Final answer:
Coordination is achieved when a single entity controls replenishment decisions because decisions are centralized and synchronized, reducing transaction costs and conformity costs, leading to more efficient supply chain management and potential economies of scale.
Step-by-step explanation:
Coordination within a supply chain is often a critical aspect of managing resources effectively. When a single stage controls replenishment decisions for the entire chain, such as with continuous replenishment programs or vendor-managed inventory, coordination is achieved largely because decisions are centralized and synchronized. This concept contrasts with every stage attempting to maximize its own profits independently, which can lead to inefficiencies and the bullwhip effect, where small fluctuations in demand can cause larger variations in orders further up the supply chain. Centralization reduces the communication barriers and paves the way for more efficient coordination between parts of the supply chain.
In such coordinated environments, the transaction costs associated with making decisions are reduced due to less back-and-forth communication and negotiation between stages.
A single decision-maker or a unified management system can also mitigate conformity costs, which refers to the loss of individual preferences in group decision-making, by ensuring that decisions align closely with the overall objectives of the supply chain as a whole.
By optimizing the replenishment process, companies can take advantage of economies of scale, as centralized decisions often lead to larger, more consistent manufacturing runs and ordering processes, allowing companies to save costs on a per-unit basis as production scales up. This is well illustrated by the success of warehouse stores like centralized Costco or Walmart, where larger operations lead to lower average costs. Thus, when the decisions areand synchronized, it is often more easy and profitable for businesses to coordinate their activities and incentivize this practice.