Information as an Enabler to Supply Chain

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Information as an Enabler to Supply Chain
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Value of Information

• In modern supply chains, information replaces
  inventory
• Why is this true?
• Why is this false?
• Information is always better than no information.
  Why?
• Information is the supply chain driver that
  serves as a glue allowing the other drivers to
  work together to create an integrated,
  coordinated supply chain

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Types of Information

• Supplier information
• Manufacturing information
• Distribution and retailing information
• Demand information

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Characteristics of good information

• Information must be accurate
• Information must be accessible in a timely
  fashion
• Information must be of the right kind

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Value of Information

• Information
• Helps reduce variability
• Helps improve forecasts
• Enables coordination of systems and strategies
• Improves customer service
• Facilitates lead time reductions
• Enables firms to react more quickly to changing
  market conditions

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Information for Coordination of Systems

• Information is required to move from local to
  global optimization
• Information is needed
• Production status and costs
• Transportation availability and costs
• Inventory information
• Capacity information
• Demand information

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Increasing Variability Upstream the Supply Chain
Bullwhip Effect
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Bullwhip Effect

• Increasing propagation of variability upstream
  through the supply chain

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We Conclude .

• Order variability is amplified up the supply
  chain upstream echelons face higher variability.
• What you see is not what they face.

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What are the Causes.

• Demand forecasting
• Min-max inventory level
• Order-up-to level
• orders increase more than forecasts
• Long cycle times
• Long lead times magnify this effect
• Impact on safety stock
• Product life cycle
• Batch ordering
• Volume transportation discount

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What are the Causes.

• Price fluctuation
• Promotional sales
• Forward buying
• Inflated orders
• Orders placed increase during shortage periods
• IBM Aptiva orders increased by 2-3 times when
  retailers thought that IBM would be out of stock
  over Christmas

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What are the Causes.

• Single retailer, single manufacturer.
• Retailer observes customer demand, Dt.
• Retailer orders qt from manufacturer.

Dt
qt
Retailer
Manufacturer
L
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Consequences.

• Increased safety stock
• Reduced service level
• Inefficient allocation of resources
• Increased transportation costs

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Ways to Cope with the Bullwhip Effect

• Reducing uncertainty
• Centralizing demand information
• Bullwhip inherent in use of various forecasting
  techniques
• Reducing variability
• Use of EDLP strategy (Payless)
• Lead time reduction
• Order lead time (time to produce and ship)
• Information lead time (time to process order)
• Efficient network distribution design
• Strategic partnership
• Vendor managed inventory (VMI)
• Sharing of customer information
• Collaborative forecasting

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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
• Transmitting POS data upstream
• Strategic partnerships
• Vendor managed inventory
• Data sharing

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Information for Effective Forecasts

• Pricing, promotion, new products
• Different parties have this information
• Retailers may set pricing or promotion without
  telling distributor
• Distributor/Manufacturer might have new product
  or availability information
• Collaborative Forecasting addresses these issues.

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Locating Desired Products

• How can demand be met if products are not in
  inventory?
• Locating products at other stores
• What about at other dealers?
• What level of customer service will be perceived?

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Lead-Time Reduction

• Why?
• Customer orders are filled quickly
• Bullwhip effect is reduced
• Forecasts are more accurate
• Inventory levels are reduced
• How?
• EDI
• POS data leading to anticipating incoming orders.

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Information to Address Conflicts

• Lot Size Inventory
• Advanced manufacturing systems
• POS data for advance warnings
• Inventory -- Transportation
• Lead time reduction for batching
• Information systems for combining shipments
• Cross docking
• Advanced DSS
• Lead Time Transportation
• Lower transportation costs
• Improved forecasting
• Lower order lead times
• Product Variety Inventory
• Delayed differentiation
• Cost Customer Service
• Transshipment

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Impact of the Bullwhip Effect
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Bull Whip Effect - Operational Obstacles
(Batching)

• Contributing factors
• High Order Cost
• Full TL economies
• Random or correlated ordering
• Counter Measures
• EDI Computer Assisted Ordering (CAO)
• Discounted on Assorted Truckload, consolidated by
  3rd party logistics
• Regular delivery appointment
• Volume and not lot size discounts
• State of Practice
• McKesson, Nabisco, ...
• 3rd party logistics in Europe, emerging in the
  U.S.
• P G

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Bull Whip Effect - Pricing Obstacles

• Contributing factors
• High-Low Pricing leading to forward buy
• Delivery and Purchase not synchronized
• Counter Measures
• EDLP
• Limited purchase quantities
• Scan based promotions
• State of Practice
• PG (resisted by some retailers)
• Scan based promotion

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The Bullwhip Effect Information Processing
Obstacles

• Contributing factors
• No visibility of end demand
• Multiple forecasts
• Long lead-time
• Counter Measures
• Access sell-thru or POS data
• Direct sales (natural on web)
• Single control of replenishment
• Lead time reduction
• State of Practice
• Sell-thru data in contracts (e.g., HP, Apple,
  IBM)
• CFAR, CPFR, CRP, VMI (PG and Wal-Mart)
• Quick Response Mfg. Strategy

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Bull Whip Effect - Operational Obstacles

• Contributing factors
• Proportional rationing scheme
• Ignorance of supply conditions
• Unrestricted orders free return policy
• Counter Measures
• Allocation based on past sales.
• Shared Capacity and Supply Information
• Flexibility Limited over time, capacity
  reservation
• State of Practice
• Saturn, HP
• Schedule Sharing (HP with TI and Motorola)
• HP, Sun, Seagate

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Managerial Implications of the Bull Whip Effect -
Behavioral Factors

• Contributing factors
• Lack of trust
• Local reaction
• Counter Measures
• Building trust and partnership
• State of Practice
• Wal-Mart and PG with CFAR

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The Bullwhip EffectManagerial Insights

• Exists, in part, due to the retailers 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 significantly
  reduce the bullwhip effect, but will not
  eliminate it.

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Steps in Cycle Time Reduction

• Establish a cycle-time reduction team
• Develop an understanding of given SC processes
  and current cycle time performance
• Identify opportunities for cycle time reduction
• Develop and implement recommendations for cycle
  time reduction
• Measure process cycle time reduction
• Conduct CI efforts for process cycle time
  reduction

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CSF of Cycle Time Reduction

• Top management support
• Commitment to significant cycle time reduction
• Use of cross function teams
• Application of TQM tools
• Training in cycle time reduction approaches
• Establish, monitor, and report cycle time
  performance measures
• Collaboration with supply chain member

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Locating Desired Products

• How can demand be met if products are not in
  inventory?
• Locating products at other stores
• What about at other dealers?
• What level of customer service will be perceived?