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CHAPTER SEVENTEEN
Discussion Questions

1. What is the bullwhip effect and how does it relate to lack of coordination in a supply chain?

The bullwhip effect refers to the fluctuation in orders along the length of the supply chain as
orders move from retailers to wholesalers to manufacturers to suppliers. The bullwhip effect
relates directly to the lack of coordination (demand information flows) within the supply
chain. Each supply chain member has a different idea of what demand is, and the demand
estimates are grossly distorted and exaggerated as the supply chain partner is distanced from
the customer.

2. What is the impact of lack of coordination on the performance of a supply chain?

The impact of lack of coordination is degradation of responsiveness and poor cost

performance for all supply chain members. As the bullwhip effect rears its ugly head, supply
chain partners find themselves with excessive inventory followed by stockouts and
backorders. The fluctuations in inventory result in increased holding costs and lost sales,
which in turn spike transportation and material handling costs. Ultimately, the struggle with
cost and responsiveness hurts the relationships among supply chain partners as they seek to
explain their lack of performance.

3. In what way can improper incentives lead to a lack of coordination in a supply chain? What
countermeasures can be used to offset this effect?

Incentive obstacles occur in situations when different participants in the supply chain are
motivated by self interest.
Incentives that focus only on the local impact of an action result in decisions being made that
achieve a local optimum but can avoid a global (supply chain) optimum. All supply chain
partners must agree on global performance measures and structure rewards such that
members are appropriately motivated.
Sales force incentives also are responsible for counterproductive supply chain behavior.
Commissions that are based on a single short time frame can be gamed by the sales force to
maximize commission but these actions inadvertently increase demand variability and exert
pressure on the supply chain. Commissions should be structured to provide incentives to
consistently sell large volumes of product over a broad time frame to the sell-through point.

4. What problems result if each stage of a supply chain views its demand as the orders placed
by the downstream stage? How should firms within a supply chain communicate to facilitate
coordination?
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If each stage of a supply chain views its demand as the orders placed by their downstream
counterpart, the bullwhip effect is realized by the supply chain. Each member develops a
forecast that is based on something other than the true customer demand and hilarity ensues.
Supply chain members should share point-of-sale (POS) data so that all members are aware
of the true customer demand for product. The beauty of data sharing requirements is that only
aggregate POS data must be shared to mitigate the bullwhip effect; there is no need to share
detailed POS data.

5. What factors lead to a batching of orders within a supply chain? How does this affect
coordination? What actions can minimize large batches and improve coordination?

Order batching is caused by a number of different factors. One mechanism is the price
structure of TL and LTL shipment quantities; there is incentive to wait a while to make sure
that a TL shipment is achieved. A customer’s natural tendency to wait for a milestone, either
real or perceived, can also cause batching. Customers may wait until Friday, Monday, the last
or first day of the month, etc., just because that’s when they always have or because that
event reminds them to order. Order batching also occurs because customers are aware of an
impending price reduction and want to take advantage of it. Batching adversely affects
supply chain coordination because the supply chain will be starved for flow, then
overwhelmed with demand.
A supply chain can reconfigure their transportation and distribution system to allow for
shipments to multiple customers on a single truck to achieve TL quantities. The chain can
also assign (or encourage) days for placing orders and move from lot-size based to volume
based quantity discounts (or abandon discounts and promotions altogether).

6. How do trade promotions and price fluctuations affect coordination in a supply chain? What
pricing and promotion policies can facilitate coordination?

Trade promotions and price fluctuations make supply chain coordination more difficult.
Customers seek to purchase goods for less and engage in forward buying which creates
spikes in demand that may exceed capacity. All parties would benefit if the supply chain used
every day low pricing (EDLP) to mitigate forward buying and allow procurement,
production, and logistics to function at a steadier pace. If price incentives must be offered,
the chain is better served by implementing a volume-based quantity discount plan instead of
a lot size based quantity discount, i.e., providing incentives to purchase large quantities over
a long period of time, perhaps a year.

7. How is the building of strategic partnerships and trust valuable within a supply chain?

Cooperation and trust within the supply chain help improve performance for the following
reasons:
When stages trust each other, they are more likely to take the other party’s objectives into
consideration when making decisions, thereby facilitating win-win situations.
Action-oriented managerial levers to achieve coordination become easier to implement and
the supply chain becomes more agile.
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An increase in supply chain productivity results, either by elimination of duplicated effort or

by allocating effort to the appropriate stage.
Detailed sales and production information is shared; this allows the supply chain to
coordinate production and distribution decisions.

8. What issues must be considered when designing a supply chain relationship to improve the
chances of developing cooperation and trust?

The issues that supply chain partners must consider when designing their chain include
assessing the value of the relationship, the operational roles and decision rights for each, the
execution of binding contracts, and establishment of conflict resolution mechanisms.
The value of the relationship is assessed by identifying the mutual benefits that it provides
and the costs and contributions of each party. The mix of effort and benefit for all parties
should be equitable.
The roles and decision rights take into account the interdependence between the parties; the
nirvana of interdependence is reciprocal interdependence, where parties come together and
exchange information and inputs in both directions. This requires more effort than sequential
interdependence but the payoff is increased supply chain surplus.
Managers can help promote trust by creating contracts that encourage negotiation as
unplanned contingencies arise since complete information and consideration of all future
contingencies is impossible. The primary contacts from each side are an important starting
point in developing a healthy relationship.
Effective contract-resolution mechanisms can significantly strengthen any supply chain
relationship. Such mechanisms allow parties the opportunity to communicate and work
through their differences, in the process building greater trust.

9. What issues must be considered when managing a supply chain relationship to improve the
chances of developing cooperation and trust?

The following issues merit attention when management endeavors to improve the chances of
success in supply chain partnership:
The presence of flexibility, trust, and commitment in both parties helps a supply chain
relationship succeed. In particular, commitment of top management on both sides is crucial
for success.
Good organizational arrangements, especially for information sharing and conflict resolution,
improve chances for success.
Mechanisms that make the actions of each party and resulting outcomes visible help avoid
conflicts and resolve disputes.
The more fairly the stronger partner teats the weaker, vulnerable partner, the stronger the
supply chain relationship tends to be.

10. What are the different CPFR scenarios and how do they benefit supply chain partners?

Collaborative planning, forecasting, and replenishment (CPFR) is defined as a business

practice that combines the intelligence of multiple partners in the planning and fulfillment of
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customer demand. In order to be successful, the two parties must have synchronized their
data and established standards for exchanging the information.
The four scenarios that sellers and buyers can collaborate along include:
 Retail event collaboration – the identification of specific SKUs that will be involved
in sales promotions and sharing of information regarding the timing, duration,
pricing, advertising, and display tactics to be deployed. The benefit of retail event
collaborations is a reduction in stockouts, excess inventory and unplanned logistics
costs.
 DC replenishment collaboration – the forecasting of DC withdrawals or demand from
the DC to the manufacturer is converted to a stream of orders that are locked in over a
specified time horizon. A successful DC replenishment collaboration reduces
production costs at the manufacturer and inventory and stockouts at the retailer.
 Store replenishment collaboration – the forecasting of store-level orders that are
committed over a specific time horizon. Such a collaboration results in greater
visibility of sales for the manufacturer, improved replenishment accuracy and product
availability, and reduced inventories.
 Collaborative assortment planning – the forecasting (collaborative interpretation) of
industry trends, macroeconomic factors, and customer tastes for seasonal goods. This
forecast is converted into a planned purchase order at the style/color/size level that is
used to produce sample products for a fashion event before final merchandising
decisions are made. The manufacturer benefits from this collaboration by having
more lead time to purchase raw materials and plan capacity.

Coordination in Supply Chain

Supply chain coordination improves if all stages of the chain take actions that are aligned and
increase total supply

Chain surplus. Supply chain coordination requires each stage of the supply chain to share
information and take into account the impact its actions have on other stages.A lack of
coordination occurs either because different stages of the supply chain have objectives that
conflict or because information moving between stages is delayed and distorted. Different
stages of a supply chain may have conflicting objectives if each stage has a different owner. As
a result, each stage tries to maximize its own profits, resulting in actions that often diminish
total supply chain profits.

Not only does each stage focus on its own objectives, but information is also often distorted as
it moves across the supply chain because complete information is not shared between stages.
This distortion is exaggerated by the fact that supply chains today produce a large variety of
products. Ford produces different models, with several options for each model. The increased
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variety makes it difficult for Ford to coordinate information exchange with thousands of
suppliers and dealers. The fundamental challenge today is for supply chains to achieve
coordination in spite of multiple ownership and increased product variety.

One outcome of the lack of supply chain coordination is the bullwhip effect, in which
fluctuations in orders increase as they move up the supply chain from retailers to wholesalers
to manufacturers to supplier.
The lack on performance of lack of Coordination

The lack of coordination in a supply chain increases variability and hurts the supply chain
surplus under various heads & impacts directly.

Manufacturing cost Impact of the Lack of Coordination

 Inventory Cost Increases
 Replenishment Lead time Increases
 Transport Cost Increases
 Labor cost for shipping & receiving Increases
 Level of product availability Decreases
 Relationship across the Supply Chain Decreases

Obstacles to Coordination in Supply Chain

Any factor that leads to either local optimization by different stages of the supply chain or an
increase in information delay, distortion, and variability within the supply chain is an obstacle
to coordination. If managers in a supply chain are able to identify the key obstacles, they can
then take suitable actions to help achieve coordination. We divide the major obstacles into five
categories:

 Incentive obstacles
 Information processing obstacles
 Operational Obstacles
 Pricing obstacles
 Behavioral obstacles

Managerial levers to achieve Coordination –

  Aligning goals & incentives
 Improving information visibility & accuracy
 Improving operational performance
 Designing pricing strategies to stabilize orders
 Building strategic partnership & trust
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To sum up, managers can help achieve coordination in the supply chain by aligning goals and
incentives across different functions and stages of supply chain. Other actions that mangers can
take to achieve the coordination include sharing of sales information and collaborative
forecasting & planning, implementation of single point of control of replenishment, improving
operations to reduce lot sizes along with lead times.

Supply Chain Management - Coordination - Topics

1. Lack of Supply Chain Coordination and the Bullwhip Effect
2. Other Effects of Lack of Supply Chain Coordination on Supply Chain Performance
3. Obstacles to Coordination in a Supply Chain
4. Managerial Levers to Achieve Coordination
5. Building Strategic Partnerships and Trust Within a Supply Chain
6. Achieving Coordination in Practice

Coordination implies actions by various agents in the supply chain that are aimed at increase in
total supply chain profits. It also implies that supply chain agents avoid actions that improve
their local profits but hurt total profits. Hence supply chain coordination principles requires
each stage of the supply chain to take into account the impact its actions have on other stages.

Lack of Supply Chain Coordination and the Bullwhip Effect

A lack of coordination creates "bullwhip effect" in the supply chain. Due to this effect,
fluctuations in sales become larger and larger fluctuations in orders at higher stages in the
supply chain. This leads to situations wherein large shortages or large surplus capacities are felt
in the supply chain cyclically.

Bullwhip effect reduces the profit of a supply chain by making it more expensive to provide a
given level of product availability.

In what way bullwhip effect increases costs for the supply chain?

1. In increases manufacturing cost.

2. It increases inventory cost.
3. It increases replenishment lead times.
4. Increases transportation cost.
5. Increases labor cost in shipping and receiving.
    All items of cost increase because excess capacity has to be installed to take care of
unnecessary peaks in demand.
6. It reduces product availability due to some orders not getting filled when demand peaks. So
some retail outlets may go out of stock.
7. Leads to problems of relationships - every body claims that they have done right. But still
there is problem in the supply chain either as unfilled orders or excess inventory not having the
order from down stream side.

The main reasons for coordination problems in supply chain are distributed owners of various
stages of production & distribution, and product variety.
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The fundamental challenge is for supply chains to achieve coordination in spite of multiple
ownership and increased product variety.

Obstacles to Coordination in a Supply Chain

What are Obstacles to Coordination in a Supply Chain?

Incentive obstacles
      If a transport manager's incentive compensation is based on average transport cost, he tries
to optimize his incentive objective without considering its effect on other supply chain stages.

      If sales force has incentive for selling to dealers, they push sales to dealers even though there
is no sale in the period to customers. This will reduce orders from the dealers in the subsequent
periods.

Information processing obstacles

       If each supply stage depends on orders from its previous stage without considering the
ultimate sales to the consumer bull whip effect will appear.
Operational obstacles

        Economic batch quantities result in large lot sizes which are released periodically.

Pricing obstacles

        Quantity discounts and sales promotion discounts to dealers create distortions in orders.

Behavioral obstacles

         Each stage of the supply chain thinks locally and it unable to see the effect on the total
supply chain and other supply chain stages.

Managerial Levers to Improve Coordination in Supply Chains

Aligning goals and incentives

Improving information accuracy
Improving operational accuracy
Designing pricing strategies to stabilize orders
Building Partnerships and trust
(Source: Chopra and Meindl)
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Building Strategic Partnerships and Trust within a Supply Chain

Mutual Trust is a belief that each agent or party is interested in the other's welfare and would
not take actions without considering their impact on the other stage.

Cooperation and trust in a supply chain relationship leads to the following benefits:

1. They are more likely to take  the other party's objectives into consideration when making
decisions.
2. Sharing of information is natural between  parties that trust each other.
3. Operational improvements are easier to implement.
4. Pricing schemes are easier to design if both parties are aiming for common good.
5. Supply chain productivity increases because inspection can be avoided at many steps.

The key steps to be taken in the design of partnership are:

1. Assessing the mutual benefit of the partnership.

2. Identifying operations roles for each party in the partnership.
3. Creating effective contracts
4. Designing effective conflict resolution mechanism

Achieving Coordination in Practice

1. Quantify the bullwhip effect

2. Get top management commitment for coordination
3. Devote resources to coordination
4. Focus on communication with others stages
5. Try to achieve coordination in the entire supply chain network
6. Use technology to improve connectivity in the supply chain
7. Share the benefits of coordination equitably.