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5-Lack of Coordination and Bullwhip Effect-20-02-2024
5-Lack of Coordination and Bullwhip Effect-20-02-2024
Coordination and
Technology in Supply Chain
www.vit.ac.in
Module:4 Coordination and Technology in Supply Chain
Part II
Role of IT in the supply chain – Macro processes - Customer Relationship Management
–Internal supply chain management – Supplier Relationship Management - Supply
chain IT in practice – Future of IT in supply chain.
Learning Objectives of this Module – Part I
• Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance.
• Identify obstacles to coordination in a supply chain.
• Discuss managerial levers that help improve coordination in a supply chain.
• Understand some practical approaches to improve coordination in a supply chain.
• Bullwhip effect
• Obstacles to Coordination
• Managerial levers to achieve coordination
• Collaborative planning, forecasting & replenishment
3
Supply Chain Coordination
• All stages of the chain take actions that are aligned and increase the total supply chain surplus.
• Each stage shares information and takes into account the effects of its actions on the other stages.
• Lack of coordination results when:
▪ Objectives of different stages conflict
▪ Information moving between stages is delayed or distorted.
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Bullwhip Effect
The bullwhip effect is the demand distortion that travels upstream in the supply chain. Upstream in the supply
chain consists of the retailer through to the distributor (wholesaler) and manufacturer. The distortion is created
by the variance of orders which may be larger than sales.
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https://www.youtube.com/watch?v=4YqOqECbPH8
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The effect on performance
https://www.cips.org/intelligence-hub/operations-management/bullwhip-effect
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Obstacles to coordination in a supply chain
• Incentive obstacles
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Behavioral Obstacles
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Incentive Obstacles
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Information Processing Obstacles
• Demand information is distorted as it moves between various stages of the supply chain ⇾increased variability
in orders.
▪ Forecasting based on orders and not customer demand
▪ Lack of information sharing
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Operational Obstacles
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Operational Obstacles
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Pricing Obstacles
• When pricing policies for a product lead to an increase in the variability of orders placed.
▪ Lot-Size based quantity decisions
▪ Price fluctuations
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Pricing Obstacles
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Behavioral Obstacles
• 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 of the supply chain react to the current local situation rather than trying to identify the root
causes.
• Different stages of the supply chain blame one another for the fluctuations.
• No stage of the supply chain learns from its action over time.
• A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply
chain performance.
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Managerial Levers to Achieve Coordination
Aligning goals and incentives - So that every participant in supply chain activities works to maximize total supply
chain profits
▪ Align goals across the supply chain
▪ 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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Managerial Levers to Achieve Coordination
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Managerial Levers to Achieve Coordination
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Continuous Replenishment and Vendor Managed Inventories
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Collaborative Planning, Forecasting, & Replenishment (CPFR)
• Sellers and buyers in a supply chain may collaborate along any or all of the following
▪ Strategy and planning
▪ Demand and supply management
▪ Execution
▪ Analysis
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Common CPFR Scenarios
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Collaborative Organization Structure
Customer 1 Team
• Demand Planning
• Sales
• Customer
Services/Logistics
Category Team
• Merchandise
planning
• Buying
• Replenishment
Customer 2 Team
• Demand Planning
• Sales
• Customer
Services/Logistics
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Discussion Questions
1. What characterizes supply chains that could be affected significantly by the bullwhip effect? How can the bullwhip
effect be reduced?
2. What is the impact of lack of coordination on the performance of a supply chain?
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?
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?
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?
6. What measures can a company employ to raise operational performance when information is distorted within the
supply chain?
7. Compare continuous replenishment programs (CRPs) and vendor managed inventory (VMI).
8. What are the different CPFR scenarios and how do they benefit supply chain partners?
© VIT University 2023 23
References
• Cederlund, Jerold P., Rajiv Kohli, Susan A. Sherer, and Yuiling Yao. “How Motorola put CPFR into Action.” Supply Chain Management
Review (October 2007): 28–35.
• Chen, Frank, ZviDrezner, Jennifer K. Ryan, and David Simchi- Levi.“Quantifying the Bullwhip Effect in a Simple Supply Chain: The
Impact of Forecasting, Lead Times, and Information.” Management Science (2000): 46, 436–443.
• Disney, S. M., and D. R. Towill. “The Effect of Vendor Managed Inventory (VMI) Dynamics on the Bullwhip Effect in Supply Chains.”
International Journal of Production Economics (2003): 85, 199–215.
• Fawcett, Stanley E., Amydee M. Fawcett, Sebastian Brockhaus, and A. Michael Knemeyer. “The Collaboration Journey: Are We There
Yet?” Supply Chain Management Review (November 2016): 20–27.
• Hammond, Janice H. 1994. Barilla Spa (A–D). Harvard Business School Case 9–694–046.
• Kumar, Nirmalya. “The Power of Trust in Manufacturer–Retailer Relationships.”Harvard Business Review (November–December 1996):
92–106.
• Seifert, Dirk. Collaborative Planning, Forecasting, and Replenishment: How to Create a Supply Chain Advantage. New York:
AMACOM, 2003.
• Voluntary Interindustry Commerce Standards. Collaborative Planning, Forecasting, and Replenishment, Version 2.0, 2002.
Part II
Role of IT in the supply chain – Macro processes - Customer Relationship
Management –Internal supply chain management – Supplier Relationship
Management - Supply chain IT in practice – Future of IT in supply chain.
Learning Objectives of this Module – Part II
• Describe supply chain coordination and the bullwhip effect, and their impact on supply chain performance.
• Identify obstacles to coordination in a supply chain.
• Discuss managerial levers that help improve coordination in a supply chain.
• Understand some practical approaches to improve coordination in a supply chain.
2 Transportation Bottlenecks
Port congestion and limited trucking capacity
Labor Shortages
3 Real-Time Tracking
IT empowers real-time tracking and monitoring of inventory and logistics, offering unparalleled
unparalleled visibility and control over the supply chain.
4 Process Optimization
Through IT systems, supply chain processes can be optimized for maximum efficiency and
efficiency and responsiveness to dynamic market demands.
Understanding Macro Processes
1 Supply Chain Macro Processes
Overview and integration of macro processes within a supply chain network.
network.
2 Collaborative Planning
Input from various teams for accurate projections.
3 Scenario Modeling
Plan for potential disruptions and uncertainties.
Procurement & Sourcing
Supplier Selection Supplier Negotiation Sourcing Strategy
Identify reliable partners for Reach favorable terms to Diversify suppliers for risk
sourcing materials. maintain cost efficiency. mitigation.
Evaluate cost, quality, and Establish mutually beneficial Seek sustainable and ethical
delivery capabilities. partnerships. sourcing practices.
Inventory Management
1 Stock Optimization 2 Real-time Monitoring
Prevent overstocking and stockouts. Track inventory levels for timely
reordering.
3 Order Fulfillment
Efficient processing to meet demand promptly.
Logistics & Distribution
Transportation Warehouse Operations
Optimize shipping routes for cost savings. Efficient loading and unloading of goods.
savings.
Delivery Management
Track shipments and ensure timely delivery.
Quality Control
IT-Enabled Services
IT tools are instrumental in providing tailored and responsive customer service,
service, thereby strengthening customer relationships.
CRM Software
Salesforce, ServiceNow
Internal Supply Chain Management
Streamlining Processes Warehouse Management Systems (WMS)
(WMS)
IT systems streamline internal processes, ensuring
Utilization of WMS enhances operational efficiency,
ensuring operational agility and responsiveness to
efficiency, ensuring accurate storage, retrieval, and
responsiveness to changing market dynamics.
and movement of goods within warehouses.
Inventory Management
Demand Segmentation
Demand Segmentation How? Using Supply Chain Analytics
The purpose of the segmentation process is to make healthcare drugs simpler and more efficient across the network by grouping products into
categories with similar characteristics.
The dimensions of the segmentation model are impact and demand variability.
Bull Horse
60t 60t
50t 50t
Bulls are large and erratic. Horses are large but steady.
Demand for bull items is 40t 40t Demand for horse items is
characterized by high volume characterized by high volume
and high variance. 30t 30t and low variance.
20t 20t
10t 10t
0t Example: 14208-16
0t Example: 6399-823-109
Rabbit Donkey
Graphs are based on actual historical sales data from Aug. 2020 – Sep. 2021 Demand in volume (units)
Segmentation concept; grouping uses share of sales volume and variance to
determine which animal the products are
Product Segmentation
GN Audio product segmentation
High
Bull Horse Chameleon Eggs Not released
High volume, Unpredictable High volume, Predictable (Manual segment) (NPIs)
Used for manually controlling Ramp
policies for products not fitting
into the other segments.
NPI
Demand (Units)
80%
Rabbit Donkey Turtles EOL
Scheduled
Low volume, Unpredictable Low volume, Predictable
(End of manufacturing)
To be
discontinued
EOL Open
EOL
Warranty
Low
0,6
High Low
C(v)
Service levels, planning principles and safety stock decisions must all be aligned with
the segmentation
1 2 3 4
Sales/ Finance
Marketing
• Production Equipment:
• 5 Industrial Blenders
• 10 Industrial Ovens
• Sensor Enabled Process Manufacturing Lines
48
Mobile Prediction Alert …
49
Production Supervisor
Production Supervisor
260006
Strawberry Jam, SJM-1001-D
Consistency
SJM-1001
53
Future of IT in Supply Chain
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Discussion Questions
1. Which processes within each macro process are best suited to being enabled by IT? Which processes are least
suited?
2. What are some advantages of the software as a service (SaaS) model? Why has it been successful in the CRM space?
3. Why is supply chain management software dominated by the ERP players, such as SAP and Oracle?
4. Identify a few examples of the availability of real-time information being used to improve supply chain
performance.
5. Discuss why the high-tech industry has been the leader in adopting supply chain IT systems.