Supply Chain Coordination and Bullwhip Effect - Essay Example

Supply Chain Coordination and Bullwhip Effect Supply chain coordination and bullwhip effect Introduction The development of effective coordination in organizations is essential for the maximization of the process of turning competitive advantage into profitability. Such coordination must occur both within the organization production and sales departments and beyond to include organizations contracted to handle its products. The process of coordination seeks to ensure that customer satisfaction is achieved through the adoption of approaches that are in tandem with their point of view. Organizations also adopt supply chain coordination to enable them align their plans with the objectives of individual enterprises that that handles their products. As such, the process emphasizes on the management of inventories and the ordering process within the organization and also within other organizations that do business with the company (Gupta & Mishra, 2012). Bullwhip effect is a trend that results into significant swings in the inventory responses in relations to alterations customer’s demands. The instability witnessed with the customer’s demand leads to the need for organizations make forecasts for demands in order to enable them position their inventory and other resources in line with the customer demand. As a product moves up the supply change, the participants within the chain observe variations in demand and this affects the need for maintaining stock safety. When the demands for the final products experience an upward movement, the supply participants at the bottom of the table increase their demands to meet the expected customer demand. However, in times of falling demand, the orders made by participants at the lowest level decreases and this affect the overall performance of the supply chain. This is known as the bullwhip effect which has significant impacts on the performance of supply chains and the profitability of participants in the chain (Whang & Lee, 1997). Supply chain coordination and bullwhip effect The development of a harmonized supply chain management results into the achievement of the process that attains their objectives and maximizes the overall profits. Supply chain coordination is the best approach to ensure that the processes of supply chain are optimized and their benefits maximized at any given time. Research has shown that lack of coordination within any level of the supply chain results into the conflict of objectives at the different stages. As goods move up the supply chain, information is also moved, and this ensures that the steps adopted by the supply chain participants are in unison with the agreed approaches (Gupta & Mishra, 2012). This can only be achieved if the organization develops an integrated coordination approach that seek to ensure that the information passed is not distorted before all the recipients can act on them. Complete lack of coordination in the supply chain has massive impacts that can affect the ability of the organization to achieve its strategic objectives and missions. These include the possibility in the increase in the overall manufacturing costs, an increase in maintaining the inventory and also an increase in the time taken to replenish the inventory and maintain a safe stock. The cost of moving the products from the manufacturing points to different players in the supply chain also increases in the event that coordination is delayed or eliminated (Whang & Lee, 1997). Lack of coordination also decreases the product availability and this affects customer satisfaction as their possibility of getting the product is reduced. Worse still, lack of coordination has been associated with the development of poor relationship between the supply chain participants, which affects the overall quality of services to customers. With a decrease in the availability of the product and a rise in the dissatisfaction of the customer, profitability in an organization decreases significantly. This affects the overall performance, maintenance and operation of the organization as different management levels begin to experience the impacts of lack of enough funding and resources (Datta & Christopher, 2011). Whenever the supply chain is not managed, stability occurs, and this result into an increase in the variability in demand as the products moves up the supply chain. A small change in the customers’ preferences for the product result into a significant variation in the orders made at the different levels of the supply chain. Oscillation in large swings occurs thereafter due to the fact that the independent supply chain participants adopt independent strategies in an attempt to solve the problem. Variability in the supply chain can arise from demand variability, issues concerning the quality of the products and strikes among the employees of the organizations (Diederichs, 2009). Bullwhip effect is associated with overreactions to backlogs occurring at a given level of supply chain which results into an increase in the demand for the products. Some organizations neglect the need to order for more products from participants below them as a strategy of reducing the inventory volume. This creates artificial shortage as other participants above the organizations access reduced volume of the product resulting into increased demand by other participants above the chain and among the final consumers. Lack of coordination up and down of the supply chain also affects stability of the market and creates room for variability of demand as each organization has the room to adopt independent approaches (Whang & Lee, 1997). Obstacles to coordination in the supply chain The obstacles have been categorized into different levels, and classes and these include the obstacles related to incentives, information processing operations within the organization, the pricing strategy adopted and the behaviours of the different participants in the supply chain. The decision by an organization to offer incentives to different participants within the supply chain creates a room for the adoption of actions that significantly increases the variability. This reduces the total returns from the supply chain due to the misalignment of the goals and plans for the supply chain with those of individual organizations. This results into the incentive obstacles which makes it difficult to monitor the events within the supply chain, and control the approaches adopted by the different participants (Hammer, 2001). Information flow within the supply chain is essential for the complete coordination of the movement of the product from the point of manufacturing all the way to the final consumer. As a result, forecasting is done based on the orders made as opposed to the customer demand and this creates information processing obstacle in the supply chain. In most instances, the supply chain participants treat each other as competitor as opposed to partners in the transfer of products to the final consumers thus affecting their willingness to share demand variability information (Diederichs, 2009). Operational obstacles results from errors made due to the actions taken in the process of pacing, and filling orders which results into the variability. Some participants within the supply chain also adopts rationing, and the creation of artificial shortages which results into shortages in an attempt to shove demand and increase the prices of the products. Pricing obstacles occurs when the policies adopted towards a product result into variability in the orders that are actually made (Gupta & Mishra, 2012). Behavioural obstacles arise from behaviours of the supply chain participants that affect their ability to effectively communicate with others, and the manufacturer. As a result, the participants in the chain develop an egocentric view of the action in disregard to the impacts that it has on other stages in the chain. The engagements of the different stages of the supply chain also vary from those adopted by the others and this stops the process of identifying the main cause of the problem. As a result, a fluctuation that may occur creates room for blame games and the participants attempt to view the actions of the others as responsible for the actual events been witnessed. This affects the communication and coordination process as anarchy exists within the supply chain filled with mistrust and competition (Hammer, 2001). Managerial levers and their role in achieving coordination in supply chain Managerial levers are management approaches and techniques that can be adopted to help in the process of coordinating the success of the supply chain. A number of levers have been used in the process of supply chain coordination and these have helped in the elimination of the variations that affect the profitability of the chain. Aligning of goals and incentives is one of the levers that have been adopted to ensure uniformity in the objectives of the different participants in the supply chain. By aligning incentives, all participants in the supply chain are provided with a purpose that will result into the maximization of the total supply profits. The process of aligning the incentives should occur across all the functions in the supply chain to ensure that uniformity is achieved which is essential for the pursuit of a common goal. The process of coordination must also be priced in line with the aligning process to enable the organization understand the financial obligations and commitment associated with the processes (Gupta & Mishra, 2012). Information passed to the different participants from the manufacturer all the way to the retailers must always be consistent and accurate. This eliminates the possibility of misunderstanding by any participant which may create room for more variability in the supply chain demand and inventory maintained. Point of sale data is information that is essential in the decision making process for the supply chain and should be shared and made available to all participants in the supply chain. Forecasting impacts on the decisions made by the participants including the inventory to maintain and the need for hoarding of the products (Hammer, 2001). When the participants participate in a collaborative forecasting and planning process, variability in this information is eliminated, and this creates room for a collective decision making process. The replenishment of the inventory and the product volume moving along the supply chain should also be coordinated from one point based on the continuous replenishment programs, and the use of vendor managed inventories (Datta & Christopher, 2011). Improvement of the operational performance is also a management approach that the organization can adopt to remain profitable and maintain an effective supply chain. This can be achieved through the reduction of the replenishment lead times which results into a decrease in the uncertainty in the demand. The lot sizes can also be reduced through the use of computer assisted ordering and the B2B exchanges which is adopted by all organizations in the supply chain. The customer ordering behaviour should also be changed as part of a process aimed at ensuring efficiency in the operational performance. The rationing decisions should also be based on information on past sales, and this should aim to discourage the hoarding games played by other participants in the supply chain (Gupta & Mishra, 2012). The stabilization of orders can also be achieved through the adoption of different pricing strategies and this will reduce the occurrence of variability. This can be achieved by adopting policies which encourage retailers to make smaller orders and reduce the practice of forward buying which result into the maintenance of larger inventories. The discounts offered to the participants in the supply chain should also be altered from being size based into being volume based discounts. This is an approach that will seek the total purchases that would have been made by the participants over a given period of time. The stabilization of orders can also be achieved through the stabilization of prices through the elimination of promotions and lower pricing adopted on a daily basis. During the promotion period, the quantity purchased should also be limited in an attempt to stabilize the ordering process which is essential in the maintenance of stable demand (Hammer, 2001). Collaborative planning, forecasting and replenishment (CPFR) Collaborative planning, forecasting and replenishment are a common management practice applied in the maintenance of the supply chain through the combination of a number of trading partners to enhance the satisfaction of the customer. It seeks to develop an inventory management approach that incorporates the input of the different participants to the supply chain. It thus relies on the information that the suppliers and the retailers share at the lowest level of the supply chain to develop customer satisfaction approaches (Diederichs, 2009). This can only be achieved if the organization develops an integrated coordination approach that seek to ensure that the information passed is not distorted before all the recipients can act on them. Complete lack of coordination in the supply chain has massive impacts that can affect the ability of the organization to achieve its strategic objectives and missions. These include the possibility in the increase in the overall manufacturing costs, an increase in maintaining the inventory and also an increase in the time taken to replenish the inventory and maintain a safe stock (Datta & Christopher, 2011). The cost of moving the products from the manufacturing points to different players in the supply chain also increases in the event that coordination is delayed or eliminated. This is due to the increases that occur to the rate of shipping the raw materials and transporting the processed materials to the inventory points in the organization. Lack of coordination also decreases the product availability, and this affects customer satisfaction as their possibility of getting the product is reduced (Hammer, 2001). In this regard, the inventory is continuously updated in order to fulfil the incoming requirements and the achievement of end-to-end processes in the supply chain. Achieving maximum benefits from CPFR can only occur if a well-structured implementation approach is developed that seeks to build collaborative ties among the participants in the supply chain. This can be achieved through the development of formal ties with partners and the identification of the performance indicators in the supply chain. Each partner in the supply chain must have a well formulated role and responsibility to reduce the possibility of an overlap and conflict in the nature of responsibilities. The development of the sales forecast must also be made with a collaborative approach that identifies the exceptions in the partners and the supply chain (Whang & Lee, 1997). Conclusion The coordination of supply chain processes is essential in the development of proper customer product delivery and the elimination of the extra costs that affect the price of the product. However, the process of coordinating the supply chain is affected by a number of obstacles which reduces the effectiveness of the coordination process (Gupta & Mishra, 2012). Participants in a supply chain hold the key to its success, and this makes them important players whose inputs must be considered to eliminate the occurrence of variability and changes in the demand for the product which affects the retailing price. References Datta, P. & Christopher, G. (2011). Information sharing and coordination mechanisms for managing uncertainty in supply chains: A simulation study. International journal of production research, 49(3), 765-803. Diederichs, M. (2009). Collaborative planning, forecasting, and replenishment (CPFR). Munich: Grin Verlag. Gupta, S. & Mishra, P. (2012). Information technology: A tool to deal with bullwhip effect in supply chain management. International journal of management and information technology, 1(3), 26-36. Hammer, M. (2001). The superefficient company. Harvard business review. Whang, S. & Lee, H. (1997). The bullwhip effect in supply chains. Sloan management review. Read More