April 10, 2015

Coordination in the Supply Chain - Review Notes

Chopra and Meindl's book, Supply Chain Management: Strategy, Planning, and Operation, is a comprehensive introduction on supply chain management.


Coordination is a very important issue in management theory. Fayol included coordination as a function of management or element of management in the theory of management developed by him. But Koontz and O'Donnell argued that the purpose of management is coordination and hence every elements of management contributes to coordination and coordination is not a separate element in management. Chopra and Meindl also indicated that coordination is the output of SCM approach. They said adopting SCM implies a focus on coordination.

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.

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.


What are Obstacles to Coordination in a Supply Chain?

Incentive obstacles
Information processing obstacles
Operational obstacles
Pricing obstacles
Behavioral obstacles
(Chopra and Meindl)

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
(Chopra and Meindl)

Building Strategic Partnerships and Trust within a Supply Chain

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

References


Sunil Chopra and Peter Meindl, Supply Chain Management: Strategy, Planning and Operations, Prentice Hall, 2001.

What Drives Supply Chain Behavior? HBS Working Knowledge article June 2004

Supply Chain Management: Chopra and Meindl - Book Information and Review




Updated 10 April 2015, 10.2.2012

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