by Jimmy Alyea
Problems that can arise when each part of a supply chain focuses solely on its own profits when making decisions:
The goal of maximizing only company profits, rather than those of the supply chain, can result in different members of a supply chain working at cross-purposes. For example, a company that makes a minor price cut at the distributor level to increase its profits may cause a major problem for vendors supplying raw materials as small changes are magnified at each level of the supply chain. Or, a company with an intracompany interfunctional view may pressure another partner in the supply chain to hold inventory in order to reduce the dominant party’s costs without regard for where inventories are best held. If the parties in such a situation do not collaborate, one may respond to implied uncertainty by increasing inventory levels (and costs) unnecessarily, thus reducing supply chain surplus. Because of the complex interrelationship of inventory held at various sites, the companies should work together to manage inventory throughout the supply chain effectively.
Actions that can help a retailer and a manufacturer work together to improve their overall performance:
Actions that enable a retailer and a manufacturer to work together to improve overall performance include the retailer’s sharing meaningful point-of-sale data, its sales forecasts and methods, and in-store and warehouse inventory. The manufacturer with this information is better able to improve the production process by reducing material costs, determine quantity based on total supply chain costs, avoid stockouts, and respond quicker to changing customer demand and market changes. Retailers, who have access to similar types of information from the manufacturer, can also make decisions that more positively affect the supply chain, such as the timing of sales promotions. Collaborative forecasting and coordination, rather than independent forecasting by a retailer and a manufacturer based on the individual cost structure of each, increases supply chain efficiency and competitiveness.
Copyright 2012 James L. Alyea. All Rights Reserved.
About Jimmy Alyea:
Jimmy Alyea lives in Houston, Texas, and holds two Bachelor of Business Administration degrees (Supply Chain Management and Marketing) and a Master of Business Administration degree. Follow Jimmy Alyea (James L. Alyea) on LinkedIn, Twitter, or Blog.