Lack of Supply Chain Coordination and the Bullwhip Effect

Lack of Supply Chain Coordination and the Bullwhip Effect, Effect of lack of co-ordination on performance, Obstacles to coordination in a supply chain

Co-ordination in a supply chain is most important thing in the supply chain. Without the coordination, there supply chain would never exist.

Lack of supply chain coordination and the bullwhip effect

  • Supply chain coordination improves if all stages of the chain take action that together to increase total supply chain profits.
  • Supply chain coordination requires each stage of the supply chain to 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 stages has a different owners.
  • Information is distorted as it moves across the supply chain because complete information is not shared between stages.
  • This may cause huge changes in the information that is shared at each stage of the supply chain. As we can say there are thousands of dealers and suppliers, if information distorts this may increase huge product verity and it’s amount. [Bullwhip effect]
  • One outcome of the lack of supply chain coordination is the bullwhip effect, in which fluctuation in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers.

Effect of lack of co-ordination on performance

  • A supply chain lacks coordination if each stage optimizes only it’s local objectives, without considering the impact on the complete chain. Total supply chain profits are thus less than what could be achieved through coordination’s.
  • Each stage of a supply chain, in trying to optimize its local objectives, takes actions that end up hurting the performance of the entire supply chain.
  • Lack of coordination also results if information distortion occurs within the supply chain. 

Consider the bullwhip effect P&G observed in the diaper supply chain. As a result of the bullwhip effect.

Impacts are given below. 

Manufacturing cost: The lack of coordination increases manufacturing cost in the supply chain. AAs a result, of the bullwhip effect, P&G and its suppliers must satisfy a stream of orders that is much more variable than customer demand.

Inventory cost: The lack of coordination increases inventory cost in the supply chain. To handle the increased variability in demand, P&G has to carry a higher level of inventory than would be required if the supply chain were coordinated.

As a result, inventory costs in the supply chain increases. The high levels of inventory also increase the warehousing space required and thus the warehousing cost incurred.

Replenishment Lead Time: Lack of coordination increases replenishment lead times in the supply chain. The increased variability as a result of the bullwhip effect makes scheduling at P&G and supplier plants must more difficult compared to a situation with level demand. There are times when the available capacity and inventory cannot supply the order coming in.

Transportation cost: The lack of coordination increases transportation cost in the supply chain. The transportation requirements over time at P&G and its suppliers are correlated with the orders being filled.

As a result of the bullwhip effect, transportation requirements fluctuate significantly over time. This raises transportation cost because surplus transportation capacity needs to be maintained to cover high-demand periods.

Labor cost for shipping receiving: The lack of coordination increases labor costs associated with shipping and receiving in the supply chain. Labor requirements for shipping at P&G and its suppliers fluctuate with orders.

The supply chain stages have the option of carrying excess labor capacity or varying labor capacity in response to the fluctuation in orders.

The level of product availability: Lack of coordination hurts the level of product availability and results in more stock outs in the supply chain. This increases the likelihood that retailers will run out of stock resulting in lost sales for the supply chain.

Obstacles to coordination in a supply chain

Some other factors need to be optimized 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’s.

The manager should identify the key obstacles and they can be avoided to achieve coordination.
  • Incentive obstacles
  • Information-processing obstacles
  • Operational obstacles
  • Pricing obstacles
  • Behavioral obstacles.
Incentive Obstacles: Incentive obstacles occur in the situation when incentives offered to different stages or participants in a supply chain lead to action that increases variability and reduces total supply chain profits.

a. Local optimization within functions or stages of the supply chain: Incentives that focus only on the local impact of an action result in decisions that do not maximize total supply chain profits.

For examples, if the compensation of a transportation manager at a firm is linked to the average transportation cost per unit, the manager is likely to take actions that lower transportation costs even if they increase inventory costs or hurt customer service.

b. Sales force incentives: Improperly structured sales force incentives are a significant obstacle to coordination in a supply chain. In many firms, sales force incentives are based on the amount the sales force sells during an evaluation period of amount or quarter.

The sales typically measured by a manufactured are the quantity sold to distributor or retailers (sell-in), not the quantity sold to a final customer.

Information-processing obstacles: Information-processing obstacles occur in the situation when demand information is distorted as it moves between different stages of the supply chain, leading to increased variability to order within the supply chain. 

c. Foresting based on orders and not customer demand: When stages within a supply chain make forecasts that are based on orders they receive any variability in customer demand is magnified as order moves up the supply chain in manufacturers and suppliers.

d. Lack of information sharing: The lack of information sharing between stages of the supply chain magnifies the information distortion.

For example, a retailer such as Wal-Mart may increase the size of a particular order because of a planned promotion. If the manufacturer is not aware of the planned promotion, it may interpret the larger order as a permanent increase in demand a place order with suppliers accordingly.

Operational obstacles: Operational obstacles occurs when the action was taken in the course of placing and filling orders lead to an increased variability. 

e. Ordering in larger lots: When a firm places order in lot sizes that are much larger than the lot sizes in which demand arise then variability of orders is magnified up the supply chain. Firms may order in larger lots because there is a significant fixed cost associated with placing receiving, or transporting an order. 

f. Large replenishment lead time: Information distortion is magnified if replenishment lead times between stages are long. Consider a situation in which a retailer has misinterpreted a random increase in demand as a growth trend.

 If the retailers face a lead time of two weeks, it will incorporate the anticipated growth over two weeks when placing the order. 

g. Rationing and shortage gaming: Rationing schemes that allocate limited production in proportion to the orders placed by retailers lead to a magnification of information distortion this can occur when a high-demand product is in short supply. 

In such a situation, manufacturers come up with a variety of machinists to ration the scarce supply of product among various distributor or retailers. 

Pricing Obstacles: pricing obstacles arise when the pricing policies for a product lead to an increase in variability of orders placed.

h. Lot size-based quantity discounts: Lot size-based quantity discounts increase the lot size of orders placed within the supply chain because lower prices are offered for larger lots.

i. Price fluctuations: Trade promotions and other short-term discounts offered by a manufactured result in forward buying, by which a wholesaler or retailer purchases large lots during the discounting period to cover demand during future periods. Forward buying results in large orders during the promotion period followed by very small orders. 

Behavioral Obstacles: Behavioral obstacles are problems in learning within organizations that contribute to information distortion. These problems are often related to the ay the supply chain is structured and the communication among different stages.

a. Each stage of supply chain views its actions locally and is unable to see the impact of its actions on other stages. 

b. Different stages of the supply chain react to the current local situation rather than trying to identify the root causes. 

Managerial Levers to Achieve Coordination

  • Aligning of goals and incentives
  • Improving information visibility and accuracy
  • Improving operational performance
  • Designing pricing strategies to stabilize orders
  • Building strategic partnership and trust
Aligning of goals and incentives: Managers can improve coordination within the supply chain by aligning goals and incentives so that every participant in supply chain works to maximize total supply chain profits.

Aligning goals across the supply chain: Coordination requires every stage of the supply chain to focus on the supply chain surplus or the total size of the pie rather than just its individual share.

In the absence of such an approach, every supply chain leaves money on the table. A focus on the supply chain surplus is unlikely to arise from actions and incentives across the supply chain align with this objective.

Aligning incentives across functions: One key to the coordinated decision within a firm is to ensure that the objective any function uses to evaluate a decision is aligned with the firm’s overall objectives. All facilities, transportation, and inventory decision should be evaluated based on their effect on profitability, not total cost.

Pricing for coordination: A manufacturer can use lot size-based quantity discounts to achieve coordination for commodity products if the manufacturer has large fixed costs associated with each lot. 

For products for which a firm has market power, a manager can use two-part tariffs and volume discounts to help achieve coordination Given demand uncertainty, manufacturers can use buy-back, revenue-sharing, and quantity flexibility contracts to spur retailers to provide levels of product availability that maximize supply chain profits.

Altering Sales Force Incentives from Sell-In to Sell-Through: Any change that reduces the incentive for a salesperson to push product to the retailer reduces the bullwhip effect.

If sales force incentives are based on sales over a rolling horizon, the incentive to push product is reduced. 

This helps reduce forward buying and the resulting fluctuation in orders. Managers can also link incentives for the sales

staff to sell-through by the retailer rather than sell-in to the retailer.

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