Within any supply chain, the work output of any node may be the input for another; as a result, variability in demand or information increases up the supply chain. Supply chain coordination directly impacts the supply chain surplus. Some of the obstacles to supply chain coordination include:
1. Incentive Obstacles
2. Information Obstacles
3. Operations Obstacles
4. Pricing Obstacles
The misalignment of performance indicators causes Incentive Obstaclesto strategic objectives. Performance indicators are generally reflective of a firm's values, and it shows the workforce what that firm values. Incentive obstacles typically result in localized optimization and inefficiencies up and downstream. For example, imagine an organization that sells a product with a short life span. The firm has a generous returns policy to allay customer fears in support of this knowledge. The Sales Manager has seen it fit to incentivize the sales target to boost revenues and hopefully market share. Customers who usually order 10 cases have ordered two times that amount to benefit from the discounts associated with the promotion. There has, however, been no corresponding demand for the product on the retail side. The result is large volumes of returns close to expired or expired. There are significant losses associated with this scenario. As a result, companies suffer lost revenues, reverse logistics costs, salvage loss, and substantial inventory write-offs.
There will be an associated' rank order for values at any point of service delivery within a supply chain.' A rank order for values is an indicator of how the firm delivers service or creates value; for example, a single firm involved in providing banking and financial services has an issue. The bank is well known for its no-frills approach to banking and the high volumes they serve daily. Customers love that you can be in and out within a few minutes; the bank's mission statement is 'Come in, Go out.' But they have recently hired a new Customer Service Manager who sees things a little differently. He has come up with some new Key Results Areas for his team, causing a few issues. In the example below, I will show how incentive obstacles can impair supply chain coordination.
The table above shows that although this is the same bank, the two business units have very different objectives. Misaligned objectives produce localized optimization in the reception area. They would do well if we were to measure Bank A's reception performance by the criteria outlined in the table. Customers would be happy; however, they head off to customer service when customers leave the reception area. Here the focus isn't on speed and throughput but customer experience. You can see how the supply chain wouldn't be able to deliver on the banks' philosophy and how, very soon, customers would become dissatisfied with the bank's service delivery.
By aligning measures, metrics, and indicators, incentive objectives improve, which leads to improvements in overall organizational or competitive strategies. The firm may also implement integrated process flows that measure inputs and outputs and each business unit's contribution to the overall result. The organization's mission statement must be aligned with measures, metrics, and indicators. The firm may have to implement a change management programme to implement the change and get the desired result effectively.
Information Processing Obstaclesare generally related to sharing valuable data, valuable data that is used in decision-making. For example, within a supply chain, small unexplained changes in demand can be misinterpreted and have a cumulative effect on variability within the supply chain as each layer compensates for the perceived variation.
Supplier Relationship Management (SRM) programmes are one way to overcome such obstacles within a supply chain. SRM programmes build trust, and strategic alliances are not uncommon. Within them, end-to-end visibility results as firms share data throughout the supply chain. For example, Walmart provides its suppliers with POS Data from customers, which it uses to automate the replenishment process – the whole system is very efficient.
Another way is to provide suppliers with long-term forecasts and share marketing plans. This information will allow suppliers to make better decisions about ordering and buying raw materials. In addition, when the information-sharing systems within a supply chain are integrated, it can lead to improved end-to-end visibility. It may even be a competitive advantage for firms.
Operations Obstacleshave to do with the interpretation of data. It has mostly to do with the fact that suppliers face more significant variability in demand than the retailer. Once again, the cumulative effect on variability causes an overcompensation within the supply chain as suppliers rush to build capacity. This buildup of power leads to the ordering of large lots, which is not aligned with the demand reality.
To overcome these deficiencies, suppliers and customers must optimize the order processing – order fulfilment processes to take advantage of the insight that improved visibility brings. But, again, trust within supply chains is crucial to overcoming these obstacles, and these issues go back to contracts, negotiations, and definitions for SOW's.
Pricing Obstaclescause high variability of orders that have been placed, volume discounts, and trade promotions. The result is high variability between sales and manufacturer shipments. Suppliers and customers can coordinate the buying relationship and rationalize purchases based on market or product characteristics. They can move from lot size-based to volume-based discounts and build strategic partnerships that create trust.
The obstacles listed above are not the only ones that can impact supply chain operations. Share other barriers that you feel may reduce the efficiency or responsiveness of supply chains in the comments.
