The lack of coordination in a supply chain increases variability and hurts the supply chain surplus. We discuss the impact of the bullwhip effect on various costs in the P&G diaper supply chain.
1. Manufacturing Cost
The lack of coordination increases manufacturing cost in the supply chain. As a result of the bullwhip effect, P&G and its suppliers must satisfy a stream of orders that is much more variable than customer demand. P&G can respond to the increased variability by either building excess capacity or holding excess inventory (see Chapter 8), both of which increase the manufacturing cost per unit produced.
2. inventory Cost
The lack of coordination increases inventory cost in the supply chain. To handle the increased variability in demand, P&G must carry a higher level of inventory than would be required if the supply chain were coordinated. As a result, inventory costs in the supply chain increase. The high levels of inventory also increase the warehousing space required and thus the warehousing cost incurred.
3. Replenishment Lead time
Lack of coordination increases replenishment lead times in the supply chain. The increased variability as a result of the bullwhip effect makes scheduling at P&G and supplier plants much more difficult than when demand is level. There are times when the available capacity and inventory cannot supply the orders coming in. This results in higher replenishment lead times.
4. Transportation Cost
The lack of coordination increases transportation cost in the supply chain. The transportation requirements over time at P&G and its suppliers are correlated with the orders being filled. As a result of the bullwhip effect, transportation requirements fluctuate significantly over time. This raises transportation cost because surplus transportation capacity needs to be maintained to cover high-demand periods.
5. Labor Cost for Shipping and Receiving
The lack of coordination increases labor costs associated with shipping and receiving in the supply chain. Labor requirements for shipping at P&G and its suppliers fluctuate with orders. A similar fluctuation occurs for the labor requirements for receiving at distributors and retailers. The various stages have the option of carrying excess labor capacity or varying labor capacity in response to the fluctuation in orders. Either option increases total labor cost.
6. Level of Product Availability
Lack of coordination hurts the level of product availability and results in more stockouts in the supply chain. The large fluctuations in orders make it harder for P&G to supply all distributor and retailer orders on time. This increases the likelihood that retailers will run out of stock, resulting in lost sales for the supply chain.
7. Relationships across the Supply chain
Lack of coordination has a negative effect on performance at every stage and thus hurts the relationships among different stages of the supply chain. There is a tendency to assign blame to other stages of the supply chain because each stage thinks it is doing the best it can. The lack of coordination thus leads to a loss of trust among different stages of the supply chain and makes any potential coordination efforts more difficult.
From the earlier discussion, it follows that lack of coordination has a significant negative impact on the supply chain’s performance by increasing cost and decreasing responsiveness. The impact of the lack of coordination on different performance measures is summarized in Table 10-1.
In the next section, we discuss various obstacles to achieving coordination in the supply chain.
Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.
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