: Ordering quantity is decided by the buyer and vendor jointly, so decision style is
decentralised.

 Level of control: There is a low level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: To fight against uncertainty of demand, buyer and vendor share risk
mutually, so risk sharing is fair.

 Resource sharing: Inventory and production level data is shared by the retailer to the manufacturer.

 Degree of dependency: The buyer and vendor have not similar influence on each other but make
decision in win-lose situation. (asymmetric and competitive)

Two part tariff:


 Decision style: As this contract allows a joint optimal-order quantity between buyer and vendor, so
decision style is decentralised.

 Level of control: Manufacturer induces the buyer to order global optimal quantity, by offering a price
discount, so there is a high level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: As vendor takes risk by offering, so risk sharing is unfair.

 Resource sharing: Inventory level data is shared by the retailer to the manufacturer.

 Degree of dependency: The retailer dependent on manufacturer to get discount. But the manufacturer
less dependent on retailer. (asymmetric and competitive)

Price discount:
 Decision style: Ordering quantity is decided by the vendor independently, so decision style is
centralised.

 Level of control: There is a high level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: Vendor takes risk and so it is unfair risk sharing.

 Resource sharing: few or no data is shared by the retailer to the manufacturer.

 Degree of dependency: The buyer and vendor have not similar influence on each other but make
decision in win-win condition. (asymmetric and cooperative)

Sales rebate:
 Decision style: The producer sets a fixed price for the product up to a specific volume, above which
the retailer has a discount. So the primary controller is manufacturer & the decision style is centralised.

 Level of control: Manufacturer fixes the price of product up to specific volume again imposes stock out
cost to the retailer. So there is a high level of control of manufacturer over the retailers.

 Degree of risk/reward sharing: In case of stock-out, the retailer must pay to the producer the same
amount of money. Again manufacturer offers discount over a specific volume. The both players share
risk. So risk sharing is fair among players.

 Resource sharing: Post of sales data is shared by the retailer to the manufacturer.

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Eighth AIMS International Conference on Management January 1-4, 2011

 Degree of dependency: The retailer dependent on manufacturer to get discount. But the manufacturer
less dependent on retailer i.e. asymmetric and cooperative.

Advance discount booking:


 Decision style: Ordering quantity is decided by the buyer independently, so decision style is
decentralised.

 Level of control: There is a low level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: To fight against uncertainty of demand, buyer and vendor share risk
mutually by providing discount to advance booking, so risk sharing is fair.

 Resource sharing: few or no data is shared by the retailer to the manufacturer.

 Degree of dependency: The buyer and vendor have not similar influence on each other but make
decision in win-win condition. (asymmetric and cooperative)

Allocation contract:
 Decision style: Ordering quantity is decided by the vendor independently, so decision style is
centralised.

 Level of control: There is a high level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: Vendor takes risk and so it is unfair risk sharing.

 Resource sharing: few or no data is shared by the retailer to the manufacturer.

 Degree of dependency: The buyer and vendor have not similar influence on each other but make
decision in win-win condition. (asymmetric and cooperative)

Collaborative initiatives:
 Decision style: All the decisions are made mutually, so decision style is decentralised.

 Level of control: There is a low to medium level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: Buyer-vendor takes risk and reward fairly.

 Resource sharing: Tactical to strategic data are shared by the buyer-vendor.

 Degree of dependency: The buyer and vendor have similar influence on each other but make decision
in win-win condition. (symmetric and cooperative)

Quick response:
 Decision style: All the decisions are made independently, so decision style is centralised.

 Level of control: There is a medium level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: Buyer-vendor takes risk and shares reward unfairly.

 Resource sharing: Operational data are shared by the buyer-vendor.

 Degree of dependency: The buyer and vendor have similar influence on each other but make decision
in win-win condition. (symmetric and cooperative)

Postponement strategy:
 Decision style: All the decisions are made mutually, so decision style is decentralised.

 Level of control: There is a low to medium level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: Buyer-vendor takes risk and shares reward unfairly.

 Resource sharing: Tactical to strategic data are shared by the buyer-vendor.

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Eighth AIMS International Conference on Management January 1-4, 2011

 Degree of dependency: The buyer and vendor have similar influence on each other but make decision
in win-win condition. (symmetric and cooperative)

Efficient consumer response (ECR):


 Decision style: All the decisions are made mutually, so decision style is decentralised.

 Level of control: There is a low level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: Buyer-vendor takes risk and shares reward unfairly.

 Resource sharing: Tactical to strategic data are shared by the buyer-vendor.

 Degree of dependency: The buyer and vendor have similar influence on each other but make decision
in win-win condition. (symmetric and cooperative)

Vendor managed inventory (VMI):


 Decision style: All the decisions are made mutually, so decision style is decentralised.

 Level of control: There is a medium level of control of manufacturer over the buyer.

 Degree of risk/reward sharing: Buyer-vendor takes risk and shares reward fairly.

 Resource sharing: Tactical data are shared by the buyer-vendor.

 Degree of dependency: The buyer and vendor have similar influence on each other but make decision
in win-win condition. (symmetric and cooperative)

Consolidating all the above attributes and interdependency, now we can broadly classify the SC coordination
mechanisms: Symmetric & cooperative, Asymmetric & cooperative, Asymmetric & competitive and Symmetric
& competitive as shown in the Table-7.

Table-7 Proposed classification of SC coordination mechanisms

Symmetric & Asymmetric & Asymmetric & Symmetric &


cooperative cooperative competitive competitive
ECR Sales rebate Quantity discount Open market
CPFR Buyback/Return policy Two part tariff
VMI Revenue sharing Price discount
Quick response Allocation rules
Collaborative design Quantity flexibility
Back up Agreements
Advance discount booking

4. Conclusion

Supply chain coordination must be considered as a part of the strategic planning process of each organisation.
Competition is not found among single companies or entities but among the supply chain networks. In this
paper, we attempt to classify supply chain coordination mechanism on the basis of interdependency of among
supply chain partners. We also described the different SC coordination in terms of different attributes; resource
sharing, decision making, level of control, and risk/reward sharing which may be beneficiary to understand the
different SC coordination mechanisms and may be useful for selection of different SC coordination
mechanisms.

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Eighth AIMS International Conference on Management January 1-4, 2011

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