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.
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
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.
