Supply Chain Management

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The Bullwhip Effect in Supply Chains

The ordering patterns share a common recurring theme: The variabilities of an upstream site are always greater than those of the downstream site.

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Examples:
Procter & Gamble (P&G) and Diapers

Reasonably stable market at consumer level Substantial variability in orders that P&G placed on suppliers (such as 3M) P&G coined the bullwhip effect

Hewlett Packard (HP) and Printers

Some variability in sales Bigger swings at the orders of resellers Even bigger swings for orders from printer division to the IC division

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Examples:

(cont.)

Efficient Consumer Response (ECR) and the grocery supply chain

$30B opportunity for streamlining grocery supply chain More than 100 days of inventory supply

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Increasing Variability of Orders up the Supply Chain

Consumer Sales Order Quantity Order Quantity Retailers Order to Manufacture

20
15 10 5 0 Time Wholesalers Orders to Manufacture

20
15 10 5 0 Time Manufacturers Orders to Supplier

Order Quantity

15

Order Quantity Time

20

20 15

10
5 0

10
5 0 Time

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Causes of Bullwhip Effect

1

Demand Forecast Updating Order Batching Price Fluctuation Rationing and Shortage Gaming

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 Demand Forecast Updating

Orders as signals of product demand
Forecasting techniques that rely heavily on recent demand observations Safety Stocks that depend on erratic variance of demand and long leadtimes

Long leadtimes and forecasting difficulties

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 Order Batching
Economies of scale in ordering costs and manufacturing setups lead to batching Periodic planning and ordering as part of MRP and periodic review systems Economies of scale in transportation (full truckload rates) Push ordering motivated by short term financial performance measures
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 Price Fluctuation
Quantity discounts and advance purchases Variance of buying quantities bigger than variances in consumption rate Bullwhip Effect due to Seasonal Sales of Soup
Order Quantity 800 600 400 200 0 1 Weeks 52 Shipments from Manufacturer to Distributors Retailers Sales

Wide

swings result in capacity adjustment costs, high inventory costs, transport diseconomies Trade promotions and supply chain management = The dumbest marketing ploy ever!
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 Rationing and Shortage Gaming

When demand exceeds manufacturing capacity, rationing or orders Customers exaggerate their real needs (gaming) Example, 1980s DRAM chips When capacity constraints are removed, orders suddenly drop Example, HP and Laserjet III Printers Motorola 1992, 1993 cellular phones

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How to counteract the Bullwhip Effect

A

Avoid Multiple Demand Forecast Updates

B Break Order Batches C Stabilize Prices D Eliminate Gaming in Shortage Situations

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A. Framework for supply chain coordination initiatives

Cause of Bullwhip: Demand forecast update

Information Sharing:

Use

of Point-of-Sale (POS) data Electronic Data Interchange (EDI) Internet Computer Assisted Ordering

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A. Framework for supply chain coordination initiatives (cont.)

Channel Alignment: Vendor Managed Inventory (VMI) Continuous Replenishment Program (CRP) at Campbell Soup, Nestle, M&M, P&G, Scott Paper Discount for Information Sharing

Operational Efficiency:
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Lead

time reduction

B. Framework for supply chain coordination initiatives

Cause of Bullwhip: Order Batching

Information Sharing:

EDI Internet

Ordering (Trading Process Network at GE)

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B. Framework for supply chain coordination initiatives (cont.)

Channel Alignment:
Discount

for Truck Load Assortment Consolidation Mixed SKUs Third Party Logistics

Operational Efficiency:

Reduction

in fixed costs of ordering by EDI or electronic commerce

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C. Framework for supply chain coordination initiatives

Cause of Bullwhip: Information Sharing: Price Fluctuations
Continuous

Replenishment Program

(CRP)

Operational Efficiency:

Everyday

Low Price (EDLP) Activity Based Costing (ABC)

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D. Framework for supply chain coordination initiatives

Cause of Bullwhip: Information Sharing: Channel Alignment: Shortage Gaming
Sharing

Sales, capacity and inventory

data
Allocation

based on past sales Placing orders ahead of peak season Stricter return and order cancellation policies

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Supply Chain Performance Measurement and Financial Analysis

Learning Objectives After reading this chapter, you should be able to do the following:
Understand the scope and importance of supply chain performance measurement. Explain the characteristics of good performance measures. Discuss the various methods used to measure supply chain costs, service, profit, and revenue. Understand the basics of an income statement and a balance sheet. Demonstrate the impacts of supply chain strategies on the income statement, balance sheet, profitability, and return on investment. Understand the use of the strategic profit model. Analyze the financial impacts of supply chain service failures. Utilize spreadsheet computer software to analyze the financial implications of supply chain decisions.

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Performance Categories
Four major categories: time, quality, cost, and supporting metrics.

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