P1: IML/FFX P2: IML/FFX QC: IML/FFX T1: IML
SupplyChainMgmt WL040/Bidgolio-Vol I WL040-Sample.cls August 13, 2003 17:21 Char Count= 0
SUPPLYCHAINCOORDINATION 369decisions. To ensure that these individual plans support
each other, the planning process must be coordinated.
The degree and scope of coordination will depend on
the economics of collaborative planning versus the costs
of undersupply and oversupply. It is likely unnecessary
and impossible to involve every supply chain member in
an aggregate plan for the entire supply chain; however,
a manufacturer should definitely involve major suppli-
ers and buyers in aggregate planning. Whether this plan-
ning information trickles to other supply chain members
(a key for the success of integrated supply chain man-
agement) will depend on the coordination capabilities of
successive layers of members emanating from a collabo-
rative planning center, which is often the major manufac-
turer.
The strategy employed to execute the aggregate plan
is a function of the information inputs into the aggregate
plan. It is vital that these inputs be as accurate as possible
throughout the entire supply chain. Integrated planning
in a supply chain requires its members to share informa-
tion. The initiator of integrated planning is typically the
major manufacturer. To understand why, we must under-
stand the dynamics of distribution.Distribution Channels
To anticipate the quantity of product to produce, a man-
ufacturer must compile demand forecasts from down-
stream supply chain members. Forecasting accuracy is
paramount because it is the basis for effective and effi-
cient management of supply chains. The root challenge of
SCM is to minimize costs and maintain flexibility in the
face of uncertain demand. This is accomplished through
capacity and inventory management. Similarly, marketers
attempt to maximize revenues through demand manage-
ment practices of pricing and promotion. Therefore, it is
vital that marketing and operations departments collab-
orate on forecasts and share harmonious incentive struc-
tures. The degree of coordination among order acquisi-
tion, supply acquisition, and production process directly
affects how smoothly a firm operates. Likewise, the coor-
dination level of buyers, suppliers, and producers directly
affects how smoothly the supply chain operates. More
specifically, accurate information flows between channel
members are essential to SCM.
A distribution channel is typically composed of a man-
ufacturer, a wholesaler, a distributor, and a retailer. The
“bull-whip effect” is a classic illustration of dysfunction
in such a channel due to the lack of information shar-
ing. This effect is characterized by increasing variability
in orders as the orders are transferred from the retailer
upstream to the distributor, then to the wholesaler, and
finally to the manufacturer. Distorted demand informa-
tion induces amplifications in variance as orders flow up-
stream. Therefore, the manufacturer bears the greatest
degree of order variability. It is for this reason that man-
ufacturers often initiate collaborative efforts with down-
stream channel members.
Lee, Padmanabhan, and Whang (1997) analyze four
sources of the bull-whip effect that correspond to respec-
tive channel practices or market conditions. The first two
causes are a direct consequence of channel practices,whereas the latter two causes are more market-driven.
The first source, demand signal processing, is largely due
to the use of past demand information to modify de-
mand forecasts. Each channel member modifies her or
his forecasts and resulting orders in isolation. These mul-
tiple forecasts blur end demand. This problem is exacer-
bated as lead time lengthens. Current practices employed
to remedy this source of information distortion include
contractual agreements to provide point of sale data from
retailers to manufacturers, vendor managed inventory to
centralize ordering decisions, and quick response man-
ufacturing to decrease lead times for order fulfillment.
The second source of information distortion, order batch-
ing, arises mainly from periodic review ordering practices
and processing costs of placing orders. Without specified
ordering times, the timing of order placement for sev-
eral vendors may coincide as a result of fiscal period de-
lineations. Additionally, a buyer may accumulate orders
to minimize high costs of ordering and shipping. Mea-
sures that can alleviate these causes are automated and
fixed-time ordering, electronic data interchange (EDI),
and the use of third-party logistics providers to offset less
than truckload diseconomies. These first two causes of in-
formation distortion generally result from each channel
member individually optimizing inventory decisions.
Price fluctuations, the third cause of the bull-whip ef-
fect, result from marketing efforts such as trade promo-
tions to generate increases in sales volumes. Wholesale
price discounts result in forward buying by retailers. The
lower price motivates retailers to stock up on product for
not only the current but also future periods. This strat-
egy results in uneven production schedules for manufac-
turers and excess inventory carrying costs for retailers.
The push for everyday low prices is an effort to do away
with trade-promotion-induced order variability. The final
cause of the bullwhip effect occurs when there exists a per-
ceived shortage of product supply. If the supplier adopts
a rationing scheme that is proportional to the quantity
ordered, buyers will simply inflate their orders to ensure
receipt of their true requirements. This type of gaming
can be avoided by rationing based on historical market
share of buyers and information sharing between buyers
and suppliers to prevent supply shortages.
This concludes our discussion of key strategic and tac-
tical issues in managing supply chains. In general, it is
obvious that chain members are motivated to minimize
information distortion and resultant order variability. It is
also clear that the remedies to these problems are rooted
in information sharing upstream through the supply
chain. Coordination mechanisms facilitating information
sharing in a supply chain are described in the next section.SUPPLY CHAIN COORDINATION
In a supply chain, coordination occurs when the con-
stituents act in unison for the betterment of the supply
chain as a whole rather than their own link. Thus, it is
likely that on an individual basis, a chain member may
stand to suffer a “loss” associated with a coordinated
decision. In economics, this is the classical principal-
agent dilemma. Supply chain coordination is fraught with