The document discusses challenges that arise from a lack of coordination within a supply chain, known as the bullwhip effect. This effect causes demand information to become distorted as it moves up the supply chain, leading each stage to have different estimates of demand. As a result, manufacturing costs, inventory costs, transportation costs, and other metrics increase, while product availability and profitability decrease. The document outlines several obstacles to coordination, including information processing, operational, pricing, incentive, and behavioral obstacles. It provides examples of each and potential remedies to improve coordination within the supply chain.

1. Chapter 4
Lack of supply chain
coordination and bullwhip effect

2. The Bullwhip Effect
• Fluctuation in orders increase as they move up the supply chain.
• Demand information is distorted as it travels within the supply
chain, so that different stages have different perspectives and
estimates of the chain demand
• Trying to run each stage of the SC based on this partial distorted
demand information can have dire consequences for all parties
involved!

4. The effect of lack of coordination on
performance
• Manufacturing cost 
• Inventory cost 
• Replenishment lead time 
• Transportation cost 
• Labor cost for shipping and receiving 
• Level of product availability 
• Relationships across the supply chain #@#*&@*!
• Profitability 
• Remark: All of the above essentially result from the increased
variability experienced by certain parts of the supply chain, due to
information distortion and lack of coordination.

5. Obstacles to Coordination in a SC
• Information Processing Obstacles
• Operational Obstacles
• Pricing Obstacles
• Incentive Obstacles
• Behavioral Obstacles

6. Information Processing Obstacles
• Independent forecasting at each stage based on received
orders
• Lack of information sharing among the various stages of
the chain

7. Potential Remedies
• Sharing point of sale data
• Collaborative forecasting and planning
• Single stage control of replenishment
– Continuous replenishment programs (CRP)
– Vendor managed inventory (VMI)

8. Operational Obstacles
• Ordering in large lots in order to reduce the fixed costs associated
with order placement and transportation.
• Large replenishment lead times that expose the company to higher
levels of variability, and raise the need for higher levels of safety
stock.
• Rationing and shortage gaming: Ordering larger quantities than
necessary, in order to eventually get what you need.

9. Potential Remedies
• Reduce replenishment lead times, by taking advantage of modern
IT capabilities
– Computer-assisted ordering
– EDI
• Reduce lot sizes
– Computer-assisted ordering
– Shipping in LTL sizes by combining shipments
– Exploit technology and other methods to simplify receiving
• Ration based on past sales and information sharing to limit
gaming

10. Pricing Obstacles
• Lot size-based discounts
• Price fluctuations (e.g., due to promotions) resulting
in “forward buying”

11. Potential Remedies
• Move from lot size-based to volume-based quantity discounts
(consider total purchases over a specified period)
• Stabilize pricing
– Eliminate promotions (EDLP)
– Limit quantity purchased during a promotion

12. Incentive Obstacles
• E.g., sales force incentives based on the amount of sells during
an evaluation period in a month or quarter.
• “Sell-in” rather than “sell-through” based evaluation.
• Local optimization within functions or stages of the supply
chain (e.g., the shipping department trying to control the
transportation cost by reducing the frequency of the shipments,
ignoring the impact of this decision on the inventory costs and
the customer service)

13. Potential Remedies
• Align incentives across functions
• Alter sales force incentives from sell-in to sell-through
• Pricing for coordination, e.g.,
– Buy-back contracts
– Quantity-flexibility contracts
• Build strategic partnerships and trust!

14. Behavioral Obstacles
• Each stage of the supply chain views its actions locally, being unable to see
the impact of its actions on other stages
• Different stages react to the current local situation rather than trying to
identify the root causes
• Eventually, stages start blaming each other for the experienced problems,
becoming enemies rather than partners
• Lack of trust results in opportunism, duplication of effort and lack of
information sharing
• From a more pragmatic standpoint, it is generally hard to trace the
consequences of certain actions because they will occur in some other
stage(s) of the supply chain.

15. Building Trust into a Supply Chain
Relationship
• Deterrence-based view
– Use formal contracts
– Parties behave in trusting manner out of self-interest
• Process-based view
– Trust and cooperation are built up over time as a result of a
series of interactions
– Positive interactions strengthen the belief in cooperation of
other party
• Neither view holds exclusively in all situations