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Coordination in a SC
ch13, Cost Efficient Responsivness Frontier, Cost Efficient Responsivness Frontier, GST SM P1

Coordination in a SC

Manmit Mahanta

Assistant Professor, GCMS

Bullwhip Effect & Lack of Coordination in a SC

  • SC coordination improves if all stages of the SC take actions together increase total supply chain profit
  • Sc coordination requires each stage of the SC to take into account the impact its actions have on other stages
  • Reasons for lack of coordination:
  • Different stages of SC have conflicting objectives
  • Information moving between stages is delayed & distorted as it is not shared properly having different owners
  • Conflicting objectives arises if different stages have different owners & each stage tries to maximize its own profits, results diminish in total profit
  • With the increase in variety of products also leads to the conflict among the SC stages
  • The outcome of lack of SC coordination is the Bullwhip Effect

Bullwhip Effect & Lack of Coordination in a SC

  • Bullwhip Effect:
  • Fluctuation in order increases as they move up the SC from retailers to wholesalers to manufacturers to suppliers
  • Bullwhip effect distorts demand information within the SC with each stage having a different estimate of what demand looks like
  • Ex: P&G have observed bullwhip effect in the SC for pampers diapers
  • They observed that sales at the retail stores fluctuated less as consumer use them at a steady rate.
  • But orders for raw materials were highly variable, increasing cost & making it difficult for supply to match demand.

Impact of Bullwhip Effect (Lack of SC Coordination) on performance:

  • Manufacturing Cost:
  • Increases manufacturing cost in the SC
  • Due to bullwhip effect P&G & its suppliers must satisfy a stream of orders that is much more variable than consumer demand
  • P&G can respond to increased variability by either building excess capacity or holding excess inventory, which increases manufacturing cost
  • Inventory Cost:
  • To handle increased variability due to bullwhip effect (lack of coordination)
  • P&G has to carry higher level of inventory than would be required if SC were coordinated
  • High Inventory = High Cost = Increased Warehousing Space = Increased Warehousing Cost
  • Replenishment Lead Time:
  • Increased variability makes scheduling at P&G & suppliers plants much more difficult compared to a situation with level demand
  • Transportation cost:
  • Labor cost of shipping & receiving:

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