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2007 Pearson Education 2007 Pearson Education

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MODULE-6

2007 Pearson Education
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
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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.
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Manufacturing cost
Inventory cost
Replenishment lead time
Transportation cost
Labor cost for shipping and receiving
Level of product availability
Relationships across the supply chain
Profitability
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Performance Measures Impact of Bullwhip Effect
Manufacturing Cost Increases
Inventory Cost Increase
Replenishment Lead Time Increase

Transportation cost Increase

Shipping and Receiving cost Increase

Level of product availability Decreases
profitability Decreases
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The bullwhip effect reduces supply chain
profitability by making it more expensive to
provide a given level of product availability

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Incentive Obstacles
Information Processing Obstacles
Operational Obstacles
Pricing Obstacles
Behavioral Obstacles
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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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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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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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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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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
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Aligning Goals and Incentives
Improving Information Accuracy
Improving Operational Performance
Designing Pricing Strategies to Stabilize
Orders
Building Strategic Partnerships and Trust
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Align incentives so that each participant has
an incentive to do the things that will
maximize total supply chain profits
Align incentives across functions
Aligned to firms overall objective
All decisions to be evaluated based on effect on
profitability not total cost
Pricing for coordination
Manufacturer can use lot size based quantity
discount to achieve coordination if manufacturer
has large fixed cost associated with each lot

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Given demand uncertainty manufacturer can use
Buyback
Revenue Sharing
Quantity flexibility contract
Altering Sales force incentive from sell-in to
sell-through
The incentive to push product is reduced
Helps to reduce forward buying & resulting in
fluctuating in orders


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Sharing point of sale data
Across the SC will reduce the bullwhip effect
Order received at diff. stage vary, as well as the
forecast
Only need to be satisfied is of the final customer
Retailer has to share the data for accurate
forecast
All stages will now follow the same change in
customer demand
Appropriate system will facilitate the sharing of
such data
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Company can use internet to share such data
Dell easy to share such data as it directly
interact with customer as well as supplier
P&G has convinced many retailer to share
demand data
Implementing collaborative forecasting &
planning
Once POS is shared different stages must forecast
& plan jointly
Retailer large demand January because of
promotion



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If no promotion planned forecast may differ
retailer & manufacturer
Entire SC to work on common forecast
Voluntary Interindustry Commerce Standards
(VICS) has set up Collaborative Planning,
Forecasting and Replenishment (CPFR) to
identify the best practice & design guidelines
Designing single stage control of
replenishment
can help diminish bullwhip effect
Each stage uses order from the previous stage
Single stage to control replenishment decision


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Reducing replenishment lead time
Reduces uncertainty in demand
Electronic Data Interchange (EDI) is useful
Reducing lot sizes
Computer-assisted ordering
Shipping in TL 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

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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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Designing a Relationship with Cooperation
and Trust
Managing Supply Chain Relationships for
Cooperation and Trust

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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
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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

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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
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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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Assessing the value of the relationship and
its contributions
Identifying operational roles and decision
rights for each party
Creating effective contracts
Designing effective conflict resolution
mechanisms
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Identify the mutual benefit provided
Identify the criteria used to evaluate the
relationship (equity is important)
Important to share benefits equitably
Clarify contribution of each party and the
benefits each party will receive
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Recognize interdependence between parties
Sequential interdependence: activities of one
partner precede the other
Reciprocal interdependence: the parties come
together, exchange information and inputs in
both directions
Sequential interdependence is the
traditional supply chain form
Reciprocal interdependence is more difficult
but can result in more benefits

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Create contracts that encourage negotiation
when unplanned contingencies arise
It is impossible to define and plan for every
possible occurrence
Informal relationships and agreements can
fill in the gaps in contracts
Informal arrangements may eventually be
formalized in later contracts
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Initial formal specification of rules and
guidelines for procedures and transactions
Regular, frequent meetings to promote
communication
Courts or other intermediaries
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Effective management of a relationship is
important for its success
Top management is often involved in the
design but not management of a
relationship
Perceptions of reduced benefits or
opportunistic actions can significantly
impair a supply chain partnership

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2007 Pearson Education
WHY THERE IS A NEED FOR CONTINUOS
REPLESHISHMENT &VENDOR
MANAGEMENT INVENTORIES?
Bullwhip effect can be dampened by
practices that assign replenishment responsibility
across the supply chain to a single entity
A single point of replenishment decision
ensures visibility & a common forecast that drives
orders across the supply chain
so industry practices the above 2 system to
assign a single point of responsibility
2007 Pearson Education
The wholesaler or manufacturer replenishes a retailer
regularly based on POS data
CRP may be supplier, distributor or third party
managed
In most instances CRP system are driven by actual
withdrawals of inventory from retailer warehouse
rather than POS data at the retailer level
CRP Is linked to good IT system across the supply
chain to provide a good information infrastructure

2007 Pearson Education
The manufacturer or supplier is responsible for
all decision regarding product inventories at
the retailer as a result control of replenishment
decision moves to the manufacturer instead of
the retailer .
In many instances of VMI ,the inventory is
owned by the supplier until it is sold by retailer
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A business practice
Trading partners working together in planning
fulfilling customer demand.
Links sales and marketing best practices to supply
chain planning and execution processes.
Objective is to increase availability to the customer
while reducing inventory, transportation and
logistics costs.

2007 Pearson Education
The Voluntary Interindustry Commerce
Standards Association (VICS) has defined
CPFR as a business practice that combines the
intelligence of multiple partners in the
planning and fulfillment of customer demand.
According to VICS, since 1988, over 300
companies have implemented the process.
2007 Pearson Education
Seller and buyers in a supply chain may
collaborate along any or all of the following four
supply chain activities.
1. Strategy and Planning
2. Demand and Supply Management
3. Execution
4. Analysis


2007 Pearson Education
1) Strategy and Planning: This activity establishes the
ground rules for the collaborative relationship. It
determines the product mix and placement and
develops event plans for the period.
2) Demand and Supply Management: This activity
estimates consumer demand and order and shipment
requirements over the planning horizon.
3) Execution: In this activity, orders are placed,
shipments are placed and delivered, products are
received and stocked, sales transaction are recorded
and payments are made.
4) Analysis: In this activity, planning and execution
are monitored for exceptions, results are aggregated
and key performance metrics are calculated. The
insight thereof is shared between the partners and
plans are adjusted for improving results.

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2007 Pearson Education
CPFR Scenario Applicability Typical Industry
Retail event
Collaboration
Highly promoted channels or
categories
All except EDLP
DC replenishment
Collaboration
Retail DC distribution Drug chain, hardware, grocery
Store replenishment
Collaboration
Direct store delivery or retail
DC-to-store distribution
Mass merchant, club store
Collaborative
Assortment planning
Apparel and seasonal goods Department store
Specialty retail

2007 Pearson Education
Retail event collaboration

In many stores, promotions and other retail events
generate the largest swings in demand, resulting in most
out-of-stocks, excess inventory and unplanned logistics
costs during these events affect financial performance for
both the retailer and the manufacturer.

In such a setting, collaboration between retailers and
suppliers to plan, forecast, and replenish promotions is
very effective.

The event including timing, duration, price point,
advertising, display tactics


2007 Pearson Education
DC replenishment Collaboration
DC Replenishment Collaboration has been the most
common starting point for trading partners to improve the
replenishment and forecasting processes between their
organizations. Executed within the framework of CPFR,
suppliers and buyers work together to optimize the flow of
inventory into the retail distribution center and out to the
stores

In this system, trading partners collaborate to improve the
accuracy of DC-to-Store and Supplier-to-Retail DC
forecasts.

Also, optimal inventory levels are calculated as
transportation and operational efficiencies are maximized.
2007 Pearson Education
Store replenishment Collaboration
Store Replenishment Collaboration aims to link
manufacturers and retailers to plan store sales and
promotion volumes, calculate store inventory requirements,
and respond to on-going operational issues. The objective is
to increase sales and reduce out-of-stocks at the most
important point of the supply chain: where the consumer
purchases the product.

The benefits attributed to store-level collaboration include
greater visibility to consumer take-away and overstock
reduction.

Trading partners have a direct view of how consumers are
responding to new products, existing shelf distribution, and
promotional take-away.
2007 Pearson Education
Collaborative Assortment planning

The assortment planning process for apparel and
footwear retailers and vendors is the activity of
determining product placement by location and by
delivery.
Retailers and vendors must work together to build and
modify assortment plans based upon financial plans,
historical sell-thru data, market trends, and production
schedules. The coordination and sharing of this
information both internally and among trading
partners is critical to delivering the right products to
the right place at the right time.


2007 Pearson Education
SARA LEE
Federated Dept. Stores
Mead
School & Office
Kimberly Clark
JCPenney
VF Corp.
Staples
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2007 Pearson Education
The enablement of coordination can be
viewed as the ultimate goal of IT in the
supply chain .
Sharing ,forecasts , visibility of
inventory levels transmitting arrival
times which have talked about has
been internal supply chain operations
At the highest level there are 2 ways in
which IT can help to improve this area .
2007 Pearson Education
Significant benefit from inter enterprise
coordination arises just from the sharing of
information between companies .IT enables
their in 2 ways :
a) actual physical sharing of the information.
b) IT also helps in sorting these data and
preparing them for viewing .
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IT helps to Improve the co ordination by using
the visible information to make the decision.
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There are perhaps more pitfalls in using IT for
co ordination because of the complexity and
difficulty of the task at hand .
The biggest hurdle is the trust factor .
For eg: Major companies that provide software
in this area are the supply chain software
provides from ERP ranks such as SAP and
Oracle and best of player such as i2
Technologies and Manugistics .

2007 Pearson Education

Achieving co ordination in practice.
Quantity the bullwhip effect:
Managers should start by comparing the
variability in the orders .they receive and
variability in the orders they places .This helps
a firm quantify its own coordination to the
bullwhip effect.
Get top management commitment for co
ordination .
coordination requires managers at all levels of
supply chain to subordinate their local interests
to the greater interest of the firm and even the
supply chain.


2007 Pearson Education
Devote resources to coordination
All practice should be involved devoting
significant managerial resources to this effort.
for e.g.: Wal mart and P&G.
Focus on communication with other stages.
good communication creates situations that
highlight the value of coordination for both
sides.
All companies are frustrated by the lack of
coordination and would be happy to share
information if it helped the supply chain to
operative in more effective manner.
eg.PC Company ordering its microprocessors

2007 Pearson Education
Try to achieve coordination in the entire supply
chain network:
The full benefits of coordination is achieved.
only when the entire supply chain network is coordination
e.g. . Toyota.


Use technology to improve the connectivity in the
supply chain:
The internet and a variety of different types of software systems can
be used to increased the visibility of throughout the supply chain .

Share the benefits of coordination equitably :
Manager from the stronger party in the supply chain relationship
must be sensitive to this fact and ensure that all parties perceive that
the way benefits are shared is fair.



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