Description
what are the causes of bullwhip effect, consequences of bullwhip effect, remedies of bullwhip effect, solutions for bullwhip effect like vendor managed inventory.
Supply Chain Management
Better Information Visibility
reducing
BULLWHIP EFFECT
What are the reasons for the channel not being coordinated?
? Lack of information
? Information about the demand is not transmitted up stream.
? Conflicting interest
? Retailers would like to have daily deliveries ? Daily deliveries are expensive for the suppliers ? Manufacturers would like to have a stable production environment. ? Buyers would like to have the flexibility to adjust to the demand and change orders with a short notice.
Conflicting Objectives in Supply Chain
1. Decentralized supply chain: each member has his own interest and act independently 2. Self-interested decision makers: every member of the supply chain optimizes his own objective. 3. These self-interested members’ decisions may not align with the optimal decisions for the overall performance of the supply chain. 4. Inefficiencies across supply chain lead to decentralization cost 5. Solution: to coordinate the members to act as if they are a centralized supply chain (i.e., one decision-maker makes decisions in behalf of the whole supply chain)
Effects of misalignment in the supply chain
Source: Murphy-Hoye, 1999
What is Bullwhip Effect?
The bullwhip effect is a phenomenon observed in supply chains where the demand variability increases as one moves up the supply chain from customers towards to distributors to manufacturers.
At P&G, diaper orders issued by distributors have a degree of variability that cannot be explained by consumer fluctuations alone At Hewlett-Packard, the orders placed to the printer division by resellers have much bigger swings and variations that customer demands
Bullwhip effect refers to the phenomenon where orders to the supplier tend to have larger variance than sales to the buyer (i.e., information distortion) and the distortion propagates upstream in an amplified form (i.e., variance amplification).
Manufacturer’s orders to its suppliers
Wholesaler’s orders to manufacturer
Store’s orders to wholesaler
Sales from store
0
Time
0
Time Time
0
Time
0
Time
Supplier
Manufacturer
Wholesaler
Retail Store
Consumers
Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Minor fluctuations in retail sales for a product can create excess inventory for distributors, manufacturers, and suppliers.
DC’s weekly orders to Manufacturer
9,000
Manufacturer’s weekly production quantity
Order quantity
7,000
Retailers’ daily orders to distribution center Babies’ daily demand for diapers
5,000
3,000
0 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30
Causes
price fluctuation
poor demand forecasting Bullwhip Effect erratic shifts in orders up and down the supply chain
order batching
rationing within the chain
? Order synchronization
? ? ?
Bullwhip effect: Causes
Multiple retailers who tend to order around the same time period Manufacturers responding to an MRP system that place raw material orders at the beginning of the month In order to save on shipping or ordering costs, firms order a full pallet or full truck load
? Order batching ? Trade promotions and forward buying
? ? ? Supplier offers a discount on product ordered in a specific time period Supplier offers a quantity discount A retailer orders a large quantity intending to take advantage of a discount and sells excess product to a second retailer (this strategy is called diversion) A retailer who is not sure that demand is stable over time may act aggressively when faced with periods of lower or higher than expected demand
A retailer who wants to insure product from an under-capacitated supplier may over order expecting to only receive a portion of the ordered quantity IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas Long lead times magnify this effect
? Reactive and over-reactive ordering
?
? Shortage gaming
?
? Demand forecast updating / Inflated Orders
? ?
? Long cycle times
Causes of Bullwhip Effect
? Demand Signal Processing (frequent updates of forecasts; only next echelon orders considered)
? Order Batching (to realise logistic Economies of scale + Reducing order processing costs) ? Price Fluctuations (resulting in over-reactions) ? Supply Rationing (Proportionate rationing; unrestricted order acceptance + free return policy)
Bullwhip Effect
Factors contributing to the Bullwhip Effect:
? ? ? ? ? ? Forecast Errors Lead Time Variability Batch Ordering Price Fluctuations Product Promotions Inflated Orders
Methods intended to reduce uncertainty, variability, and lead time:
? Vendor Managed Inventory (VMI) ? Just In Time replenishment (JIT) ? Strategic partnership
Effects
Consequences of bullwhip effect
? Increased safety stock ? Reduced service level ? Inefficient allocation of resources ? Increased transportation costs ? Bullwhip effect leads to higher variance in demands as observed by the upstream members of the supply chain. This requires
? Higher safety stock
? A more flexible production system and/or higher smoothing costs in production
? A more flexible transportation system and/or higher smoothing costs in transportation
Even slight demand uncertainties and variability become magnified if each distinct entity on the chain, makes ordering and inventory decisions with respect to its own interest above those of the chain
Distorted information can lead to tremendous inefficiencies •excessive inventories •poor customer service •lost revenues •ineffective shipments •missed production schedules.
A common way to solve the bullwhip problem is by sharing information along the supply chain through EDI, extranets, and groupware technologies. For example employing a vendor-managed inventory (VMI) strategy, the vendor monitors inventory levels and when it falls below the threshold for each product this automatically triggers an immediate
shipment.
Remedies
Counter-Measures for BWE
? Avoid multiple demand forecasts
? Order based on ultimate customer demand ? Use EDI+POS+VMI ? Choose a good forecasting method (PLC has a major say) ? Move from decentralized DM to centralized planning (visibility+control is better) ? Remove layers in channel if possible
? Eg: HP, Apple, IBM, P&G/Walmart
Counter-Measures for BWE
? Break order batches
Increase frequency of ordering (OP costs reduced by EDI) Resort to standardization to minmize OP costs Use 3PL to make small batch replenishments economical Aggregate across retail outlets to utilize FTL EoS Reduce safety stocks by cutting lead times Eg: 3PL using Fedex, P&G Stabilize prices EDLP (P&G) Special purchase contracts
? Eliminate shortage gaming
Allocate based on past sales (Sun) Share capacity and information (HP, Motorola) Limit flexibility wrt time (HP, Seagate)
Bullwhip effect: Remedies
Centralizing demand information occurs when customer demand information is available to all members of the supply chain.
Reducing uncertainty. This can be accomplished by centralizing demand information.
Reducing variability. This can be accomplished by using a technique made popular by WalMart and then Home Depot called everyday low pricing (EDLP). EDLP eliminates promotions as well as the shifts in demand that accompany them. Reducing lead time. Order times can be reduced by using EDI (electronic data interchange). Strategic partnerships. The use of strategic partnerships can change how information is shared and how inventory is managed within the supply chain. These will be discussed later.
Cross-docking. This involves unloading goods arriving from a supplier and immediately loading these
goods onto outbound trucks bound for various retailer locations. This eliminates storage at the retailer’s inbound warehouse, cuts the lead time, and has been used very successfully by WalMart and Xerox among others.
Delayed differentiation. This involves adding differentiating features to standard products late in the
process. For example, Bennetton decided to make all of their wool sweaters in undyed yarn and then dye the sweaters when they had more accurate demand data. Another term for delayed differentiation is postponement.
Direct shipping. This allows a firm to ship directly to customers rather than through retailers. This
approach eliminates steps in the supply chain and reduces lead time. Reducing one or more steps in the supply chain is known as disintermediation. Companies such as Dell use this approach.
Sharing Information: Retailers may give the supplier frequent access to actual consumer demand data
so that the supplier can make its production plans accordingly.
Vendor Managed inventory: The retailer no longer decides when and how much inventory to order.
Instead, the supplier decides the timing and quantity of shipments to the retailer (e.g. P&G and Wal-Mart)
Smoothing the flow of products: Supplier and the retailers coordinate the timing of orders so that
retailers do not place orders at the same time.
Coping with the Bullwhip Effect in Leading Companies
? Reduce uncertainty
? POS ? Sharing information ? Sharing forecasts and policies
? Reduce variability
? Eliminate promotions ? Year-round low pricing
? Reduce lead times
? EDI ? Cross docking
? Strategic partnerships
? Vendor managed inventory ? Data sharing
Illustrations
Cause 1: Demand Forecast Updating (Demand Signal Processing)
Order Qt goes to upstream Orders from downstream in the past p time periods Dt-p, Dt-p+1, …, Dt-1
Mfctr.
Lead time L
Retailers
Customers
• Retailers forecast customers demand and then place orders with manufacturer • Manufacturer receives orders from retailers
Demand variability gets amplified from downstream to upstream!
- Commonly, the variability of Q is 2 to 15 times the variability of D
Cause 2: Rationing and Shortage Gaming
? When product demand exceeds supply, a manufacturer often rations its product to customers. Example:
Dealer 1
Car Manufacturer Available = 200 Dealer 2
Order = 100 Order = 200
Received = 67
Received = 133
Only 2/3 of the order can be fulfilled
• Knowing the manufacturer policy, customers exaggerate their real needs when they order (game the system). Example:
Dealer 1 Car Manufacturer Available = 500
Need = 120
Need = 180
Order = 180 Order = 270
Received = 180 Received = 270
Dealer 2
Order more than needed so that if only 2/3 of the order is filled you still get what you actually need
As a result, customers’ orders give the supplier little information on a product’s real demand, a particularly vexing problem for new products
Coordinating S.C. Inventory
? Consider a simple demand driven supply chain: a buyer and a supplier
Supplier
Buyer
Customers
? The buyer produces D = 10,000 units/year of a product at a constant rate. Each time the buyer places an order for a certain component, the ordering cost is Sb = $100. The buyer’s inventory holding cost is H = $10/yr and optimal ordering quantity: 2 DSb 2(10, 000)(100) EOQb ? ? ? 447 H 10 ? The supplier produces an order whenever one is received from the buyer. ? Each time the seller sets up to produce a batch of components, the production setup cost is Ss = $300. ? The supplier’s total (setup) cost = Ss(D/EOQb) = 300(10,000/447) = 6711 ? Optimal ordering quantity for the centralized supply chain:
EOQSC ?
2 D ( Sb ? S s ) ? H
2(10, 000)(100 ? 300) ? 894 10
TC = 894 x 10/2 + (10000/894) x 100 = $ 5,589
$ 11,184
$ 8,944 $ 6,711 $ 4,472 $ 3,356
$ 5,589
Supplier’s cost (at Q=447) = Ss (D/EOQb) = 300(10,000/447) = $6,711 Buyer’s cost (at Q=447) = ?(2 x D x H x Sb) = ?(2 x 10000 x 10 x 100) = $ 4,472
Supplier’s cost (at Q=894) = Ss (D/EOQb) = 300(10,000/894) = $3,356 SC overall cost (at Q=894) = ?(2 x D x H x (Sb + Ss)) = ?(2 x 10000 x 10 x 400) = $ 8,944
Supplier cost Buyer cost Supply chain cost
Buyer's optimal Centralized supply chain's quantity optimal quantity Cost saving Q=447 Q=894 $6,711 $3,356 $3,356 $4,472 $5,589 -$1,116 $11,184 $8,944 $2,239
? If buyer orders Q=894, supply chain’s total cost is reduced ? But, buyer incurs a higher cost, and will not order Q=894 The SC is NOT coordinated without a compensation for buyer
? For any order quantity Q, the buyer always bears a fraction of ? of the total cost of the supply chain
? Supplier promises to pay buyer ? The buyer promises to pay the supplier = = (1–?) ? (buy’s total holding and setup cost) (?) ? (supplier’s total setup cost)
? Buy’s optimal quantity = SC’s optimal quantity = centralized SC’s optimal quantity = 894 ? There exist a ? such that buyer and suppliers are both better off than ordering Q = 447
Few recent trends
Solutions for Battling Bullwhip Effect
? Vendor Managed Inventory (VMI)
? Vendors take control of inventory management at the retailers
? Quick Response (QR)
? Vendors receive POS data from retailers, and use this information to synchronize their production and inventory activities.
Vendor Managed Inventory (VMI)
? How does it work?
? The vendor (supplier) receives inventory and point-of-sales (POS) data from the retailers and calculates how much to ship to retailers. ? The vendor places orders for supply.
? VMI projects
? Dillard Department Stores, JCPenney and Wal-Mart ? Sales increases of 20 to 25% ? 30% inventory turnover improvements
Quick Response
? The supplier receives POS data from retailers, and use this information to synchronize their production and inventory activities.
? The retailer prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.
Quick Response vs. VMI
? Sales information passed back to the supplier. ? Bullwhip effect is reduced. ? What’s the difference?
? Who chooses the order quantity?
? VMI: Supplier ? QR: Retailer
? Who chooses when to order?
? VMI: Supplier ? QR: Retailer
?
Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in the grocery industry’s pursuit of ?efficient consumer response? and the garment industry’s ?quick response.? Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms like Barilla (the pasta manufacturer). The supplier—usually the manufacturer but sometimes a reseller or distributor— makes the main inventory replenishment decisions for the consuming organization. ? The supplier monitors the buyer’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing. ? Transactions customarily initiated by the buyer (like purchase orders) are initiated by the supplier instead. ? The purchase order acknowledgment from the supplier may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in transit.
Vendor Managed Inventory
?
?
Example: Quick Response at Benetton
? Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy. ? Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion. ? Many attribute Benetton’s success to successful use of communication and information technologies. ? Benetton uses an effective strategy, referred to as Quick Response, in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton’s mainframe computer in Italy. ? Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors.
? Our goal: to attain performance of centralized supply chain with decentralized decision making ? How do we do that?
1. 2. 3. A contract is agreed by and announced to all members before they make decisions Each member independently decides and acts The contract is executed
? We say a decentralized SC is coordinated by a contract, if
? ? The total profit of decentralized SC equals the total profit of centralized SC, and All members are better off under this contract, compared to the case without such a contract (uncoordinated case)
How Does Benetton Cope with the Bullwhip Effect?
1. Integrated Information Systems
• Global EDI network that links agents with production and inventory information
• EDI order transmission to HQ • EDI linkage with air carriers • Data linked to manufacturing 2. Coordinated Planning • Frequent review allows fast reaction • Integrated distribution strategy
Bullwhip effect and different players
? Reducing bullwhip effect certainly reduces costs at the manufacturer end, does it have any impact on retailer end?
? Are all actions taken to reduce the bullwhip effect “Pareto improving”? ? Who will pay for the efforts to reduce the bullwhip effect?
What Is the Right Supply Chain for Your Product ?
VMI? Outsourcing? …….
Quick Response?
Make to order?
Causes of bullwhip effect:
Demand signal processing
? Mitigating Strategies
? Reasons
? If the supply chain player updates the order-up-to-level based on its new estimate of demand, the variance in orders it places exceeds the variance in demand it observes. ? This gets amplified if the supply chain player does not observe the final demand (at the retailer), but forecasts demand based on the orders it received from downstream ? Larger the lead time, larger the bullwhip effects caused by demand signal processing ? A special case where the demand is forecasted using moving average method (Chen et al)
? Allow access to end customer demand to all members in the supply chain (share POS)
? Sell-thru data in contracts at HP, Apple, IBM
? Single control of replenishment
? Make the manufacturer responsible for replenishing the supply chain, i.e., Vendor Managed Inventory (VMI) for companies like P&G and Wal-Mart
? Reduce the lead times
? Quick response systems in apparel industry, flexible manufacturing
Causes of bullwhip effect:
Constrained Supply
? Mitigating Strategies ? Allocate supply based on the final demand not based on orders received ? GM, HP and TI allocating based on sales history ? Remove the perceptions that the supply will be short ? Share the production and inventory information with downstream ? Reduce the buyer’s flexibility ? Construct contracts that will restrict the order quantities ? Eliminate constraints on the supply by collaborating with retailers
Reasons
? When the demand downstream (e.g. retailers) exceeds the capacity upstream (e.g. manufacturer) The typical practice for the upstream (manufacturer) is to allocate the supply to different downstream entities (retailers) in proportion to their orders. This leads to retailers ordering more than they need in order to get more share from the supply In theory, the order quantity (equilibrium order quantity) where retailers are competing in such a setting exceeds the order quantity (standard newsboy order quantity) where the retailers assume infinite capacity at the manufacturing level Note also these inefficiencies may occur even though there is no real shortage, but the retailers perceive that there is shortage at the manufacturing level
?
?
?
?
Causes of bullwhip effect:
Order batching
? Mitigating Strategies
Reasons
? Retailers do not order every time they face a demand as a result of ? Periodic review process
? Reduce order costs
? Reduce paperwork, implement EDI for ordering
? Setup costs associated with ordering
? As a result, the retailers batch their orders which leads to distortion in demand information ? This distortion is magnified when there are multiple retailers and their ordering is not synchronized ? Distortion is highest when ordering is correlated ? Distortion is smallest when ordering is balanced ? Larger the review period, higher the distortion
? Reduce transportation costs
? Reduce the desire for full truck loads ? Allow mixed truckloads (P&G) ? Use third party logistics (3PL) companies for efficient transportation
? Synchronize ordering
? Move away from correlated ordering to balanced ordering
Causes of bullwhip effect:
Price variations
Mitigating Strategies
? Stop manufacturer’s trade promotions
Reasons
? If the manufacturers are offering promotions, retailers may act by procuring more than they currently need in anticipation of future demand (i.e., forward buy) ? In theory, the order-up-to-level in one period changes with the procurement cost in that period ? This leads to further distortion in the demand information communicated to the manufacturer
? Everyday Low Pricing (EDLP) by P&G, etc
? Savings through forward buying may be illusive
? Justify forward buying by also considering inventory carrying costs
? Implement purchase contracts (synchronize purchase and delivery schedules)
? The result is higher inventory costs at both ends
? Since the retailers need to keep inventory ahead of the need
? Still offer promotions and/or quantity discounts but allow multiple shipments over time at the same price
? Since the manufacturers need to prepare in advance for the surge in demand created by the promotion
doc_909012391.pptx
what are the causes of bullwhip effect, consequences of bullwhip effect, remedies of bullwhip effect, solutions for bullwhip effect like vendor managed inventory.
Supply Chain Management
Better Information Visibility
reducing
BULLWHIP EFFECT
What are the reasons for the channel not being coordinated?
? Lack of information
? Information about the demand is not transmitted up stream.
? Conflicting interest
? Retailers would like to have daily deliveries ? Daily deliveries are expensive for the suppliers ? Manufacturers would like to have a stable production environment. ? Buyers would like to have the flexibility to adjust to the demand and change orders with a short notice.
Conflicting Objectives in Supply Chain
1. Decentralized supply chain: each member has his own interest and act independently 2. Self-interested decision makers: every member of the supply chain optimizes his own objective. 3. These self-interested members’ decisions may not align with the optimal decisions for the overall performance of the supply chain. 4. Inefficiencies across supply chain lead to decentralization cost 5. Solution: to coordinate the members to act as if they are a centralized supply chain (i.e., one decision-maker makes decisions in behalf of the whole supply chain)
Effects of misalignment in the supply chain
Source: Murphy-Hoye, 1999
What is Bullwhip Effect?
The bullwhip effect is a phenomenon observed in supply chains where the demand variability increases as one moves up the supply chain from customers towards to distributors to manufacturers.
At P&G, diaper orders issued by distributors have a degree of variability that cannot be explained by consumer fluctuations alone At Hewlett-Packard, the orders placed to the printer division by resellers have much bigger swings and variations that customer demands
Bullwhip effect refers to the phenomenon where orders to the supplier tend to have larger variance than sales to the buyer (i.e., information distortion) and the distortion propagates upstream in an amplified form (i.e., variance amplification).
Manufacturer’s orders to its suppliers
Wholesaler’s orders to manufacturer
Store’s orders to wholesaler
Sales from store
0
Time
0
Time Time
0
Time
0
Time
Supplier
Manufacturer
Wholesaler
Retail Store
Consumers
Inaccurate information can cause minor fluctuations in demand for a product to be amplified as one moves further back in the supply chain. Minor fluctuations in retail sales for a product can create excess inventory for distributors, manufacturers, and suppliers.
DC’s weekly orders to Manufacturer
9,000
Manufacturer’s weekly production quantity
Order quantity
7,000
Retailers’ daily orders to distribution center Babies’ daily demand for diapers
5,000
3,000
0 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30 Day 1 Day 30
Causes
price fluctuation
poor demand forecasting Bullwhip Effect erratic shifts in orders up and down the supply chain
order batching
rationing within the chain
? Order synchronization
? ? ?
Bullwhip effect: Causes
Multiple retailers who tend to order around the same time period Manufacturers responding to an MRP system that place raw material orders at the beginning of the month In order to save on shipping or ordering costs, firms order a full pallet or full truck load
? Order batching ? Trade promotions and forward buying
? ? ? Supplier offers a discount on product ordered in a specific time period Supplier offers a quantity discount A retailer orders a large quantity intending to take advantage of a discount and sells excess product to a second retailer (this strategy is called diversion) A retailer who is not sure that demand is stable over time may act aggressively when faced with periods of lower or higher than expected demand
A retailer who wants to insure product from an under-capacitated supplier may over order expecting to only receive a portion of the ordered quantity IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas Long lead times magnify this effect
? Reactive and over-reactive ordering
?
? Shortage gaming
?
? Demand forecast updating / Inflated Orders
? ?
? Long cycle times
Causes of Bullwhip Effect
? Demand Signal Processing (frequent updates of forecasts; only next echelon orders considered)
? Order Batching (to realise logistic Economies of scale + Reducing order processing costs) ? Price Fluctuations (resulting in over-reactions) ? Supply Rationing (Proportionate rationing; unrestricted order acceptance + free return policy)
Bullwhip Effect
Factors contributing to the Bullwhip Effect:
? ? ? ? ? ? Forecast Errors Lead Time Variability Batch Ordering Price Fluctuations Product Promotions Inflated Orders
Methods intended to reduce uncertainty, variability, and lead time:
? Vendor Managed Inventory (VMI) ? Just In Time replenishment (JIT) ? Strategic partnership
Effects
Consequences of bullwhip effect
? Increased safety stock ? Reduced service level ? Inefficient allocation of resources ? Increased transportation costs ? Bullwhip effect leads to higher variance in demands as observed by the upstream members of the supply chain. This requires
? Higher safety stock
? A more flexible production system and/or higher smoothing costs in production
? A more flexible transportation system and/or higher smoothing costs in transportation
Even slight demand uncertainties and variability become magnified if each distinct entity on the chain, makes ordering and inventory decisions with respect to its own interest above those of the chain
Distorted information can lead to tremendous inefficiencies •excessive inventories •poor customer service •lost revenues •ineffective shipments •missed production schedules.
A common way to solve the bullwhip problem is by sharing information along the supply chain through EDI, extranets, and groupware technologies. For example employing a vendor-managed inventory (VMI) strategy, the vendor monitors inventory levels and when it falls below the threshold for each product this automatically triggers an immediate
shipment.
Remedies
Counter-Measures for BWE
? Avoid multiple demand forecasts
? Order based on ultimate customer demand ? Use EDI+POS+VMI ? Choose a good forecasting method (PLC has a major say) ? Move from decentralized DM to centralized planning (visibility+control is better) ? Remove layers in channel if possible
? Eg: HP, Apple, IBM, P&G/Walmart
Counter-Measures for BWE
? Break order batches
Increase frequency of ordering (OP costs reduced by EDI) Resort to standardization to minmize OP costs Use 3PL to make small batch replenishments economical Aggregate across retail outlets to utilize FTL EoS Reduce safety stocks by cutting lead times Eg: 3PL using Fedex, P&G Stabilize prices EDLP (P&G) Special purchase contracts
? Eliminate shortage gaming
Allocate based on past sales (Sun) Share capacity and information (HP, Motorola) Limit flexibility wrt time (HP, Seagate)
Bullwhip effect: Remedies
Centralizing demand information occurs when customer demand information is available to all members of the supply chain.
Reducing uncertainty. This can be accomplished by centralizing demand information.
Reducing variability. This can be accomplished by using a technique made popular by WalMart and then Home Depot called everyday low pricing (EDLP). EDLP eliminates promotions as well as the shifts in demand that accompany them. Reducing lead time. Order times can be reduced by using EDI (electronic data interchange). Strategic partnerships. The use of strategic partnerships can change how information is shared and how inventory is managed within the supply chain. These will be discussed later.
Cross-docking. This involves unloading goods arriving from a supplier and immediately loading these
goods onto outbound trucks bound for various retailer locations. This eliminates storage at the retailer’s inbound warehouse, cuts the lead time, and has been used very successfully by WalMart and Xerox among others.
Delayed differentiation. This involves adding differentiating features to standard products late in the
process. For example, Bennetton decided to make all of their wool sweaters in undyed yarn and then dye the sweaters when they had more accurate demand data. Another term for delayed differentiation is postponement.
Direct shipping. This allows a firm to ship directly to customers rather than through retailers. This
approach eliminates steps in the supply chain and reduces lead time. Reducing one or more steps in the supply chain is known as disintermediation. Companies such as Dell use this approach.
Sharing Information: Retailers may give the supplier frequent access to actual consumer demand data
so that the supplier can make its production plans accordingly.
Vendor Managed inventory: The retailer no longer decides when and how much inventory to order.
Instead, the supplier decides the timing and quantity of shipments to the retailer (e.g. P&G and Wal-Mart)
Smoothing the flow of products: Supplier and the retailers coordinate the timing of orders so that
retailers do not place orders at the same time.
Coping with the Bullwhip Effect in Leading Companies
? Reduce uncertainty
? POS ? Sharing information ? Sharing forecasts and policies
? Reduce variability
? Eliminate promotions ? Year-round low pricing
? Reduce lead times
? EDI ? Cross docking
? Strategic partnerships
? Vendor managed inventory ? Data sharing
Illustrations
Cause 1: Demand Forecast Updating (Demand Signal Processing)
Order Qt goes to upstream Orders from downstream in the past p time periods Dt-p, Dt-p+1, …, Dt-1
Mfctr.
Lead time L
Retailers
Customers
• Retailers forecast customers demand and then place orders with manufacturer • Manufacturer receives orders from retailers
Demand variability gets amplified from downstream to upstream!
- Commonly, the variability of Q is 2 to 15 times the variability of D
Cause 2: Rationing and Shortage Gaming
? When product demand exceeds supply, a manufacturer often rations its product to customers. Example:
Dealer 1
Car Manufacturer Available = 200 Dealer 2
Order = 100 Order = 200
Received = 67
Received = 133
Only 2/3 of the order can be fulfilled
• Knowing the manufacturer policy, customers exaggerate their real needs when they order (game the system). Example:
Dealer 1 Car Manufacturer Available = 500
Need = 120
Need = 180
Order = 180 Order = 270
Received = 180 Received = 270
Dealer 2
Order more than needed so that if only 2/3 of the order is filled you still get what you actually need
As a result, customers’ orders give the supplier little information on a product’s real demand, a particularly vexing problem for new products
Coordinating S.C. Inventory
? Consider a simple demand driven supply chain: a buyer and a supplier
Supplier
Buyer
Customers
? The buyer produces D = 10,000 units/year of a product at a constant rate. Each time the buyer places an order for a certain component, the ordering cost is Sb = $100. The buyer’s inventory holding cost is H = $10/yr and optimal ordering quantity: 2 DSb 2(10, 000)(100) EOQb ? ? ? 447 H 10 ? The supplier produces an order whenever one is received from the buyer. ? Each time the seller sets up to produce a batch of components, the production setup cost is Ss = $300. ? The supplier’s total (setup) cost = Ss(D/EOQb) = 300(10,000/447) = 6711 ? Optimal ordering quantity for the centralized supply chain:
EOQSC ?
2 D ( Sb ? S s ) ? H
2(10, 000)(100 ? 300) ? 894 10
TC = 894 x 10/2 + (10000/894) x 100 = $ 5,589
$ 11,184
$ 8,944 $ 6,711 $ 4,472 $ 3,356
$ 5,589
Supplier’s cost (at Q=447) = Ss (D/EOQb) = 300(10,000/447) = $6,711 Buyer’s cost (at Q=447) = ?(2 x D x H x Sb) = ?(2 x 10000 x 10 x 100) = $ 4,472
Supplier’s cost (at Q=894) = Ss (D/EOQb) = 300(10,000/894) = $3,356 SC overall cost (at Q=894) = ?(2 x D x H x (Sb + Ss)) = ?(2 x 10000 x 10 x 400) = $ 8,944
Supplier cost Buyer cost Supply chain cost
Buyer's optimal Centralized supply chain's quantity optimal quantity Cost saving Q=447 Q=894 $6,711 $3,356 $3,356 $4,472 $5,589 -$1,116 $11,184 $8,944 $2,239
? If buyer orders Q=894, supply chain’s total cost is reduced ? But, buyer incurs a higher cost, and will not order Q=894 The SC is NOT coordinated without a compensation for buyer
? For any order quantity Q, the buyer always bears a fraction of ? of the total cost of the supply chain
? Supplier promises to pay buyer ? The buyer promises to pay the supplier = = (1–?) ? (buy’s total holding and setup cost) (?) ? (supplier’s total setup cost)
? Buy’s optimal quantity = SC’s optimal quantity = centralized SC’s optimal quantity = 894 ? There exist a ? such that buyer and suppliers are both better off than ordering Q = 447
Few recent trends
Solutions for Battling Bullwhip Effect
? Vendor Managed Inventory (VMI)
? Vendors take control of inventory management at the retailers
? Quick Response (QR)
? Vendors receive POS data from retailers, and use this information to synchronize their production and inventory activities.
Vendor Managed Inventory (VMI)
? How does it work?
? The vendor (supplier) receives inventory and point-of-sales (POS) data from the retailers and calculates how much to ship to retailers. ? The vendor places orders for supply.
? VMI projects
? Dillard Department Stores, JCPenney and Wal-Mart ? Sales increases of 20 to 25% ? 30% inventory turnover improvements
Quick Response
? The supplier receives POS data from retailers, and use this information to synchronize their production and inventory activities.
? The retailer prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.
Quick Response vs. VMI
? Sales information passed back to the supplier. ? Bullwhip effect is reduced. ? What’s the difference?
? Who chooses the order quantity?
? VMI: Supplier ? QR: Retailer
? Who chooses when to order?
? VMI: Supplier ? QR: Retailer
?
Popularized in the late 1980s by Wal-Mart and Procter & Gamble, VMI became one of the key programs in the grocery industry’s pursuit of ?efficient consumer response? and the garment industry’s ?quick response.? Successful VMI initiatives have been trumpeted by other companies in the United States, including Campbell Soup and Johnson & Johnson, and by European firms like Barilla (the pasta manufacturer). The supplier—usually the manufacturer but sometimes a reseller or distributor— makes the main inventory replenishment decisions for the consuming organization. ? The supplier monitors the buyer’s inventory levels (physically or via electronic messaging) and makes periodic resupply decisions regarding order quantities, shipping, and timing. ? Transactions customarily initiated by the buyer (like purchase orders) are initiated by the supplier instead. ? The purchase order acknowledgment from the supplier may be the first indication that a transaction is taking place; an advance shipping notice informs the buyer of materials in transit.
Vendor Managed Inventory
?
?
Example: Quick Response at Benetton
? Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy. ? Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion. ? Many attribute Benetton’s success to successful use of communication and information technologies. ? Benetton uses an effective strategy, referred to as Quick Response, in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton’s mainframe computer in Italy. ? Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors.
? Our goal: to attain performance of centralized supply chain with decentralized decision making ? How do we do that?
1. 2. 3. A contract is agreed by and announced to all members before they make decisions Each member independently decides and acts The contract is executed
? We say a decentralized SC is coordinated by a contract, if
? ? The total profit of decentralized SC equals the total profit of centralized SC, and All members are better off under this contract, compared to the case without such a contract (uncoordinated case)
How Does Benetton Cope with the Bullwhip Effect?
1. Integrated Information Systems
• Global EDI network that links agents with production and inventory information
• EDI order transmission to HQ • EDI linkage with air carriers • Data linked to manufacturing 2. Coordinated Planning • Frequent review allows fast reaction • Integrated distribution strategy
Bullwhip effect and different players
? Reducing bullwhip effect certainly reduces costs at the manufacturer end, does it have any impact on retailer end?
? Are all actions taken to reduce the bullwhip effect “Pareto improving”? ? Who will pay for the efforts to reduce the bullwhip effect?
What Is the Right Supply Chain for Your Product ?
VMI? Outsourcing? …….
Quick Response?
Make to order?
Causes of bullwhip effect:
Demand signal processing
? Mitigating Strategies
? Reasons
? If the supply chain player updates the order-up-to-level based on its new estimate of demand, the variance in orders it places exceeds the variance in demand it observes. ? This gets amplified if the supply chain player does not observe the final demand (at the retailer), but forecasts demand based on the orders it received from downstream ? Larger the lead time, larger the bullwhip effects caused by demand signal processing ? A special case where the demand is forecasted using moving average method (Chen et al)
? Allow access to end customer demand to all members in the supply chain (share POS)
? Sell-thru data in contracts at HP, Apple, IBM
? Single control of replenishment
? Make the manufacturer responsible for replenishing the supply chain, i.e., Vendor Managed Inventory (VMI) for companies like P&G and Wal-Mart
? Reduce the lead times
? Quick response systems in apparel industry, flexible manufacturing
Causes of bullwhip effect:
Constrained Supply
? Mitigating Strategies ? Allocate supply based on the final demand not based on orders received ? GM, HP and TI allocating based on sales history ? Remove the perceptions that the supply will be short ? Share the production and inventory information with downstream ? Reduce the buyer’s flexibility ? Construct contracts that will restrict the order quantities ? Eliminate constraints on the supply by collaborating with retailers
Reasons
? When the demand downstream (e.g. retailers) exceeds the capacity upstream (e.g. manufacturer) The typical practice for the upstream (manufacturer) is to allocate the supply to different downstream entities (retailers) in proportion to their orders. This leads to retailers ordering more than they need in order to get more share from the supply In theory, the order quantity (equilibrium order quantity) where retailers are competing in such a setting exceeds the order quantity (standard newsboy order quantity) where the retailers assume infinite capacity at the manufacturing level Note also these inefficiencies may occur even though there is no real shortage, but the retailers perceive that there is shortage at the manufacturing level
?
?
?
?
Causes of bullwhip effect:
Order batching
? Mitigating Strategies
Reasons
? Retailers do not order every time they face a demand as a result of ? Periodic review process
? Reduce order costs
? Reduce paperwork, implement EDI for ordering
? Setup costs associated with ordering
? As a result, the retailers batch their orders which leads to distortion in demand information ? This distortion is magnified when there are multiple retailers and their ordering is not synchronized ? Distortion is highest when ordering is correlated ? Distortion is smallest when ordering is balanced ? Larger the review period, higher the distortion
? Reduce transportation costs
? Reduce the desire for full truck loads ? Allow mixed truckloads (P&G) ? Use third party logistics (3PL) companies for efficient transportation
? Synchronize ordering
? Move away from correlated ordering to balanced ordering
Causes of bullwhip effect:
Price variations
Mitigating Strategies
? Stop manufacturer’s trade promotions
Reasons
? If the manufacturers are offering promotions, retailers may act by procuring more than they currently need in anticipation of future demand (i.e., forward buy) ? In theory, the order-up-to-level in one period changes with the procurement cost in that period ? This leads to further distortion in the demand information communicated to the manufacturer
? Everyday Low Pricing (EDLP) by P&G, etc
? Savings through forward buying may be illusive
? Justify forward buying by also considering inventory carrying costs
? Implement purchase contracts (synchronize purchase and delivery schedules)
? The result is higher inventory costs at both ends
? Since the retailers need to keep inventory ahead of the need
? Still offer promotions and/or quantity discounts but allow multiple shipments over time at the same price
? Since the manufacturers need to prepare in advance for the surge in demand created by the promotion
doc_909012391.pptx