Module 6

MODULE 6

COORDINATION IN THE SUPPLY CHAIN

Contents

Supply Chain Coordination Bullwhip effect Effects of Lack of Supply Chain Coordination Obstacles to coordination Managerial levers to Achieve Coordination Continuous Replenishment Program (CRP) Vendor Managed Inventory (VMI) Collaborative Planning, Forecasting and

Replenishment (CPFR)

Supply Chain Coordination

Supply Chain Coordination happens when all stages in the supply chain take actions collectively resulting in higher total supply chain profitability

Supply chain coordination requires that each stage takes into account the effects of its actions on the other stages

Lack of coordination results when: Objectives of different stages conflict Information flow between stages is delayed

and distorted

Bullwhip Effect

Bullwhip Effect (or Whiplash effect): Fluctuations in orders increase as they move up the supply

chain from retailers to wholesalers to manufacturers to suppliers

Uncertain demand information within the supply chain where each stage has different demand estimates (addition of buffers) and results in loss of supply chain coordination

Happens due to customer demand fluctuations and inaccurate forecasts

Example: Effect on Textile industry in 2006-2008

The Effect of lack of coordination (Bullwhip effect) on Supply Chain performance

Manufacturing cost increases: Increased demand variability leads to

building excess capacity or higher inventory thereby increasing manufacturing cost

Inventory cost increases: Higher inventory levels lead to higher

inventory holding costs Warehousing cost increases:

Higher inventory levels increase warehousing space required thereby increasing warehousing cost

Replenishment lead time increases: High demand variability makes production

scheduling and inventory planning difficult which increases replenishment lead time

Transportation cost increases: Since the demand varies, transportation

requirements also fluctuate which increases transportation cost

The Effect of lack of coordination (Bullwhip effect) on Supply Chain performance continued…

Labour cost for shipping and receiving increases: Demand fluctuations lead to variation

in labour requirements which increases the costs

Level of product availability decreases: High demand variability makes product

supply on time difficult and may result in stock outs

Relationships across the supply chain worsens: Poor performance at every stage

impacts the interaction between stages negatively

Profitability decreases: Reduced supply chain profitability as

its more expensive to provide a given level of product availability

Obstacles to Coordination in a Supply Chain

Incentive Obstacles: Happens when incentives offered to

different stages in a supply chain increase variability and reduce total supply chain profits Local optimization within functions or

stages of a supply chain: Logistics department - Aims at

reducing transport cost even though it would increase inventory levels downstream in the supply chain.

Sales department - Sales Force Incentives are based on quantities sold to distributors or retailers (Sell-In) and not on quantities sold to end consumers (Sell-Through). This leads to order fluctuations.

Obstacles to Coordination in a Supply Chain continued…

Information Processing Obstacles: Occurs when demand information is unclear

between different stages of the supply chain leading to increased order variation Forecasting based on random orders:

Example: A random increase in customer demand at Big-Bazaar would lead to placing high orders with manufacturer. The manufacturer places even higher orders with supplier (assuming it as a growth trend). This will lead to build-up of inventories at each stage.

Lack of information sharing: Example: A Levis store increases orders of a

particular product category due to a special promotion. If the manufacturer is not aware of this promotion, they might assume a growth trend and place higher orders with suppliers as a result.


Operational obstacles: Happens when actions taken during

placing and filling orders lead to an increase in variabilityOrdering in large lots:

Example: Mega-Mart orders lot sizes for belts much larger than what is essentially required in order to utilize economies of scale.

Large replenishment lead times: Example: Shoppers-Stop has a lead time of

15 days for luxury watches and have misjudged a random increase as a steady growth trend. They will include anticipated growth over 15 days into its orders leading to an inventory excess.


Operational obstacles continued… Rationing and shortage gaming - Rationing

schemes that allocate limited production in proportion to orders placed by retailers. Especially done for high-demand products which are in short supply. Retailers will place higher orders than what is actually required to increase the amount supplied to them. • Example: For Lenovo, due to alternate

phases of IC chip shortages and surpluses, inventory level fluctuations had a massive impact on their financials.


Pricing obstacles: Occurs when pricing policies for a product

lead to an increase in variability of orders placed Lot-size based quantity decisions:

Quantity discounts based on economies of scale increases lot size of orders which raises the variability up the supply chain

Price fluctuations: Trade promotions and other short-term

discounts offered by a manufacturer lead to wholesaler/retailer buying large quantities which covers even future demand. This results in higher production and shipments during promotions followed by a sudden decrease thereafter.

Example: HUL’s trade promotion for Surf Excel at Big Bazaar


Behavioral Obstacles: Related to problems in learning,

communication between the supply chain stages and how the supply chain is structured Each stage of the supply chain views only

its own actions and does not observe the impact of its actions on other stages

Different stages blame each other for the fluctuations, rather than trying to identify the root causes and learning from errors

Lack of trust results in selfish opportunism, duplication of effort and inadequate information sharing

Managerial Levers to Achieve Coordination

Aligning Goals and Incentives: Align goals and incentives so that each

participant works towards maximizing total supply chain profits Align incentives across functions – All facility,

transportation and inventory decisions must be evaluated based on their effect on overall profitability

Pricing for coordination – Use lot size based discounts and suitable contracts to ensure product availability throughout the supply chain

Alter sales force incentives - From Sell-In (sale by manufacturer to retailer) to Sell-Through (sale by retailer to end consumer)

Managerial Levers to Achieve Coordination continued…

Improving Information Accuracy:

Sharing POS data – Shared POS data across the supply chain means each stage will forecast demand based on actual sales data

Collaborative forecasting and planning – Each stage must forecast and plan jointly so that complete benefits of POS data can be realized

Single stage control of replenishment - Since key replenishment happens at the retailer, only this data must be considered for replenishment across the supply chain


Improving Operational Performance: Reducing replenishment lead time:

Orders through Internet (E-commerce), Flexible manufacturing, Advance Shipping Notice (ASN) and Cross-docking techniques.

Reduces uncertainty in demand because multiple orders can be placed with higher accuracy of forecasts.

Reducing lot sizes: Advanced Planner & Optimizer (APO) assisted ordering –

ensures correct orders TL shipping by combining shipments of a variety of

products: E.g. 7-Eleven combines temperature dependent

products into a TL ; Milk Route Temporal Aggregation to ensure evenly distributed

orders over time Rationing based on past sales and sharing information:

Turn-and-Earn - Allocate stock based on past actual retailer sales rather than current orders. E.g. Automobile industry

Information sharing. E.g. Retailers' Pre-Ordering in Puma and Reebok


Designing Pricing Strategies to Stabilize Orders: Moving from Lot-size based to Volume-based quantity discounts:

Since Volume-based quantity discounts consider total purchases over a specific time-frame rather than a Single Lot, this ensures stabilization.

Stabilizing Pricing: Attempt to eliminate promotions and

implement EDLP Tie promotion payments to Sell-Through rather

than Sell-In Building strategic partnerships and trust:

Easier to implement the above approaches if there is trust

Sharing of accurate information results in better matching of supply and demand

Avoids duplicated efforts and leads to lower overall costs

Continuous Replenishment Program (CRP)

Bullwhip effect can be reduced by assigning replenishment responsibility to a single entity.

Single Point of Replenishment decisions ensure visibility and a common forecast across the supply chain.

Continuous Replenishment Program (CRP): Based on ‘Pull’ process Wholesaler or Manufacturer replenishes a

Retailer regularly based on POS data or inventory consumption from retailer warehouse

IT systems linked across the supply chain provides the information infrastructure

Inventory at retailer is owned by the retailer Advantages – Reduces Inventory, Decreases

Stock-outs, & Improves Customer Service

Examples: Wal-Mart, Dell, Hyper-City retail

Vendor-Managed Inventory (VMI) Vendor-Managed Inventory (VMI) is an

integrated approach where inventory at the distributor/retailer is monitored and managed by the manufacturer/supplier

Control of replenishment decision moves to Manufacturer instead of Retailer

Requires retailer to share customer demand information with manufacturer for making inventory replenishment decisions

Vendor-Managed Inventory (VMI) continued… In many instances, inventory is owned by

supplier or manufacturer until its sold by retailer

Example: Wal-Mart and P&G Have a VMI program for over 10 years Revenues increased significantly Wal-Mart’s operating costs reduced drastically P&G’s market share grew (because Wal-Mart

gave it preferred shelf space) Customer Service levels increased significantly

Collaborative Planning, Forecasting and Replenishment (CPFR)

A business practice in which buyer and supplier integrate plans, forecasts and delivery schedules to ensure smooth flow of products across the supply chain Examples: Sears and Michelin tyres, Wal-Mart and

P&G have collaboration for the following activities: Strategy and Planning – Overall scope of the

collaboration, responsibilities, identify product promotions, new product launches and store openings/closings.

Demand and Supply management – Sales forecasting, future product ordering, inventory levels and replenishment lead times.

Execution – Receipt of Actual orders and Order Fulfillment through production, shipping, receiving and stocking products.

Analysis – Identifying Exceptions (gap in forecasts), assessing performance and past trends.

Module 6

Documents

Transcript of Module 6