Optimal supply chain performance requires the execution of a precise set of actions. Unfortunately, those actions are not always in the best interest of the members in the supply chain, i.e., the supply chain members are primarily concerned with optimizing their own objectives, and that self-serving focus often results in poor performance. However, optimal performance can be achieved if the firms coordinate is such a way that firm’s objective becomes aligned with the supply chain’s objective. Supply chain coordination requires all stages to take actions that maximize total supply chain profits. A lack of coordination results if different stages focus on optimizing their local objectives or if information is distorted as it moves as across the supply chain.
A key obstacle in coordination in the supply chain is misaligned incentives that result in different stages optimizing local objectives instead of total supply chain profits. Other obstacles include lack of information sharing, operational inefficiencies leading to large replenishment lead times and large lots, sales force incentives that encourage forward buying, rationing schemes that encourage inflation of orders, promotions that encourage forward buying, and a lack of trust that makes any effort toward coordination difficult.
Managers can help achieve coordination in the supply chain by aligning goals and incentives across different functions and stages of the supply chain. Other actions that managers can take to achieve coordination include sharing of sales information and collaborative forecasting and planning, implementation of single-point control of replenishment, improving operations to reduce lead times and lot sizes, Every Day Low Pricing (EDLP), and other strategies that limit forward buying, and the building of trust and strategic partnership within the supply chain.