Title: Supply Chain Integration
1Supply Chain Integration
- Ranjan Ghosh
- Indian Institute of Management Calcutta
2Outline of the Presentation
- The Bullwhip Effect
- Distribution Strategies and Information Systems
- Supply Chain Management Pitfalls and
Opportunities
3The 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.
Figure 1. Order Stream
Huang at el. (1996), Working Paper, Philips Lab
4The Bullwhip Effect and its Impact on the Supply
Chain
Figure 2. Point-of-sales Data-Original
Figure 3. POS Data After Removing Promotions
5The Bullwhip Effectand its Impact on the Supply
Chain
Figure 4. POS Data After Removing Promotion
Trend
6Higher Variability in Orders Placed by Computer
Retailer to Manufacturer Than Actual Sales
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan
Management Review
7Increasing Variability of Orders Up the Supply
Chain
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan
Management Review
8We Conclude .
- Order Variability is amplified up the supply
chain upstream echelons face higher variability. - What you see is not what they face.
9What are the Causes.
- Promotional sales
- Volume and Transportation Discounts
- Inflated orders
- - 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
10 What are the Causes.
- Single retailer, single manufacturer.
- Retailer observes customer demand, Dt.
- Retailer orders qt from manufacturer.
Dt
qt
Retailer
Manufacturer
L
11What are the Causes.
- Promotional sales
- Volume and Transportation Discounts
- Inflated orders
- - IBM Aptiva orders increased by 2-3 times when
retailers though that IBM would be out of stock
over Christmas - - Same with Motorolas Cellular phones
- Demand Forecast
- Long cycle times
12 What are the Causes.
- Single retailer, single manufacturer.
- Retailer observes customer demand, Dt.
- Retailer orders qt from manufacturer.
Dt
qt
Retailer
Manufacturer
L
13Var(q)/Var(D)For Various Lead Times
- Lead time of the manufacturer L so that an
order placed by the retailer at the end of period
t is received in the beginning of period (tL). - In every period, the retailer calculates a new
mean and standard deviation, based on the p most
recent observations of demand. If the variance of
the customer demand seen by the retailer is
Var(D), then the variance of the orders placed by
the retailer to the manufacturer, Var(q),
relative to the value of the customer demand,
satisfies - Var(q)/Var(D) 1 ( 2L/p ) ( 2L2/p2 )
14Var(q)/Var(D)For Various Lead Times
14
L5
L5
12
10
L3
L3
8
6
L1
4
L1
2
0
0
5
10
15
20
25
30
15Consequences.
- Increased safety stock
- Reduced service level
- Inefficient allocation of resources
- Increased transportation costs
16Consequences.
- Single retailer, single manufacturer.
- Retailer observes customer demand, Dt.
- Retailer orders qt from manufacturer.
Dt
qt
Retailer
Manufacturer
L
17Consequences.
- Increased safety stock
- Reduced service level
- Inefficient allocation of resources
- Increased transportation costs
18Multi-Stage Supply Chains
- Consider a multi-stage supply chain
- Stage i places order qi to stage i1.
- Li is lead time between stage i and i1.
qoD
q1
q2
Retailer Stage 1
Manufacturer Stage 2
Supplier Stage 3
L1
L2
19Multi-Stage SystemsVar(qk)/Var(D)
- Supply Chain with Centralized Demand Information
- The variance of the orders placed by the kth
stage of the supply chain, Var(qk), relative to
the variance of the customer demand, Var(D), is - k k
- Var(qk) / Var(D) 1 (2 S Li / p) 2( ? Li
)2 / p2 - i1
i1 - where Li is the lead time between stage i and
stage (i1).
20Multi-Stage SystemsVar(qk)/Var(D)
- Supply Chain with Decentralized Demand
Information - The variance of the orders placed by the kth
stage of the supply chain, Var(qk), relative to
the variance of the customer demand, Var(D), is - k
- Var(qk) / Var(D) ? 1 (2 Li / p) 2( Li2
/ p2) - i1
- where Li is the lead time between stage i and
stage (i1).
21Multi-Stage SystemsVar(qk)/Var(D)
Dec, k5
Cen, k5
Dec, k3
Cen, k3
k1
22The 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 reduce the
bullwhip effect, but will not eliminate it.
23Coping with the Bullwhip Effect in Leading
Companies
- Reduce Variability and Uncertainty
- - POS
- - Sharing Information
- - Year-round low pricing
- Reduce Lead Times
- - EDI
- - Cross Docking
- Alliance Arrangements
- Vendor managed inventory
- On-site vendor representatives
24Example 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.
25ExampleQuick 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.
26How 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
27Distribution Strategies
- Warehousing
- Direct Shipping
- No DC needed
- Lead times reduced
- smaller trucks
- no risk pooling effects
- Cross-Docking
28Cross Docking
- In 1979, Kmart was the king of the retail
industry with 1891 stores and average revenues
per store of 7.25 million - At that time Wal-Mart was a small niche retailer
in the South with only 229 stores and average
revenues about half of those Kmart stores. - Ten years later, Wal-Mart transformed itself it
has the highest sales per square foot, inventory
turnover and operating profit of any discount
retailer. Today Wal-Mart is the largest and
highest profit retailer in the world.
29What accounts for Wal-Marts remarkable success
- The starting point was a relentless focus on
satisfying customer needs Wal-Mart goal was
simply to provide customers access to goods when
and where they want them and to develop cost
structures that enable competitive pricing - The key to achieving this goal was to make the
way the company replenished inventory the
centerpiece of its strategy.
30What accounts for Wal-Marts remarkable success?
- This was obtained by using a logistics technique
known as cross-docking. Here goods are
continuously delivered to Wal-Marts warehouses
where they are dispatched to stores without ever
sitting in inventory. - This strategy reduced Wal-Marts cost of sales
significantly and made it possible to offer
everyday low prices to their customers.
31Characteristics of Cross-Docking
- Goods spend at most 48 hours in the warehouse,
- Avoids inventory and handling costs,
- Wal-Mart delivers about 85 of its goods through
its warehouse system, compared to about 50 for
Kmart, - Stores trigger orders for products.
32System Characteristics
- Very difficult to manage,
- Requires linking Wal-Marts distribution centers,
suppliers and stores to guarantee that any order
is processed and executed in a matter of hours, - Wal-Mart operates a private satellite-communicatio
ns system that sends point-of-sale data to all
its vendors allowing them to have a clear vision
of sales at the stores
33System Characteristics
- Need a fast and responsive transportation system
- Wal-Mart has a dedicated fleet of 2000 truck that
serve their 19 warehouses - This allows them to
- ship goods from warehouses to stores in less than
48 hours - replenish stores twice a week on average.
34Distribution Strategies
35Supply 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