Coordination agreements

The Pacific Northwest Coordination Agreement is signed it seeks to meet the region s electricity needs most efficiently by... 

P G manages the inventory at the Walmart warehouses), scanner-based promotions (where the manufacturer pays the retailer based on units sold during a particular period). Changes in the coordination agreements impact the entire supply chain. 

This example illustrates the benefit of thinking outside the box as defined by Industrial Chemicals and examining the root causes for order variation, i.e., the supply chain structure. But it also means moving to a bigger box, i.e., including more entities in the supply chain. The new perspective considers the link between demand variation and truck capacity driven by existing coordination agreements (backhaul discounts). The case shows the benefit... 

Consider the in-stock availability offered to the customer (with a nearly zero lead time) by the retailer if the retailer and manufacturer were to carry inventory. It is clear that the retailer s choice of inventory would reflect retailer margins and costs associated with excess inventory. Such a choice of customer service level may not reflect what is best for the overall supply chain, something that is discussed in the chapter on coordination. Thus, a focus on availability will encourage the manufacturer and retailer to establish coordination agreements that can increase the delivered service level to the customer. 

Consider contexts when capacity decisions have to be made in advance of demand realization. In the apparel industry, capacity has to be chosen eight to twelve months ahead of demand. In the auto industry, plans for capacity configurations at plants are made several years in advance. For infrastructure decisions, such as highway construction, decisions may be made fifteen to twenty years in advance. In a just-in-time delivery context, decisions may be made four hours in advance ([52]). Clearly the main question is the extent of demand uncertainty when decisions are made and the consequences of having an inadequate level of capacity. In addition, if the capacity decision maker is different from the information provider, incentive effects have to be considered. Hence the need for coordination agreements (as discussed in Chapter 5). However, the availability of alternate sources of capacity, albeit at a higher cost, can relieve the pressure to commit to capacity in advance. 

This chapter will provide tools and associated concepts to develop coordination agreements. First, some specific examples to illustrate the use of coordination agreements. 

It is thus clear that the wholesale price contract caimot always create a coordinated supply chain, that is, that the profits added across individual companies do not attain the supply chain maximum profit because the optimal capacity decision, from a supply chain perspective, is not chosen. The next section describes a coordinating agreement that can generate a coordinated supply chain. 

Consider a coordination agreement in which the retailer pays w for each unit purchased as well as r per unit of leftover unused capacity. Such contracts are termed take-or-pay contracts and are found commonly in many Just-In-Time contexts. For example, it is reported ([52]) that Toyota guarantees that its actual orders will deviate by no more than 10% around forecasted offtakes and will pay for any deviations. In the transportation industry, Reynolds commits to minimum volumes to carriers and will pay if observed demand falls short of these minimum volumes. Eppen and Iyer [29] describe a backup agreement in the apparel industry, which consists of a payment of w per unit taken and a payment of per unit not taken. 

Consider another coordination agreement in which the retailer is offered an incentive to place advance orders, i.e., orders in advance of demand realization. Suppose the retailer is charged tu per unit for these orders and w per unit for later orders. As long as w, the retailer may... 

The key message is that in many supply chain contexts coordinating agreements can deliver significant improvements that all involve expanding the supply chain profit pie, thus enabling Pareto-improving profit situations. 

For shippers and transportation providers, an important metric is the total supply chain cost of transportation transactions. This total supply chain cost includes the effect on both transport costs and associated inventory costs. In addition, measures of performance include delivery lead time, percent on-time delivery or delivery within time windows, and schedule flexibility to accommodate shipment reschedules. Given the large volume of shipments that occur on dedicated contract trucking, there is scope for use of information, coordination agreements, and associated capadty commitments to improve performance across a supply chain. Competing carriers sell bundled routes to minimize shipper costs. 

Using Coordination Agreements to Improve Transportation Systems... 

Coordinating agreements can be implemented between a shipper and a transport provider to improve performance. Consider a supply chain consisting of suppliers, manufacturing plants, and customer locations. In the original system, suppose each plant runs as an independent profit center, choosing its own transportation. To create scale economies as well as increase the fraction of line and backhaul routes, an alternate system can be implemented to coordinate across locations and with a transport company. Consider the potential impact on the system as it transitions from independent transport choices to a corporate load control center that enables performance improvement. 

What does all this mean for a supply chain manager in Europe It means that spatial distance may not be an appropriate way to look at the supply chain because country boundaries may have an impact. It means that individual country specific rules regarding truck sizes and movement would need to be considered while planning the supply chain network. Coordination agreements to decide how orders are initiated and delivered could have a significant impact on costs. In short, the supply chain architecture in Europe would have to respond to the specific European logistics context. 

Finally, as part of a coordination agreement with suppliers, capacity commitment is used to reserve capacity at suppliers in anticipation of demand. But capacity markets are also observed in certain areas of the industry. The Italian apparel manufacturing industry has the impannatori or capacity brokers, who mediate between the need for capacity and its availability across the small entrepreneurs in Prato, Italy ([69]). Studies of the Prato markets surest that in return for the abdity to sell capacity, sewing and printing machine manufacturers have ino-eased the extent of investment in modern machinery to levels significantly higher than the rest of the world. 

In order to illustrate the need for coordination agreements to implement quick response, consider the example of a retailer Assort that sells womens dresses. The first analysis will use a long lead time relationship between a manufacturer and Assort. In this relationship, the retailer has... 

It is clear that since the retailer-expected profits increase while the manufacturer revenues decrease, manufacturer profits decrease (if costs were to remain the same). Thus QR is not Pareto improving without coordination agreements. This su ests the need for agreements between the manufacturer and the retailer to implement QR. 

Since QR without any agreements does not benefit the manufacturer, coordination agreements may be necessary. One possible agreement is that the retailer commits to a higher service level, say 100% in this example, in return for the manufacturer providing QR. 

This shows that improving lead times and enabling decisions under a lower demand forecast error may require coordination agreements between members of the apparel supply chain. Once such coordination agreements are estabhshed, the access to manufacturing capacity closer to demand enables improved competitiveness of the apparel supply chain. Notice that all four Cs played a role in improving the supply chain. 

The disposable camera supply chain requires a careful design to in-centivize the customer to take the finished camera to a retail store, coordination agreements to incent the retail store to return the product to the manufacturer, a counter to track use of the components, simple snap design to separate components, sufficient capacity of subsidized labor to break apart the camera, and a competitive pricing model to recover component cost over multiple product generations. In short, all the Four Cs of supply chain management had to be planned carefully to ensure an effective reverse supply chain for the FunSaver cameras. 

Coordination agreements between the facility and the off-site authorities should also be developed. These will usually address the levels at which notification must occur, the type and format of the information that needs to be provided by the facility, the communication mechanisms, and the assistance that will be provided by the facility staff and organizations to support the off-site planning and response efforts. These agreements should also address the need for the off-site authorities to handle the exit of facility staff in case of a site evacuation of nonessential personnel. 

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