Coordinating In A Supply Chain
Lack of Coordination and Supply Chain Bullwhip Effect
The supply chain requires coordination of all actions to be taken to increase profits and take into account the impacts that will occur. Lack of good coordination will reduce the total profit. This is because each party in the supply chain has its own goal of maximizing its own profits.
Lack of coordination between each party in the supply chain will have an impact known as the bullwhip effect. The bullwhip effect is an increasing demand from consumers to retailers, retailers to agents, agents to producers, producers to suppliers due to the lack of coordination of information on each party.
Although consumption of the final product is stable, orders for raw materials vary widely and costs increase making it difficult for supply to meet demand. The same phenomenon, over a longer period of time, has been observed in several industries that are quite susceptible to "boom and bust" cycles.
A good example is the production of memory chips for personal computers. Between 1985 and 1998 there were at least two cycles during which memory chip prices fluctuated by a factor of more than there.
These large fluctuations in prices are driven by either large shortages or surplus capacity. Scarcity and exacerbated by panic buying and overordering followed by a sudden drop in demand. In this section of the text, we consider how lack of coordination affects supply chain performance.
Effects on Performance of Lack of Coordination
Lack of coordination leads to distorted information in the supply chain. The impact of the lack of coordination in the supply chain affects:
1. Manufacturing cost: Lack of coordination increases the cost of manufacture in the supply chain. As a result of the bullwhip effect, P&G and its suppliers have to meet the demand flow more than consumer demand.
2. Inventory cost: Lack of coordination increases the cost of supplies in the supply chain. To overcome the variability in demand, P&G companies have to keep a larger supply than what is needed in the supply chain. This results in an increase in inventory costs.
3. Replenishment lead time: Lack of coordination increases lead time. Increased variability as a result of the bullwhip effect made the scheduling of P&G and the factory suppliers much more than their demand level.
4. Transportation cost: Lack of coordination increases transportation costs in the supply chain. Transportation needs overtime to P&G and its correlated suppliers to fulfill orders. As a result, bull whips cause transportation requirements to fluctuate significantly from time to time. This results in increased transportation costs because excess transport capacity needs to be considered to cover periods of high demand.
5. Labor cost for shipping and receiving: Lack of coordination increases labor costs in relation to sending and receiving in the supply chain. Labor requirements for deliveries at P&G and its suppliers fluctuate with similar fluctuating orders occurring for labor requirements in receiving from distributors and retailers.
The various stages have a choice between excess worker capacity or multiple worker capacities in response to fluctuations in orders.
6. Level of product availability: Lack of coordination causes losses to product availability and results in deeper stockouts in the supply chain. Large fluctuations in orders make it more difficult for P&G to provide all distributor and retailer orders on time.
This increases the likelihood that the retailer will run out of stock, thus losing sales in the supply chain.
7. Relationship across the supply chain: A lack of coordination has a negative impact on performance at each stage and thus leads to loss of relationships in the supply chain. There is a tendency to blame the other stages of the supply chain because each stage is felt to be doing its best.
Constraints in Supply Chain Coordination
In the supply chain, there are constraints on coordination, so it is necessary to take action to assist coordination. These constraints are incentive barriers, information processing barriers, operational barriers, price barriers, and behavioral barriers.
Intensive barriers occur when the intensive stages are different or actions that can increase variability so as to reduce the profits obtained by the supply chain. There are 2 incentive barriers, namely local optimization in supply chain functions/stages and structured incentives.
Local optimization in the function/stage of the supply chain focuses more on the local impact of the results of action in making decisions, which does not maximize supply chain profits.
Example: Kmart company manager, purchasing, and inventory decisions are used to maximize Kmart profits, so it does not maximize supply chain profits. Meanwhile, structured incentives are an obstacle in supply chain coordination.
Manufacturers usually measure sales from the quantity sold to distributors or retailers, not the quantity sold to the final customer (through the seller).
Example: Barilla offers sales force incentives based on the quantity sold to distributors during the promotional period.
Information processing bottlenecks occur when demand information is blocked at each stage of the supply chain resulting in distinct increases in orders in the supply chain. There are 2 obstacles in the information process, namely forecasting based on orders, not customer requests, and losses from sharing information.
Order-based forecasting is not customer demand, so make estimates based on orders received. So that considering the impact of a random increase in customer demand, the order will be enlarged. For example, a retailer increases the order size to account for future growth, so the wholesaler will place larger orders with the manufacturer.
Lack of information at the supply chain stage contributes to information distortion. For example, retailers such as Wal-Mart increase the number of certain orders. If the company is not aware of the planning, it can interpret the large order as a permanent increase in orders.
So the company and its suppliers will have plenty of inventory right after Wal-Mart has completed the increase in order quantities. Lack of information between retailers and manufacturers can lead to large ups and downs incorporate orders.
Operational barriers occur in placing and filling orders which leads to increased variability. When a company orders a lot size that is larger than the lot size when the demand arises, the order variability increases.
However, this resulted in the erratic order flow. Information drift increases if the additional lead time is too long. When one of the supply chain management plays a "game" which results in the factory not knowing the actual market demand so that there is a shortage or excess stock in the market which results in chaos in the downstream, or there is one link in the chain that hoarding goods to occur scarcity and create chaos in the SCM chain so that demand increases from the downstream.
Price constraints arise when the pricing policy for a product causes increased variability of orders. The increase in order size in the supply chain and the resulting lot size increases the bullwhip effect on the supply chain.
Manufacturers and distributors usually make promotions periodically, thus making buyers demand more than is actually needed. This kind of promotion can put the supply chain at risk, this is because the buyer will order more than needed when there is a promotion and when the price becomes normal there will be no purchase because the customer still has a stock of goods. This keeps the request map from showing the true pattern.
Behavioral barriers are problems that occur in an organization that contribute to the bullwhip effect. These problems are often related to the structure of a supply chain and the form of communication that occurs between each stage.
Managerial Levers to Achieve Coordination
Having identified the barriers to coordination there is a manager's action that can help overcome obstacles and achieve coordination in the supply chain. The following managerial actions increase the total supply chain profit and reduce the disruption of information.
These actions include:
Aligning Objectives and Incentives
Managers can improve coordination in the supply chain through goal alignment and incentives so that each member in the supply chain activities works to maximize total supply chain profits.
Aligning Objectives Across the Supply Chain
Coordination requires each stage of the supply chain to focus on the excess of the supply chain or the total size of the whole rather than just their individual parts. Judging from several approaches, each supply chain leaves money on the table.
A focus in the supply chain is unlikely until actions and incentives in the supply chain are aligned with this goal. Risk-sharing through approaches such as quantity flexibility grows the total surplus (surplus) of the supply chain while growing the share for each share.
The key to coordination is with a mechanism that allows the formation of mutually beneficial scenarios where the supply chain surplus grows along with the profits for all stages of the supply chain.
Aligning Incentives Across Functions
One key to coordinating decisions within a company is to ensure that the objectives of each function are used to evaluate a decision in line with the objectives of the company as a whole. All facility, transportation, and supply decisions must be evaluated on the basis of their effect on profits, not total costs, or even worse, only local costs.
This helps avoids situations such as the transportation manager making the decision that transportation costs are lowest but increase the overall cost of the supply chain.
Pricing for Coordination
A firm can use a lot-size based quantity discount to achieve coordination on product commodities if the firm has large fixed costs associated with each lot. For a company's product that has market power, a manager can use the two-part rate and volume discount to help achieve coordination.
With uncertain demand, companies can use buybacks, revenue sharing, and quantity flexibility contracts to encourage retailers to provide a level of product availability that maximizes total supply chain profits. Buyback contracts have been used in the publishing industry to increase total supply chain profits.
Changing the Sales Force's Incentive from Sell in to Sell Through
Any change that reduces the salesperson's incentive to pressure products onto retailers to reduce the bullwhip effect. If the intensive sales force is based on selling over the turnaround, the incentive to suppress the product is reduced.
This helps reduce direct purchases and the fluctuations that result in orders. Managers can also link incentives for personal (employee) sales to sell through through retailers more quickly than selling into retailers.
This action removes any motivation a sales employee might need to push a purchase forward. Elimination from immediate purchases helped reduce fluctuations in the order flow.
Improving the Accuracy of Information
Managers can achieve coordination by increasing the availability of accurate information for different stages in the supply chain.
Distribution of Sales Data Points
Sharing of Sales data points across the supply chain can help reduce the bullwhip effect. The main cause for information disruption is the fact that each stage of the supply chain uses order to forecast future demand.
Given that the orders received by different stages vary, forecasts at different stages also vary. In reality, only supply chain demand must satisfy the end customer. If a retailer shares sales data points with other stages of the supply chain, all stages of the supply chain can forecast future demand based on customer demand.
Sharing of sales data points helps reduce information distraction because each stage now responds to the same changes in customer demand. Observation of the distribution of aggregate sales data points that is sufficient to minimize disruption of information.
We don't always need to share detailed sales data points. The use of appropriate information systems facilitates sharing of some data. Companies can also use the internet to share data with suppliers.
Collaborative Application of Forecasting and Planning
A sales data point is shared, the different stages of the supply chain have to work together to forecast and plan if complete coordination is to be achieved. Without joint planning, sharing sales data points does not guarantee coordination.
A retailer may have observed a large demand in January, therefore executing a promotion. If no promotions are planned in January, the retailer's forecast will be different from the company's forecast even if both have past sales data points.
Companies must be aware of the retailer's promotion plans to achieve coordination. The key to ensuring the entire supply chain is to operate by forecasting in general.
To facilitate this type of coordination in a supply chain environment, the Inter-Trade Industry Voluntary Standards Association (VICS) has established planning, forecasting, and replenishment cooperation committee (CPFR) to identify best practices and design guidelines for collaborative planning and forecasting. This practice is described later in the next chapter.
Designing Single Stage Control of Replenishment
Designing a supply chain in which a single stage control decision of refilling for the entire supply chain can help reduce information disruption. As mentioned earlier, a key cause of information disruption is the fact that each stage of the supply chain uses orders from the previous stage as demand history.
As a result, each stage views its role as one of the filling orders placed by the next stage. In fact, the key to replenishment is with the retailer, because that is where the customer's last purchase is.
When the decision to control a single stage of replenishment for the entire supply chain, the problem of various forecasting is eliminated and coordination in the supply chain is followed.
For a company like Dell that sells directly to customers, the sole control of refilling is automatic because there is no intermediary between the company and the customer. The company automatically becomes the single point of control on refilling decisions.
When sales occur through a retailer, there are some industry practices such as a seller-managed replenishment and inventory sustainability program which will be described in the next chapter.
Improve Operational Performance
Managers can help reduce distortion of information by improving operational performance and designing schematically appropriate rations in cases of shortages.
Reduce Supply Order Time
By reducing supply order time, managers can reduce demand uncertainty during the lead. Reduced lead times are especially beneficial for seasonal items. Thus, a reduction in order disclosure time helps reduce distortion of information by reducing underlying demand uncertainty.
Things managers can do to reduce lead time:
- Order electronically, either via e-commerce on the internet or via Electronic Data Interchange (EDI)
- Flexibility and cellular manufacturing at plant plants
- Increased- ASNs associated with acceptance
- Cross-docking can be related to the movement of product between stages in the supply chain
Managers can reduce information distortion by implementing operational improvements that reduce lot size. A reduction of the lot size reduces the fluctuation that can accumulate from each stage of the supply chain, thereby reducing drift.
To reduce lot size, managers must take actions that help reduce the fixed costs associated with ordering, transporting, and receiving each lot. Wal-mart and Seven-Eleven Japan have been very successful in reducing equipment ordering times by combining shipping across multiple products and suppliers.
Rationing Based on Sales Speed And Information Sharing To Limit Gaming
To reduce information distortion managers can design rationing schemes that prevent retailers from falsely pumping their orders in cases of shortages. One approach, referred to as turn-and-earn, is to allocate available supply based on past retail sales rather than current retail orders. Tying up the allocation of funds for past sales removes any possible retailer incentive to expand orders.
Devising Strategies To Stabilize Order Prices
Managers can reduce information distortion by devising pricing strategies that encourage retailers to order in smaller lots and reduce forward buying.
Changing from size-based to volume-based on discounted quantity
lotsAs a result of the size-based lot quantity discount, retailers increase their lot size to take full advantage of the discount. Volume-based quantity discounts offer to remove the incentive to increase the size of each lot because the volume-based discount takes into account the number of purchases over a given period rather than purchases per lot.
Volume base quantity discounts result in many sizes, smaller ones thus reducing viability in the supply chain. The resulting volume-based quantity discount on smaller lots reduces ordering variability in the supply chain.
Managers can dampen the bullwhip effect by eliminating the promotion and replenishment of an EDLP. The elimination of promotions eliminates forward buying by retailers and results in orders that match customer demands. P&G, Campbell Soup, and several other manufacturers have implemented EDLP to dampen the bullwhip effect.
Build partnership and trust strategies
Managers can easily use levers to achieve coordination if trust and strategic partnerships are built in the supply chain. The sharing of accurate information that is trusted by each stage results in a better match between supply and demand throughout the supply chain and lower costs. a
A good relationship also tends to lower transaction costs at each stage of the supply chain. For example, a supplier's supply chain can omit business forecasts if it trusts orders and forecast information received from retailers.
The collaborative planning, forecasting, and filling (CPFR)
Voluntary Interindustry Commerce Standards Association (VICS)has designated CPFR as "a business practice of combining intelligence from multiple partners in planning and meeting consumer demand." according to VICS, since 1998, "more than 300 companies have implemented the process."
It is important to understand that the success of the CPFR can only be built on a foundation where both parties have synchronized their data and the standards set for exchanging information.
The seller and the buyer may work together in a supply chain with any or all of the following supply chain activities:
- Strategy and planning
- Demand and supply management
A fundamental aspect of successful collaboration is exception identification and resolution. Exceptions refer to a gap between the predictions made by two parties or multiple performance metrics that fall or are likely to fall outside acceptable limits. These metrics may include supplies that are over the target or the availability of products that are well below targets.
One of the successes of the CPFR was carried out by Henkel, a detergent manufacturer from Germany, and Eroski, a food retailer in Spain. Prior to CPFR, Eroski saw frequent stockouts of Henkel products, especially during promotions.
At the start of the CPFR in December 1999, 70 percent of forecast sales had an average error of 50 percent and only 5 percent had an error of more than 20 percent. Within 4 months of implementing the CPFR, 70 percent of forecast sales had errors below 20 percent and only 5 percent had errors above 50 percent. CPFR produced 98 percent customer service levels and an average inventory of only five days.
Collaborative retail events
In any retail environment, such as a supermarket, a promotional event and other retail event has an important impact on demand. Stockouts, excess inventory and unforeseen logistics costs during these events affect financial performance for the retailer and manufacturer. Arranged in such a way that collaboration between retailers and suppliers for planning, forecasting, and filling promotions is very effective
1. Quantity bullwhip effect
Managers must begin to compare the variability of orders received from customers with the variability of orders with suppliers.
2. Obtaining top management commitment to coordination
The most important aspect of SCM, coordination will succeed only with top management commitment.
3. Provides resources for coordination
Coordination cannot be achieved without the resources involved. One solution to overcoming coordination problems is for resources to be drawn from different companies in the supply chain.
4. Focus on communication with other stages
5. Good communication with other stages in the supply chain will create a good situation too, so that distortion of information can be avoided.
6. Try to achieve coordination in the supply chain network
7. It is not enough just a few stages in the supply chain to coordinate. However, overall coordination is required at all stages of the supply chain.
8. Use technology to improve connectivity in the supply chain.
9. Use of the internet and a variety of different software can be used to improve coordination skills.