Coordination in a

10 Supply Chain

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PowerPoint presentation
to accompany
Chopra, Meindl, and Kalra
Supply Chain Management, 6e
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 Learning Objectives
1. Describe supply chain coordination and the

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bullwhip effect, and their impact on supply chain
performance.
2. Identify obstacles to coordination in a supply
chain.
3. Discuss managerial levers that help achieve
coordination in a supply chain.
4. Understand the different forms of collaborative
planning, forecasting, and replenishment that are
possible in a supply chain.

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 Lack of Supply Chain Coordination
and the Bullwhip Effect
• Supply chain coordination – all stages of the chain

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take actions that are aligned and increase total
supply chain surplus
• Requires that each stage share information and take
into account the effects of its actions on the other
stages
• Lack of coordination results when:
– Objectives of different stages conflict
– Information moving between stages is delayed or
distorted

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 Bullwhip Effect
• Fluctuations in orders increase as they

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move up the supply chain from retailers to
wholesalers to manufacturers to suppliers
• Distorts demand information within the
supply chain
• Results from a loss of supply chain
coordination

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 Demand at Different Stages

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FIGURE 10-1

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 The Effect on Performance
• Lack of coordination increases variability and

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hurts supply chain surplus
• Impact on costs
– Manufacturing cost
– Inventory cost
– Replenishment lead time
– Transportation cost
– Labor cost for shipping and receiving
– Level of product availability
– Relationships across the supply chain
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 The Effect on Performance

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Performance Measure Impact of the Lack of Coordination
Manufacturing cost Increases
Inventory cost Increases
Replenishment lead time Increases
Transportation cost Increases
Shipping and receiving cost Increases
Level of product availability Decreases
Profitability Decreases

TABLE 10-1

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 Key Point

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The lack of coordination hurts both
responsiveness and cost in a supply chain
by making it more expensive to provide a
given level of product availability.

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 Obstacles to Coordination
in a Supply Chain

• Incentive Obstacles

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

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 Incentive Obstacles

• Occur when incentives offered to different

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stages or participants in a supply chain lead
to actions that increase variability and
reduce total supply chain profits
– Local optimization within functions or stages of
a supply chain
– Sales force incentives

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 Information Processing Obstacles
• When demand information is distorted as it

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moves between different stages of the
supply chain, leading to increased
variability in orders within the supply chain
– Forecasting based on orders and not customer
demand
– Lack of information sharing

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 Operational Obstacles
• Occur when placing and filling orders lead

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to an increase in variability
– Ordering in large lots
– Large replenishment lead times
– Rationing and shortage gaming

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 Operational Obstacles
FIGURE 10-2

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 Pricing Obstacles
• When pricing policies for a product lead to

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an increase in variability of orders placed
– Lot-size based quantity decisions
– Price fluctuations

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 Pricing Obstacles
FIGURE 10-3

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 Behavioral Obstacles
• Problems in learning within organizations that
contribute to information distortion

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1. Each stage of the supply chain views its actions locally and
is unable to see the impact of its actions on other stages
2. Different stages of the supply chain react to the current
local situation rather than trying to identify the root
causes
3. Different stages of the supply chain blame one another
for the fluctuations
4. No stage of the supply chain learns from its actions over
time
5. A lack of trust among supply chain partners causes them
to be opportunistic at the expense of overall supply chain
performance
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 Managerial Levers to
Achieve Coordination

• Aligning goals and incentives

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

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 Aligning Goals and Incentives
• Align goals and incentives so that every

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participant in supply chain activities works
to maximize total supply chain profits
– Align goals across the supply chain
– Align incentives across functions
– Pricing for coordination
– Alter sales force incentives from sell-in (to the
retailer) to sell-through (by the retailer)

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 Improving Information Visibility and
Accuracy
• Sharing customer demand data

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• Implementing collaborative forecasting and
planning
• Designing single-stage control of
replenishment
– Continuous replenishment programs (CRP)
– Vendor managed inventory (VMI)

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 Key Point

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Demand planning at each stage in a supply
chain based on the stream of orders
received from its down- stream stage
results in a magnification of fluctuation in
orders as one moves up the supply chain
from the retailer to the manufacturer. It is
better for the entire supply chain to
forecast based on end customer demand.

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 Improving Operational Performance

• Reducing replenishment lead time

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• Reducing lot sizes
• Rationing based on past sales and sharing
information to limit gaming

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 Designing Pricing Strategies
to Stabilize Orders
• Encouraging retailers to order in smaller lots

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and reduce forward buying
– Moving from lot size-based to volume-based
quantity discounts
– Stabilizing pricing
– Building strategic partnerships and trust

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 Continuous Replenishment and
Vendor-Managed Inventories

• A single point of replenishment

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• CRP – wholesaler or manufacturer
replenishes based on POS data
• VMI – manufacturer or supplier is
responsible for all decisions regarding
inventory
• Substitutes

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 Collaborative Planning, Forecasting, and
Replenishment (CPFR)

• Sellers and buyers in a supply chain may

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collaborate along any or all of the following
1. Strategy and planning
2. Demand and supply management
3. Execution
4. Analysis

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 Common CPFR Scenarios

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Where Applied in Supply
CPFR Scenario Chain Industries Where Applied
Retail event collaboration Highly promoted channels All industries other than
or categories those that practice EDLP
DC replenishment Retail DC or distributor DC Drugstores, hardware,
collaboration grocery
Store replenishment Direct store delivery or Mass merchants, club
collaboration retail DC-to-store delivery stores
Collaborative assortment Apparel and seasonal goods Department stores,
planning specialty retail

TABLE 10-2

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 Collaborative Planning, Forecasting, and
Replenishment (CPFR)

• Retail event collaboration

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• DC replenishment collaboration
• Store replenishment collaboration
• Collaborative assortment planning
• Organizational and technology
requirements for successful CPFR
• Risks and hurdles for a CPFR
implementation

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 Collaborative Planning, Forecasting, and
Replenishment (CPFR)

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FIGURE 10-4

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 Achieving Coordination in Practice

• Quantify the bullwhip effect

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• Get top management commitment for coordination
• Devote resources to coordination
• Focus on communication with other stages
• Try to achieve coordination in the entire supply chain
network
• Use technology to improve connectivity in the supply
chain
• Share the benefits of coordination equitably

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 Summary of Learning Objectives

1. Describe supply chain coordination and the

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bullwhip effect, and their impact on supply chain
performance
2. Identify obstacles to coordination in a supply chain
3. Discuss managerial levers that help achieve
coordination in a supply chain
4. Understand the different forms of CPFR possible in
a supply chain

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