Chapter 5:

Argument for the abudance of information-

Helps-
reduce variability in the supply chain
Suppliers make better forecasts, accounting for promos and market changes
Enables the coordination of manufacturing and distribution systems and
strategies
Enables retailers to better serve their customers by offering tools for locating
desired items
Enables retailers to reach and adapt to supply problems quicker
Reduction in lead times
Bullwhip effect:
Suppliers and retailers have observed that inventory and back order levels have
fluctuated a lot across the supply chain.
A flucuation in orders from the distrubutor to the factory has a flown on effect
on orders to suppliers.
The wholesaler receives orders from the retailer and places orders with the
supplier, the distributor. The wholesaler then tries to predict forecasted demand
of the retailer.
As the retailers demand varies, the wholesaler must hold more safety stock just
in case. The result is higher inventory and thus higher costs. Therefore we need
tools to control the bullwhip effect. The ability to control the variability increases
in the supply chain.
Main factors causing increase in variability:
Demand forecasting. Inventory strategies lead to the bull whip effect, such as the
periodic review policy where the inventory policy is characterized by a single
parameter (base stock level). The w/h determines a target inventory level and
reviews it each week. Safety stock and base level stock quanities are modified
each week, thus increasing variability.
Lead time. The higher the increase in lead time the higher the variability. The
sum of the lead time and review period are multipled using the estimates of avg
and SD of demand.
Batch ordering. If a retailer uses batch ordering with a (Q,R) or min max policy
then you will observe orders one week followed by none and then another order.
Price fluctuations. Retailers stock up when the prices are low, thus ordering is
smaller when prices are high.
Inflated orders. If retailers and distributors suspect that a product will be in
short supply, order more. When it is over the retailer orders the same amount,
thus variability.
Quantifing the increase in variability:
Simply supply chain-2 stage (retailer and manufacturing)
Fixed lead time: order place at end of period t is received at start of period t+L
Uses: periodic review policy
1: Base stock level calculated- L X AVG + z X STD X SQR (L)
AVG and STD are the average and standard deviation of daily and weekly
customer demand.
Z is the safety factor ensuring that probability of no stockouts during lead time is
equal to the level of service
Using observed customer demand retailer can estimate the average and standard
deviation of demand
Calculate the variability faced by the manuf and compared to variability of the
retailer.
Centralizing a supply chain means information is being shared. So if info is
shared the stages will not have to rely on the previous stage for demand
information. Thus all forecasting can be done accurately and decrease the effect
of bullwhip.
Coping with the Bullwhip effect:
1: Reducing uncertainty. This is done through centralizing the demand
information in the supply chain.
2: Reduce variability in the customer demand process.
3: Lead time reduction can reduce variability. There are two lead times, order
(produce and ship) and information ( process). Reduce through cross docking
and EDI respectively.
4: Strategic partnerships