OPSM 305 Supply Chain Management Koç University OPSM 305 Supply Chain Management Class 20: Vendor Managed Inventory Zeynep Aksin zaksin@ku.edu.tr

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 reduce the bullwhip effect, but will not eliminate it.

Coping with the Bullwhip Effect in Leading Companies Reduce Variability and Uncertainty - POS - Sharing Information - Year-round low pricing Reduce Lead Times - EDI - Cross Docking Alliance Arrangements Vendor managed inventory On-site vendor representatives

Barilla SpA

Barilla SpA Part A Barilla SpA is the world’s largest pasta manufacturer The company sells to a wide range of Italian retailers, primarily through third party distributors During the late 1980s, Barilla suffered increasing operational inefficiencies and cost penalties that resulted from large week-to-week variations in its distributors’ order patterns

Distribution Factories 25 %65 %35 800 SKU CDC 2 Depots 18 %10 %90 GD DO 14 days stock Order delivery 24-48 hrs Zincir Mağazalar Bağımsız marketler Signora Maria (Bakkal) 45% of dry products %20 %35 12 days stock 10 days stock 14 days stock

Signora Maria (Bakkal) Ordering Process Fresh Depots Dry 8-10 days Daily Orders 24-48 hours Signora Maria (Bakkal) Independent Markets Chains

What is driving this order pattern? Exhibit 12 Weekly Demand for Barilla Dry Products from Cortese’s Northeast Distribution Center to the Pedrignano CDC, 1989.

Causes for Demand Fluctuations Transportation discounts Volume discount Promotional activity No minimum or maximum order quantities Product proliferation Long order lead times Poor customer service rates Poor communication

How does Barilla compare to the beergame?

What is the impact of fluctuations? Because of high product changeover: either inefficient production or excess finished goods inventory, Inventory costs: finished goods yet also stockouts due to unexpected peaks in certain SKUs Utilization of central distribution low, yet need to be prepared for fluctuations Transportation costs high due to variability in demand for trucking Excess capacity at distributor due to need to store items bought during promotions

Impact of Bullwhip in general High inventory/lost sales/backlog cost Low customer satisfaction Low operational efficiency - underutilization - overtime - expediting Unnecessary capacity investment Swings in working capital Blaming others; frustration, helplessness

JITD To address this problem, the director of logistics suggests the implementation of Just-in-Time Distribution (JITD), with Barilla’s distributors. Under the proposed JITD system, decision-making authority for determining shipments from Barilla to a distributor would transfer from the distributor to Barilla. Specifically, rather than simply filling orders specified by the distributor, Barilla would monitor the flow of its product through the distributor’s warehouse, and then decide what to ship to the distributor and when to ship it.

Basic premise of JITD Replace Sequential optimization with Global optimization Who will optimize? Eliminate some of the ‘false’ economics that drive traditional ordering processes

Strategic Partnering Types of SP: Quick Response: Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. In this strategy, the retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.

Strategic Partnering Continuous Replenishment: Vendors receive POS data and use it to prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory. Wal-Mart Advanced Continuous Replenishment: Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.

Strategic Partnering Vendor Managed Inventory (VMI):JITD VMI Projects at Dillard Department Stores, J.C. Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements.

Requirements for Effective SP Advanced information systems Top management commitment Mutual trust

Main Characteristics of SP