2 Value of Information“In modern supply chains, information replaces inventory”Why is this true?Why is this false?Information is always better than no information. Why?Information is the supply chain driver that serves as a glue allowing the other drivers to work together to create an integrated, coordinated supply chain
3 Types of Information Supplier information Manufacturing information Distribution and retailing informationDemand information
4 Characteristics of good information Information must be accurateInformation must be accessible in a timely fashionInformation must be of the right kind
5 Value of Information Information Helps reduce variability Helps improve forecastsEnables coordination of systems and strategiesImproves customer serviceFacilitates lead time reductionsEnables firms to react more quickly to changing market conditions
6 Information for Coordination of Systems Information is required to move from local to global optimizationInformation is needed :Production status and costsTransportation availability and costsInventory informationCapacity informationDemand information
7 Increasing Variability Upstream the Supply Chain –Bullwhip Effect
8 Bullwhip EffectIncreasing propagation of variability upstream through the supply chain
9 We Conclude ….Order variability is amplified up the supply chain; upstream echelons face higher variability.What you see is not what they face.
10 What are the Causes…. Demand forecasting Long cycle times Min-max inventory levelOrder-up-to levelorders increase more than forecastsLong cycle timesLong lead times magnify this effectImpact on safety stockProduct life cycleBatch orderingVolume & transportation discount
11 What are the Causes…. Price fluctuation Inflated orders Promotional salesForward buyingInflated ordersOrders placed increase during shortage periodsIBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas
12 What are the Causes…. Single retailer, single manufacturer. Retailer observes customer demand, Dt.Retailer orders qt from manufacturer.DtqtRetailerManufacturerL
13 Consequences…. Increased safety stock Reduced service level Inefficient allocation of resourcesIncreased transportation costs
14 Ways to Cope with the Bullwhip Effect Reducing uncertaintyCentralizing demand informationBullwhip inherent in use of various forecasting techniquesReducing variabilityUse of EDLP strategy (Payless)Lead time reductionOrder lead time (time to produce and ship)Information lead time (time to process order)Efficient network distribution designStrategic partnershipVendor managed inventory (VMI)Sharing of customer informationCollaborative forecasting
15 Coping with the Bullwhip Effect in Leading Companies Reduce uncertaintyPOSSharing informationSharing forecasts and policiesReduce variabilityEliminate promotionsYear-round low pricingReduce lead timesEDICross dockingTransmitting POS data upstreamStrategic partnershipsVendor managed inventoryData sharing
16 Information for Effective Forecasts Pricing, promotion, new productsDifferent parties have this informationRetailers may set pricing or promotion without telling distributorDistributor/Manufacturer might have new product or availability informationCollaborative Forecasting addresses these issues.
17 Locating Desired Products How can demand be met if products are not in inventory?Locating products at other storesWhat about at other dealers?What level of customer service will be perceived?
18 Lead-Time Reduction Why? How? Customer orders are filled quickly Bullwhip effect is reducedForecasts are more accurateInventory levels are reducedHow?EDIPOS data leading to anticipating incoming orders.
19 Information to Address Conflicts Lot Size – Inventory:Advanced manufacturing systemsPOS data for advance warningsInventory -- Transportation:Lead time reduction for batchingInformation systems for combining shipmentsCross dockingAdvanced DSSLead Time – Transportation:Lower transportation costsImproved forecastingLower order lead timesProduct Variety – Inventory:Delayed differentiationCost – Customer Service:Transshipment
21 Bull Whip Effect - Operational Obstacles (Batching) Contributing factorsHigh Order CostFull TL economiesRandom or correlated orderingCounter MeasuresEDI & Computer Assisted Ordering (CAO)Discounted on Assorted Truckload, consolidated by 3rd party logisticsRegular delivery appointmentVolume and not lot size discountsState of PracticeMcKesson, Nabisco, ...3rd party logistics in Europe, emerging in the U.S.P & GNotes:Also seen in NOVA; access to sell-thru data by manufacturer allows him to schedule production based on sales rather than orders.Reduce transaction costs- EDI- CAO- McKesson’s “Economost”Discounts for ordering assortments rather than single product full-truckloads.Coordination of delivery schedules.Third party logistics can consolidate orders from multiple retailers.
22 Bull Whip Effect - Pricing Obstacles Contributing factorsHigh-Low Pricing leading to forward buyDelivery and Purchase not synchronizedCounter MeasuresEDLPLimited purchase quantitiesScan based promotionsState of PracticeP&G (resisted by some retailers)Scan based promotionNotes:EDLPSynchronize delivery and purchase. That is, manufacturer may give hi-lo prices and retailers may order large quantities, but mfr. will deliver them over multiple periods.Special Purchase contracts - E.g., discounts for total minimum commitments.
23 The Bullwhip Effect: Information Processing Obstacles Contributing factorsNo visibility of end demandMultiple forecastsLong lead-timeCounter MeasuresAccess sell-thru or POS dataDirect sales (natural on web)Single control of replenishmentLead time reductionState of PracticeSell-thru data in contracts (e.g., HP, Apple, IBM)CFAR, CPFR, CRP, VMI (P&G and Wal-Mart)Quick Response Mfg. StrategyNotes: Direct marketing channels not subject to bull whip effect due to demand signal processing. E.g., Dell-Direct of Dell Computers. The manufacturer has control of the entire supply chain.
24 Bull Whip Effect - Operational Obstacles Contributing factorsProportional rationing schemeIgnorance of supply conditionsUnrestricted orders & free return policyCounter MeasuresAllocation based on past sales.Shared Capacity and Supply InformationFlexibility Limited over time, capacity reservationState of PracticeSaturn, HPSchedule Sharing (HP with TI and Motorola)HP, Sun, SeagateNotes:Allocate supply in proportion to retailers market share in previous period. GM, TI, HP …Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing.Special contracts that restrict ordering (e.g., HP, SUN)- our paper on forecasts and flexibility- reserve capacity (Seagate reserves a portion of supplier’s capacity)Free return policies and generous order cancellation can lead to gaming.
25 Managerial Implications of the Bull Whip Effect - Behavioral Factors Contributing factorsLack of trustLocal reactionCounter MeasuresBuilding trust and partnershipState of PracticeWal-Mart and P&G with CFARNotes:Allocate supply in proportion to retailers market share in previous period. GM, TI, HP …Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing.Special contracts that restrict ordering (e.g., HP, SUN)- our paper on forecasts and flexibility- reserve capacity (Seagate reserves a portion of supplier’s capacity)Free return policies and generous order cancellation can lead to gaming.
26 The Bullwhip Effect: Managerial Insights Exists, in part, due to the retailer’s need to estimate the mean and variance of demand.The increase in variability is an increasing function of the lead time.The more complicated the demand models and the forecasting techniques, the greater the increase.Centralized demand information can significantly reduce the bullwhip effect, but will not eliminate it.
27 Steps in Cycle Time Reduction Establish a cycle-time reduction teamDevelop an understanding of given SC processes and current cycle time performanceIdentify opportunities for cycle time reductionDevelop and implement recommendations for cycle time reductionMeasure process cycle time reductionConduct CI efforts for process cycle time reduction
28 CSF of Cycle Time Reduction Top management supportCommitment to significant cycle time reductionUse of cross function teamsApplication of TQM toolsTraining in cycle time reduction approachesEstablish, monitor, and report cycle time performance measuresCollaboration with supply chain member
29 Locating Desired Products How can demand be met if products are not in inventory?Locating products at other storesWhat about at other dealers?What level of customer service will be perceived?