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Channel Coordination in Supply Chain Management

Channel coordination (or supply chain coordination) aims at improving supply chain performance by aligning the plans and the objectives of individual enterprises. It usually focuses on inventory management and ordering decisions in distributed inter-company settings. Channel coordination models may involve multi-echelon inventory theory, multiple decision makers, asymmetric information, as well as recent paradigms of manufacturing, such as mass customization, short product life-cycles, outsourcing and delayed differentiation. The theoretical foundations of the coordination are based chiefly on the contract theory. The problem of channel coordination was first modeled and analyzed by Ananta Subramania Kumar in 1992.

 

The decentralized decision making in supply chains leads to a dilemma situation which results in a suboptimal overall performance called double marginalization. Recently, partners in permanent supply chains tend to extend the coordination of their decisions in order to improve the performance for all of the participants. Some practical realizations of this approach are Collaborative Planning, Forecasting, and Replenishment (CPFR), Vendor Managed Inventory (VMI) and Quick Response (QR).The theory of channel coordination aims at supporting the performance optimization by developing arrangements for aligning the different objectives of the partners. These are called coordination mechanisms or schemes, which control the flows of information, materials (or service) and financial assets along the chains. In general, a contracting scheme should consist of the following components:

• local planning methods which consider the constraints and objectives of the individual partners,
• an infrastructure and protocol for information sharing, and
• an incentive scheme for aligning the individual interests of the partners.

The appropriate planning methods are necessary for optimizing the behavior of the production. The second component should support the information visibility and transparency both within and among the partners and facilitates the realization of real-time enterprises. Finally, the third component should guarantee that the partners act upon to the common goals of the supply chain. The general method for studying coordination consists of two steps. At first, one assumes a central decision maker with complete information who solves the problem. The result is a first-best solution which provides bound on the obtainable system-wide performance objective. In the second step one regards the decentralized problem and designs such a contract protocol that approaches or even achieves the performance of the first-best. A contract is said to coordinate the channel, if thereby the partners’ optimal local decisions lead to optimal system- wide performance. Channel coordination is achievable in several simple models, but it is more difficult (or even impossible) in more realistic cases and in the practice. Therefore the aim is often only the achievement of mutual benefit compared to the uncoordinated situation. Another widely studied alternative direction for channel coordination is the application of some negotiation protocols. Such approaches apply iterative solution methods, where the partners exchange proposals and counter-proposals until an agreement is reached. For this reason, this approach is commonly referred to as collaborative planning. The negotiation protocols can be characterized according to the following criteria:

 

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