VTU MBA SCM Module 6

1. COORDINATION IN THE
SUPPLY CHAIN
MODULE 6

2. LACK OF SUPPLY CHAIN COORDINATION
AND THE BULLWHIP EFFECT
• Supply chain coordination – all stages in the supply chain take
actions together (usually results in greater total supply chain
profits)
• SC coordination requires that each stage take into account the
effects of its actions on the other stages
• Lack of coordination results when:
• Objectives of different stages conflict or
• Information moving between stages is distorted
22/16/2015

3. BULLWHIP EFFECT
• Fluctuations in orders increase as they move up the
supply chain from retailers to wholesalers to
manufacturers to suppliers
• Distorts demand information within the supply chain,
where different stages have very different estimates of
what demand looks like
• Results in a loss of supply chain coordination
• Examples: Proctor & Gamble (Pampers); HP (printers);
Barilla (pasta)
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4. THE EFFECT OF LACK OF COORDINATION
ON PERFORMANCE
• Manufacturing cost (increases)
• Inventory cost (increases)
• Replenishment lead time (increases)
• Transportation cost (increases)
• Labor cost for shipping and receiving (increases)
• Level of product availability (decreases)
• Relationships across the supply chain (worsens)
• Profitability (decreases)
• The bullwhip effect reduces supply chain profitability by
making it more expensive to provide a given level of
product availability
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5. OBSTACLES TO COORDINATION IN A
SUPPLY CHAIN
• Incentive Obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles
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6. INCENTIVE OBSTACLES
• When incentives offered to different stages or
participants in a supply chain lead to actions that
increase variability and reduce total supply chain profits
– misalignment of total supply chain objectives and
individual objectives
• Local optimization within functions or stages of a
supply chain
• Sales force incentives
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7. INFORMATION PROCESSING OBSTACLES
• When demand information is distorted as it moves
between different stages of the supply chain, leading to
increased variability in orders within the supply chain
• Forecasting based on orders, not customer demand
• Forecasting demand based on orders magnifies
demand fluctuations moving up the supply chain
from retailer to manufacturer
• Lack of information sharing
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8. OPERATIONAL OBSTACLES
• Actions taken in the course of placing and filling orders
that lead to an increase in variability
• Ordering in large lots (much larger than dictated by
demand)
• Large replenishment lead times
• Rationing and shortage gaming (common in the
computer industry because of periodic cycles of
component shortages and surpluses)
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9. PRICING OBSTACLES
• When pricing policies for a product lead to an increase
in variability of orders placed
• Lot-size based quantity decisions
• Price fluctuations (resulting in forward buying)
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10. BEHAVIORAL OBSTACLES
• Problems in learning, often related to communication in the
supply chain and how the supply chain is structured
• Each stage of the supply chain views its actions locally and is
unable to see the impact of its actions on other stages
• Different stages react to the current local situation rather
than trying to identify the root causes
• Based on local analysis, different stages blame each other
for the fluctuations, with successive stages becoming
enemies rather than partners
• No stage learns from its actions over time because the most
significant consequences of the actions of any one stage
occur elsewhere, resulting in a vicious cycle of actions and
blame
• Lack of trust results in opportunism, duplication of effort,
and lack of information sharing
102/16/2015

11. MANAGERIAL LEVERS TO ACHIEVE
COORDINATION
• 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
• Improving Information Accuracy
• Sharing point-of-sale data
• Implementing collaborative forecasting and planning
• Designing single stage control of replenishment
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12. MANAGERIAL LEVERS TO ACHIEVE
COORDINATION
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• Improving Operational Performance
• Reducing replenishment lead time
• Reducing lot sizes
• Rationing based on past sales and sharing information to
limit gaming
• Designing Pricing Strategies to Stabilize Orders
• Moving from lot-size based to volume-based quantity
discounts
• Stabilizing pricing
• Building Strategic Partnerships and Trust

13. ALIGNING GOALS AND INCENTIVES
• Align incentives so that each participant has an
incentive to do the things that will maximize total
supply chain profits
• 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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14. IMPROVING INFORMATION VISIBILITY
AND ACCURACY
• Sharing point of sale data
• Collaborative forecasting and planning
• Single stage control of replenishment
• Continuous replenishment programs (CRP)
• Vendor managed inventory (VMI)
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15. IMPROVING OPERATIONAL PERFORMANCE
• Reducing replenishment lead time
• Reduces uncertainty in demand
• Electronic Data Interchange (EDI) is useful
• Reducing lot sizes
• Computer-assisted ordering, B2B exchanges
• Shipping in LTL sizes by combining shipments
• Technology and other methods to simplify receiving
• Changing customer ordering behavior
• Rationing based on past sales and sharing information to
limit gaming
• “Turn-and-earn”
• Information sharing
152/16/2015

16. DESIGNING PRICING STRATEGIES
TO STABILIZE ORDERS
• Encouraging retailers to order in smaller lots and reduce
forward buying
• Moving from lot size-based to volume-based quantity
discounts (consider total purchases over a specified time
period)
• Stabilizing pricing
• Eliminate promotions (everyday low pricing EDLP)
• Limit quantity purchased during a promotion
• Tie promotion payments to sell-through rather than
amount purchased
• Building strategic partnerships and trust – easier to
implement these approaches if there is trust
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17. BUILDING STRATEGIC PARTNERSHIPS
AND TRUST IN A SUPPLY CHAIN
• Background
• Designing a Relationship with Cooperation and Trust
• Managing Supply Chain Relationships for Cooperation
and Trust
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18. BUILDING STRATEGIC PARTNERSHIPS
AND TRUST IN A SUPPLY CHAIN
• Trust-based relationship
• Dependability
• Leap of faith
• Cooperation and trust work because:
• Alignment of incentives and goals
• Actions to achieve coordination are easier to
implement
• Supply chain productivity improves by reducing
duplication or allocation of effort to appropriate
stage
• Greater information sharing results
182/16/2015

19. TRUST IN THE SUPPLY CHAIN
• Historically, supply chain relationships are based on
power or trust
• Disadvantages of power-based relationship:
• Results in one stage maximizing profits, often at the
expense of other stages
• Can hurt a company when balance of power changes
• Less powerful stages have sought ways to resist
192/16/2015

20. BUILDING TRUST INTO A SUPPLY CHAIN
RELATIONSHIP
• Deterrence-based view
• Use formal contracts
• Parties behave in trusting manner out of self-interest
• Process-based view
• Trust and cooperation are built up over time as a
result of a series of interactions
• Positive interactions strengthen the belief in
cooperation of other party
• Neither view holds exclusively in all situations
202/16/2015

21. BUILDING TRUST INTO A SUPPLY CHAIN
RELATIONSHIP
• Initially more reliance on deterrence-based view, then
evolves to a process-based view
• Co-identification: ideal goal
• Two phases to a supply chain relationship
• Design phase
• Management phase
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22. DESIGNING A RELATIONSHIP WITH COOPERATION AND
TRUST
• Assessing the value of the relationship and its contributions
• Identify the mutual benefit provided
• Important to share benefits equitably
• Identifying operational roles and decision rights for each party
• Sequential interdependence is the traditional supply chain form
• Reciprocal interdependence is more difficult but can result in more
benefits
• Creating effective contracts
• Create contracts that encourage negotiation when unplanned
contingencies arise
• Informal relationships and agreements can fill in the “gaps” in
contracts
• Designing effective conflict resolution mechanisms
• Initial formal specification of rules and guidelines for procedures
and transactions
• Regular, frequent meetings to promote communication
222/16/2015

23. MANAGING SUPPLY CHAIN RELATIONSHIPS
FOR COOPERATION AND TRUST
• Effective management of a relationship is important for
its success
• Top management is often involved in the design but not
management of a relationship
• process of alliance evolution
• Perceptions of reduced benefits or opportunistic actions
can significantly impair a supply chain partnership
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24. CONTINUOUS REPLENISHMENT PROGRAM
(CRP) AND VENDOR-MANAGED
INVENTORY(VMI)
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• In CRP, the wholesaler or manufacturer replenishes a
retailer regularly based on POS data.
• CRP may be supplier, distributor, or 3rd party managed.
• CRP systems are driven by actual withdrawals of inventory
from retailer warehouse rather than POS data at the
retailer level.
• Tying CRP systems to warehouse withdrawals is easier to
implement and retailers are comfortable sharing data at
this level.
• IT system linked provides a good information
infrastructure on which CRP is based.
• In CRP, inventory at the retailer is owned by the retailer.

25. VMI
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• With VMI, the manufacturer or supplier is responsible for
all the decisions regarding product inventories at the
retailers.
• The control of the replenishment decision moves to the
manufacturer instead of the retailer.
• The inventory is owned by the supplier until sold by the
retailer.
• VMI requires the retailer to share the demand information
with the manufacturer to allow it to make replenishment
decisions.

26. VMI
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• VMI can allow a manufacturer to increase its profits as
well as profits for the entire supply chain if both retailer
and manufacturer margins are considered when making
inventory decisions.
• VMI also helps by conveying customer demand data to
the manufacturer, which can then plan production
accordingly. This helps improve manufacturer forecasts
and better match manufacturer production with customer
demand.

27. COLLABORATIVE PLANNING, FORECASTING,
AND REPLENISHMENT(CPFR)
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• The voluntary interindustry commerce standards (VISC)
has defined CPFR as “a business practices that combines
the intelligence of multiple partners in the planning and
fulfilment of customer demand.”
• Successful CPFR can only be built in which 2 parties
(buyers and sellers) have synchronized their data and
established standards for exchanging information.

28. COLLABORATIVE PLANNING,
FORECASTING, AND REPLENISHMENT(CPFR)
2/16/2015 28
• Buyers and sellers may collaborate along any or all the below
activities:
• Strategy and planning: the partners determine the scope
and assign roles, responsibilities and clear checkpoints.
• Demand and supply management: a collaborative sales
forecast projects the partners best estimate of customer
demand at the point of sale.
• Execution: as forecasts are firm, they are converted into
actual orders.
• Analysis: focus on identifying exceptions and evaluating
metrics that are used to assess performance or identify
trends

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• A fundamental aspect of successful collaboration is the
identification and resolution of exceptions.
• Exceptions refer to the gap between forecasts made by
the two sides or some other performance metric that are
falling or likely to fall outside acceptable bounds.
• These metrics may include inventories that exceed
targets or product availability that fall below targets.
• For successful CPFR, it is important to have a process in
place that allows the two parties to solve exceptions.
• It resulted in low forecast errors, increased customer
service, and an average inventory of only 5 days.
COLLABORATIVE PLANNING,
FORECASTING, AND REPLENISHMENT(CPFR)

30. 4 COMMON CPFR SCENARIOS
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CPFR Scenarios Where applied in supply
chain
Industries where
applied
Retail event
collaboration
Highly promoted
channels or categories
All industries other
than those who practice
Everyday Low Price
DC replenishment
collaboration
Retail DC or distributor
DC
Drug store, hardware,
grocery
Store replenishment
collaboration
Direct store delivery or
DC-to-store delivery
Mass merchants, club
stores
Collaborative
assortment planning
Apparel and seasonal
goods
Department store and
specialty retail

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• A successful implementation of CPFR requires a change in
organizational structure, to be scalable and
implementation of appropriate technology.
• Effective collaboration requires manufacturers to set up
cross-functional, customer-specific teams that include
sales, demand planning and logistics.
• For large customers, focus has become feasible with the
consolidation in retailing. For smaller customers, such
teams can be focused by geography or sales channel.
• For retailers that have multiple level of inventory such as
DCs and retail stores, duplication of inventories is
common.
ORGANIZATIONAL AND TECHNOLOGICAL
REQUIREMENTS FOR SUCCESSFUL CPFR

32. COLLABORATIVE ORGANIZATIONAL STRUCTURE
Note: The CPFR is not dependent on technology but requires
technology to be scalable. CPFR technologies have been developed to
facilitates sharing of forecasts and historical information, evaluating
exception conditions, and enabling revisions. These solutions must be
integrated with enterprise systems that record all supply chain
transactions.
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Manufacturer Organization Retailer Organization
Category team
• Merchandise
planning
• Buying
• replenishment
Customer 1 team
Demand planning
Sales
Customer service/
Logistics
Customer 2 team
Demand planning
Sales
Customer service/
Logistics

33. RISKS AND HURDLES FOR CPFR
IMPLEMENTATION
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• Risk of information misuse.
• Risk of change in technology(collaborative relationship at
stake)
• Risk of low interaction (culture difference between 2
entities)
• Major hurdle being the inability to foster a collaborative
culture across partners.

34. CPFR-INDIAN EXPERIENCES
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• Raheja’s Group’s HyperCity has been among the pioneers in adopting
CPFR practices in India and has synchronized the operations in more
than 50 of its stores to improve information flow and coordination
through distribution channel.
• As per the informations HyperCity’s parent company, Shoppers’ Stop,
has resulted in the following benefits:
• Increase of 25-30% in food sales
• Decrease in 2% of the stock level
• Increased revenue
• Lower inventory holding cost
• Higher availability of product on the shelf
• Improved brand loyalty
• Assured customer retention
• Elimination of expired stocks
• Longer shelf life for consumption.

35. ASSIGNMENT…
• What are supply chain coordination and the bullwhip effect,
and what are their effects on supply chain performance?
• What are the causes of the bullwhip effect, and what are
obstacles to coordination in the supply chain?
• What are the managerial levers that help achieve
coordination in the supply chain?
• What are actions that facilitate the building of strategic
partnerships and trust in the supply chain?
352/16/2015