When each stage in a supply chain optimizes its individuals (local) objective, without taking into consideration the impact of its action on the entire supply chain, lack of coordination exists in the supply chain.
If proper coordination exists among the various stages in the supply chain, total supply chain profits can be higher than what could be achieved when each stage optimizes its own objective.
When each stage to optimize it’s local objective its actions may affect adversely the performance of the entire supply chain.
Lack of coordination can also occur if information distortion occurs within the supply chain. The bullwhip effect observed in a supply chain is an example.
What are the Effects of Lack of Coordination on Supply Chain
The impact of the increase in variability on various measures in a supply chain is discussed in the following paragraphs:
1. Manufacturing Cost
The bullwhip effect increases manufacturing costs in the supply chain.
The manufacturing firm and its suppliers must satisfy a stream of orders which is much different than customer demand.
The manufacturing firm can respond to the increased variability by either building excess capacity or holding excess inventory which increases the manufacturing cost per unit produced.
2. Inventory Cost
The bullwhip effect increases inventory costs in the supply chain.
The manufacturing firm has to carry a higher level of inventory to handle the variability in demand than would be required if the bullwhip effect does not exist.
As a result, inventory costs in the supply chain increases. Also the warehousing cost increases.
Related: Top Important Documents Used in Transportation and Warehousing.
3. Replenishment Lead Time
The replenishment time in the supply chain is increased by the bullwhip effect.
The increased variability resulting from the bullwhip effect makes scheduling of production at the manufacturing firms and supplier plants much more difficult compared to a situation with level demand.
When the available capacity and inventory can not supply the incoming orders, the replenishment lead time in the supply chain from the manufacturing firm and its suppliers will be higher.
4. Transportation Cost
The bullwhip effect increases transportation costs in the supply chain.
The transportation requirements overtime at the manufacturing firm and its suppliers are correlated with the orders being filled.
As a result of the bullwhip effect, the transportation requirements fluctuate significantly over time.
This increases transportation costs because of the need to maintain surplus transportation capacity to cover higher demand periods.
5. Labour Cost for Shipping and Reciving
The labor costs associated with shipping and receiving in the supply chain is increased by the bullwhip effect.
Labor requirements for shipping at the manufacturing firm and its suppliers fluctuate with orders.
A similar fluctuation occurs for the labor requirements for receiving at diminutions and retailers.
The various stages for the supply chain have the option of carrying excess labor capacity or varying labor capacity in response to the fluctuation in orders.
Either option increases the labor cost.
Related: 31 Factors Affecting the Choice of Distribution Channels.
6. Level of Product Availability
The level of product availability is affected by the bullwhip effect.
This results in more stock-outs in the supply chain.
The large fluctuation in orders makes it difficult for the manufacturing firms to supply all distributors and retailer orders in time.
This increases the likelihood that retailers will run out of stock, resulting in lost sales for the supply chain.
7. Relationship Across the Supply Chain
The bullwhip effect has a negative effect on performance at every stage and thus affects the relationship between stages of the supply chain.
Each stage in the supply chain has a tendency to blame the other stages because each stage is doing the best it can.
The bullwhip effect thus leads to a loss of trust between different stages of the supply chain and makes any potential coordination efforts more difficult.
From the above discussion, it follows that the bullwhip effect and the resulting lack of coordination have aa a significant negative impact on the supply chain performance.
The bullwhip effect reduces the efficiency of the supply chain by increasing cost and decreasing responsiveness.
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