Discussion 17

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CHAPTER SEVENTEEN
Discussion Questions

1. What is the bullwhip effect and how does it relate to lack of coordination in a supply chain?

The bullwhip effect refers to the fluctuation in orders along the length of the supply chain as orders move from retailers to wholesalers to manufacturers to suppliers. The bullwhip effect relates directly to the lack of coordination (demand information flows) within the supply chain. Each supply chain member has a different idea of what demand is, and the demand estimates are grossly distorted and exaggerated as the supply chain partner is distanced from the customer.

2. What is the impact of lack of coordination on the performance of a supply chain?

The impact of lack of coordination is degradation of responsiveness and poor cost performance for all supply chain members. As the bullwhip effect rears its ugly head, supply chain partners find themselves with excessive inventory followed by stockouts and backorders. The fluctuations in inventory result in increased holding costs and lost sales, which in turn spike transportation and material handling costs. Ultimately, the struggle with cost and responsiveness hurts the relationships among supply chain partners as they seek to explain their lack of performance.

3. In what way can improper incentives lead to a lack of coordination in a supply chain? What countermeasures can be used to offset this effect?

Incentive obstacles occur in situations when different participants in the supply chain are motivated by self interest. Incentives that focus only on the local impact of an action result in decisions being made that achieve a local optimum but can avoid a global (supply chain) optimum. All supply chain partners must agree on global performance measures and structure rewards such that members are appropriately motivated. Sales force incentives also are responsible for counterproductive supply chain behavior. Commissions that are based on a single short time frame can be gamed by the sales force to maximize commission but these actions inadvertently increase demand variability and exert pressure on the supply chain. Commissions should be structured to provide incentives to consistently sell large volumes of product over a broad time frame to the sell-through point.

4. What problems result if each stage of a supply chain views its demand as the orders placed by the downstream stage? How should firms within a supply chain communicate to facilitate coordination?

If each stage of a supply chain views its demand as the orders placed by their downstream counterpart, the bullwhip effect is realized by the supply chain. Each member develops a forecast that is based on something other than the true customer demand and hilarity ensues. Supply chain members should share point-of-sale (POS) data so that all members are aware of the true customer demand for product. The beauty of data sharing requirements is that only aggregate POS data must be shared to mitigate the bullwhip effect; there is no need to share detailed POS data.

5. What factors lead to a batching of orders within a supply chain? How does this affect coordination? What actions can minimize large batches and improve coordination?

Order batching is caused by a number of different factors. One mechanism is the price structure of TL and LTL shipment quantities; there is incentive to wait a while to make sure that a TL shipment is achieved. A customer’s natural tendency to wait for a milestone, either real or perceived, can also cause batching. Customers may wait until Friday, Monday, the last or first day of the month, etc., just because that’s when they always have or because that event reminds them to order. Order batching also occurs because customers are aware of an impending price reduction and want to take advantage of it. Batching adversely affects supply chain coordination...
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