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‹#› Het begint met een idee
CHAPTER 8 – COORDINATION IN A SUPPLY CHAIN
Dung H. Nguyen
Faculty of International Economic Relations
University of Economics and Law

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Vrije Universiteit Amsterdam
 Supply chain coordination
 Bullwhip effect
 Effect of lack of coordination
 Obstacles to coordination in a supply chain
 Managerial levers to achieve coordination
 Continuous replenishment
 Vendor-managed inventory
 Collaborative planning, forecasting, and replenishment
 Coordination in practice
CONTENTS
CONTENTS
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SUPPLY CHAIN COORDINATION
SUPPLY CHAIN COORDINATION
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All stages of the chain are aligned to 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:
o Objectives of different stages conflict
o Information moving between stages is delayed or distorted

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BULLWHIP EFFECT
BULLWHIP EFFECT
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Fluctuations in orders increase as they move up the supply chain from
retailers to wholesalers to manufacturers to suppliers

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BULLWHIP EFFECT
BULLWHIP EFFECT
Intentionally blank

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BULLWHIP EFFECT
BULLWHIP EFFECT
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Manufacturer’s Orders to
Suppliers
Wholesaler’s Orders to
Manufacturers
Retailer’s Orders to
Wholesalers
Consumer Sales
Time
Time
Time
Time
1. Demand forecast updating
2. Order batching
3. Price fluctuations
4. Rationing and shortage gaming
CAUSES
Source: Lee et al. (1997)

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BULLWHIP EFFECT
BULLWHIP EFFECT
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• Information sharing
• Channel alignment
• Pricing stabilization
• Allocation based on past sales records rather than on orders.
INITIATIVES

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EFFECT OF LACK OF COORDINATION
EFFECT OF LACK OF COORDINATION
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• Manufacturing cost: increase
• Inventory cost: increase
• Lead time: increase
• Transportation cost: increase
• Labor cost for shipping and receiving: increase
• Level of product availability: decrease
• Relationships across the supply chain: loss of trust

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OBSTACLES TO COORDINATION IN A SUPPLY CHAIN
OBSTACLES TO COORDINATION IN A SUPPLY CHAIN
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 Incentive obstacles:
o Local optimization within functions or stages of a supply chain
o Sales force incentives
 Information-processing obstacles:
o Forecasting based on orders and not customer demand
o Lack of information sharing
 Operational obstacles:
o Ordering in large lots
o Large replenishment lead times
o Rationing and shortage gaming

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OBSTACLES TO COORDINATION IN A SUPPLY CHAIN
OBSTACLES TO COORDINATION IN A SUPPLY CHAIN
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 Pricing obstacles:
o Lot-size–based quantity discounts
o Price fluctuations
 Behavioral obstacles:
o Problems in learning within organizations that contribute to information
distortion

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MANAGERIAL LEVERS TO ACHIEVE COORDINATION
MANAGERIAL LEVERS TO ACHIEVE COORDINATION
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 Aligning goals and incentives
 Improving information visibility and accuracy
 Improving operational performance
 Designing pricing strategies to stabilize orders
 Building strategic partnerships and trust

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ALIGNING GOALS AND INCENTIVES
ALIGNING GOALS AND INCENTIVES
 Aligning goals across the supply chain
 Aligning incentives across functions
 Pricing for coordination
 Altering sales force incentives from sell-in to sell-through
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IMPROVING INFORMATION VISIBILITY AND ACCURACY
IMPROVING INFORMATION VISIBILITY AND ACCURACY
 Sharing customer demand data
 Implementing collaborative forecasting and planning
 Designing single-stage control of replenishment
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IMPROVING OPERATIONAL PERFORMANCE
IMPROVING OPERATIONAL PERFORMANCE
 Reducing the replenishment lead time
 Reducing lot sizes
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DESIGNING PRICING STRATEGIES TO STABILIZE ORDERS
DESIGNING PRICING STRATEGIES TO STABILIZE ORDERS
 Moving from lot-size–based to volume-based quantity discounts
 Stabilizing pricing
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BUILDING STRATEGIC PARTNERSHIPS AND TRUST
BUILDING STRATEGIC PARTNERSHIPS AND TRUST
 Actions such as information sharing, changing of incentives,
operational improvements, and stabilization of pricing typically help
improve the level of trust
 Require a clear identification of roles and decision rights for all
parties, effective contracts, and good conflict resolution mechanisms
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CONTINUOUS REPLENISHMENT
CONTINUOUS REPLENISHMENT
The practice of partnering between supply chain members that
changes the traditional replenishment process to the replenishment
of products based on actual data.
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VENDOR-MANAGED INVENTORY (VMI)
VENDOR-MANAGED INVENTORY (VMI)
An approach to inventory and order fulfilment whereby the supplier,
not the customer, is responsible for managing and replenishing
inventory
 Benefits:
o Improve the forecast
o Minimize the impact of demand amplification
o Minimize inventory, but meeting the service level
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VENDOR-MANAGED INVENTORY (VMI)
VENDOR-MANAGED INVENTORY (VMI)
 Approach:
o Agree a contract
o Share information
o Monitor the process
o Replenish inventory
o Payment
 Problems:
o Unwillingness to share data
o Investment and restructuring costs
o Retailer vulnerability
o Lack of standard procedures
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COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT (CPFR)
COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT (CPFR)
A business practice that combines the intelligence of multiple partners
in the planning and fulfillment of customer demand
 Cases of CPFR:
o Retail event collaboration
o DC replenishment collaboration
o Store replenishment collaboration
o Collaborative assortment planning
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Source: VICS (2004)

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COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT (CPFR)
COLLABORATIVE PLANNING, FORECASTING, AND REPLENISHMENT (CPFR)
Source: Jacobs and Chase (2018)
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CPFR STEPS
CPFR STEPS
1. Creation of a front-end partnership agreement
2. Joint business planning
3. Development of demand forecasts
4. Sharing forecasts
5. Inventory replenishment
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ACHIEVE COORDINATION IN PRACTICE
ACHIEVE COORDINATION IN PRACTICE
 Quantify the bullwhip effect
 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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‹#› Het begint met een idee
CHAPTER 8 – COORDINATION IN A SUPPLY CHAIN
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