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Agenda. The Bullwhip EffectDistribution Strategies and Information SystemsSupply Chain Management: Pitfalls and OpportunitiesNew technologies for supply chain management and flexible manufacturing imply that businesses can perceive imbalances in inventories at a very early stage." - Alan Green
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1. Marketing Channels Value of Information
Distribution Strategies
8 January
2. Agenda The Bullwhip Effect
Distribution Strategies and Information Systems
Supply Chain Management: Pitfalls and Opportunities
New technologies for supply chain management and flexible manufacturing imply that businesses can perceive imbalances in inventories at a very early stage. - Alan Greenspan (Feb 2001)
3. The Bullwhip Effect and its Impact on the Supply Chain Consider the order pattern of a single color television model sold by a large electronics manufacturer to one of its accounts, a national retailer.
4. The Bullwhip Effect and its Impact on the Supply Chain
5. The Bullwhip Effectand its Impact on the Supply Chain
6. Higher Variability in Orders Placed by Computer Retailer to Manufacturer Than Actual Sales
7. Increasing Variability of Orders Up the Supply Chain
8. Any conclusions ? Information about the demand for a product becomes distorted as it moves along the supply chain.
Order Variability is amplified up the supply chain; upstream echelons face higher variability.
What you see as an upstream member of the supply chain is not what the retailer actually faces.
9. What are the Causes? Promotional sales
Inflated orders gaming
- IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas
- Same with Motorolas Cellular phones
Demand Forecast
Long cycle times
Order Batching
10. Demand Orders as signal of product demand
Forecasting that may rely too much on recent demand
Safety stock that depends on erratic demand
Long lead times
11. Order batching Gaming Economies of scale in ordering costs and manufacturing setups
MRP periodic ordering
Economies of scale in transportation
Push strategies in order to reduce inventory and/or enhance short-term financial measures
12. Single retailer, single manufacturer.
Retailer observes customer demand, Dt.
Retailer orders qt from manufacturer.
Lead time + 1 = L.
13. The Bullwhip Effect
14. Var(q)/Var(D):For Various Lead Times
15. Consequences. Increased safety stock
Reduced service level
Inefficient allocation of resources
Increased transportation costs
16. Multi-Stage Supply Chains Consider a multi-stage supply chain:
Stage i places order qi to stage i+1.
Li is lead time between stage i and i+1.
17. Formula (to memorize)
18. Multi-Stage Systems: Var(qk)/Var(D)
19. The Bullwhip Effect:Managerial Insights Exists, in part, due to the retailers need to estimate the mean and variance of customer 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.
20. Coping with the Bullwhip Effect Reduce Variability and Uncertainty
POS
Sharing Information
Year-round low pricing
Reduce Lead Times
EDI
Cross Docking
Alliance Arrangements
Vendor managed inventory (VMI)
On-site vendor representatives
Continuous Replenishment Programs
21. Coping with the Bullwhip Effect Use of 3PL/4PL
Customer management
Activity Based Costing
Strategy: Everyday low cost Everyday low price
Order return and cancellation policy (reduce gaming)
Placing orders before peak periods
22. In summary Avoid multiple demand forecast updates
Stabilize prices
Eliminate gaming
23. 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 Benettons success to successful use of communication and information technologies.
24. Example:Quick Response at Benetton 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 Benettons 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.
25. How Does BenettonCope 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
26. Distribution Strategiesand Information Systems Pull Vs. Push Strategies
Push Strategies:
Production decisions based on forecasts
Manual purchase orders and invoices are employed
Ordering decisions based on inventory & forecasts.
27. Push Strategies Single retailer, single manufacturer.
Retailer observes customer demand, Dt.
Retailer orders qt from manufacturer.
28. Distribution Strategies Direct Shipping
No DC needed
Lead times reduced
smaller and more frequent trucks leading to transportation cost increases
no risk pooling effects
Warehousing
Cross-docking
High inventory throughput
Decreased lead times
29. Characteristics of Cross-Docking: Goods spend at most 12-15 hours in the warehouse,
Avoids high inventory handling costs,
Example: Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for Kmart,
Stores trigger orders for products.
30. System Characteristics: Very difficult to manage,
Requires linking distribution centers, suppliers and stores to guarantee that any order is processed and executed in a matter of hours,
Wal-Mart, Home Depot, etc., operate a satellite-communications system that sends point-of-sale data to all its vendors allowing them to have a clear vision of sales at the stores.
31. Transshipment What is the value of transshipment?
What tools are needed?
What if the network system is decentralized?
32. Push Strategies:
Excess finished goods inventory
Inefficient production
Inefficient operations, high costs, low service levels
- Excess capacity
- Low utilization of resources
- High transportation cost
Distribution Strategies
33. Pull Strategies Single retailer, single manufacturer.
Retailer observes customer demand, Dt.
Retailer orders qt from manufacturer.
POS Data
34. Pull Strategies
Production is demand driven
Faster information flow mechanisms are used
Inventory levels are reduced
Distribution facilities are transformed from storage points to coordinators of flow.
But:
Harder to leverage economies of scale
Doesnt work in all cases
Distribution Strategies
35. Push and Pull Systems
How can a supply chain take advantage of both the push and pull systems?
36. Supply Chain Integration Dealing with Conflicting Goals Lot Size vs. Inventory
Inventory vs. Transportation
Lead Time vs. Transportation
Product Variety vs. Inventory
Cost vs. Customer Service
37. Supply Chain Management:Pitfalls and Opportunities Conflicting Objectives in the Supply Chain
1. Purchasing
Stable volume requirements
Flexible delivery time
Little variation in mix
Large quantities
2. Manufacturing
Long run production
High quality
High productivity
Low production cost
38. Supply Chain Management:Pitfalls and Opportunities 3. Warehousing
Low inventory
Reduced transportation costs
Quick replenishment capability
4. Customers
Short order lead time
High in stock
Enormous variety of products
Low prices
39. Symptoms of Supply Chain Problems Stock-outs and High Inventory
Long Cycle Times
High Returns
High Costs
Poor Service Level
40. Common Pitfalls 1. Information and Management
No Supply Chain Metrics
Inadequate Definition of Customer Service
Inaccurate Delivery Status Data
Inefficient Information Systems
2. Operational Control
Ignoring the Impact of Uncertainties
Simplistic Inventory Stocking Policies
Discrimination against Internal Customers
Poor Coordination
41. Common Pitfalls
3. Design and Strategy
Incomplete Shipment Methods Analysis
Incorrect Assessment of Inventory Costs
Product and Process Design without SC Consideration
Focus on Incomplete Supply Chain