The document discusses supply chain integration, emphasizing the stages involved, causes of the bullwhip effect, and barriers to successful collaboration among firms. It outlines strategies for improving integration and mitigating demand distortions, such as sharing information and aligning incentives. Successful relationships in supply chains are highlighted as essential for achieving operational efficiencies and overcoming external coordination challenges.

1. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Supply Chain Integration
Supply Chain Integration
9
9

2. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Learning Objectives
• What are the different stages of supply chain integration?
• What are the main causes of the bullwhip effect?
• What are the barriers to successful supply chain integration?
• How do firms build successful partnerships in supply chains?
• In what ways do industry initiatives like ECR, VMI & CPFAR
help firms in achieving supply chain integration?

3. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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VENDORS CUSTOMERS
C1
C2
C3
C4
C5
C6
INBOUND
TRANSPORTATION
PLANTS INTERFACILITY
TRANSPORTATION
DISTRIBUTION
CENTERS
OUTBOUND
TRANSPORTATION
The Supply Chain

4. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Cost
Service Level
0 100%
Existing Position
Enhancing Supply Chain Performance
.
SC Integration
SC Reconfiguration
SC Optimization
Inefficient Practices

5. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Achieving an Integrated Supply Chain

6. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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† in days
* Data Source: PROWESS(CMIE)
** based on limited study carried out by author in year 2001
Supply Chain Inventory for
FMCG Companies†

7. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Planning and Control Structure for
Internal Integration
Centralized Planning
Impact of computing and communication
technologies
Decentralized Planning
Building customer supplier linkages with service
level contracts
Service levels monitoring
Hybrid approach
Centralised planning for bottleneck resources and
decentralized planning for rest of the resources

8. Author: Janat Shah
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Centralized Versus Decentralized Planning
• Hard constraints versus soft constraints
• Knowledge at local level
• Empowerment issues
• Higher lead-times and capacity slack in
decentralized systems

9. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Increase in Demand Volatility While
Moving Up the Supply Chain
• Order to the upstream member in supply
chain exhibit greater distortion than actual
variation observed in orders at the retail sale
• The variance of orders increases as one moves
upstream. This is called the bullwhip effect.

10. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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The Beer Game
Factory
Factory
Depot Wholesaler Retailer
D
D D D
CUSTOMER
D D D
 Each entity has complete local information, but no global information.
Demand distortion observed in Beer Game: Bullwhip Effect

11. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Demand Distortion Observed in the
Buyer–Supplier Supply Chain
Supplier Retailer :
Order
Demand
Delivery
Supply chain

12. Author: Janat Shah
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Demand Distortion Due to Buyer Practices
Forecasting of future trends in demand
Updation of future demand based on receipt of
recent demand
Safety stock adjustments
Impact of any promotion plan
Order batching to take care of Economies of scale in
Production and procurement resulting in
Large production runs
Buying in large batches

13. Author: Janat Shah
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Impact of Forecast Updating:
Buyer–Supplier Link
• Buyer- supplier
• Lead-time for buyer = 2 weeks
1 Week for order transmission & 1 week for delivery
• Manufacturing Lead-time for supplier = 2 weeks
• Forecasting and SS policy used by buyer &
supplier
Forecast = current period demand
Safety stock = 2 weeks of cover

14. Author: Janat Shah
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Demand Distortion Across a Chain

15. Author: Janat Shah
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Demand Distortion:
Impact of Supplier Practices
Incentives offered to buy in bulk
Price promotions
Lotsize based quantity discounts
Sales force incentives
Supplier behaviour Uncertainty
Shortage handling
Price fluctuations
Delivery reliability
Supplier inefficiency
Long lead time

16. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Demand Distortions Across the
Buyer–Supplier Link

17. Author: Janat Shah
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Demand Fluctuation at Different Stages of
a Supply Chain

18. Author: Janat Shah
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Demand Distortion: Unnecessary Inventory at
Buyer–supplier Interface
Material flow
Supplier
Plant
Customer
plant
FG inventory at
supplier plant
RM inventory at
customer’s plant
Demand as perceived by supplier
Consumption
pattern
at customer’s end
Information
PVC
producer
PVC pipe
producer
Supplier
Plant

19. Author: Janat Shah
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Bullwhip Effect
• Multiple forecast updating
• Order batching
• Shortage gamming
• Price fluctuations
• Long lead-times

20. Author: Janat Shah
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Counteracting Demand Distortions:
Remedial Strategies
• Demand Information sharing across chain
• Aligning incentives across chain
Contracts
• Revenue Sharing, Buy back contract, sales Rebate
contract
Information sharing & Monitoring
Shifting of decision rights
Trust based relationship
• Improving Operational efficiencies

21. Author: Janat Shah
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Managing External Integration
• How can Tata motors motivate suppliers to build necessary
capacity for Auto components for Nano Car?
• Malls : DLF is planning to spend 16000 crore in next four
years in developing malls. - Can they enter into revenue-
sharing contracts with retailers versus fixed-rental model?
• Ongoing confrontation between movie producers and
multiplex owners
• Successful external integration between Bharti Airtel and
strategic partners like IBM , Nokia and Ericsson

22. Author: Janat Shah
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Challenges in Inter-firm Coordination
• Incentive compatible contracts
• Can not observe and monitor partner’s
efforts?
• How do we motivate partner to invest in
performance improvement?
• May not be able to enforce contracts

23. Author: Janat Shah
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Challenges in Supply Chain Integration
Firms tend to focus on value appropriation and not
on value creation
Power balance in chain
Inherent conflict which can not be addressed by
incentive alignment
Different stakeholders
Different objectives
Different worldview of future
Dynamic nature of relationships

24. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Cost Impact of Action/Initiative

25. Author: Janat Shah
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HUL: Working Capital Management
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Raw materials and
spares days
74 64 49 53 53 61 64 66 57 47 34
Work in progress 17 9 4 3 4 4 3 2 11 10 8
Finished goods days 46 39 31 31 31 36 29 32 37 33 28
Average debtors
days
15 15 8 9 13 17 19 14 15 14 11
Average creditors
days
68 84 68 74 83 96 94 97 108 104 94
Net working capital
cycle days
84 44 26 23 18 22 20 17 12 2 -13

26. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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The Automotive Supply Chain:
An Inventory Profile
0
2
0
4
0
6
0
8
0
1
0
0
1
2
0
M
a
x
im
u
m
A
v
era
g
e
M
in
im
u
m
Days
of
Inventory
First Tier
Supplier
Inbound
Logistics
Vehicle
Manufacturers
Outbound
Logistics
Distribution
& Retail
(UK 1999 Figures, Volume Car Stock Levels
Source: Holweg (2002)

27. Author: Janat Shah
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Dynamic Nature of Supply Chain
Relationships
Changes in Environment
Completive, technological
Changes in skills and goals
Fairness of treatment
Assessment costs and benefits of relationships

28. Author: Janat Shah
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Genuine Differences in Aligning Incentives
• Manufacturer versus multi-brand retailer
• Supplier/customer competing in end market
• Listed firm’s focus on quarterly and annual
results
• Supplier serving multiple industries
• Members do not share the same world view

29. Author: Janat Shah
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Building Partnership and Trust in
Supply Chains
• Design relationship
Mutual dependence
Central Hub ( Toyota, Benetton)
• Manage and nurture relationships
• Redesign relationship with change in
environment

30. Author: Janat Shah
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Building Supply Chain Relationships
• Assessing the value of relationships
• Identify operational roles and decision rights
for each party: if required reorganize activities
• Creating effective contracts
• Designing effective conflict resolution
mechanisms
• Invest in relationships

31. Author: Janat Shah
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Classification of Relationships

32. Author: Janat Shah
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Supply Chain External Integration:
Popular Initiatives
• VMI
• JIT II
• ECR
• QR
• CFPAR

33. Author: Janat Shah
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Conceptual View of the ECR

34. Author: Janat Shah
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ECR India Initiative
• Monitor and share the stockout data of their own brands
• Benchmark their figures against those of others
• Share best practices to minimize new product failures
• Tackle problems of excess inventory in the supply chain
• Formation of joint groups:
The Stockouts Group
The Logistics Group
The Dataflow Group
The FMCG Policy For Organized Retail Group

35. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Summary-I
• In well-managed chains, material, information and finance flows
seamlessly across department boundaries and organization boundaries.
• By working on supply chain integration it would be possible to shift the
entire efficiency frontier downward, which in turn would allow the firm
to improve performance on cost and service fronts simultaneously.
• Firms should work towards internal integration initially and at a later
stage should attempt to work towards external integration.
• To make supply chain integration possible, the organization will have to
make corresponding changes in organization structure processes and
performance measures.
• In a typical supply chain one observes a phenomenon called the bullwhip
effect as we move upstream in the chain from retailers to wholesalers
and to manufacturers. Each stage in the chain distorts demand and the
variability in demand keeps increasing as we move upstream in the chain
the chain.

36. Author: Janat Shah
Supply Chain Management-Text and Cases, 2nd Edition
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Summary-II
• Five different causes of the bullwhip effect : multiple demand forecast
update by various supply chain members, order batching at various stages in
the chain, price fluctuations within the chain, and shortage gaming by
partners in the chain, and long lead time involved in purchasing and
manufacturing.
• Companies can avoid this bullwhip effect by information sharing , aligning
incentives and improving operational efficiency in the chain
• It is not unusual to find supply chains where two parties in the chain have
genuine differences and therefore external integration would be difficult to
attempt in such a situation.
• It has been found that successful relationship building involves the following
three elements: design relationship with cooperation and trust, manage and
nurture relationships and redesign relationships with changes in environment