scm: information distortion1 supply chain management demand variability and coordination in a supply...
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SCM: Information distortion 1
Supply Chain Management
Demand Variability and Coordination in a Supply Chain
SCM: Information distortion 2
Demand variability and information distortion
• The Pampers Supply Chain (P&G)
Babies Customers Retailers Wholesalers P & G 3 M
SCM: Information distortion 3
Demand variability and information distortion
• HP printer
• HP executives found:– Sales at major resellers show some fluctuation– Orders from these resellers show much larger
fluctuation– Orders from HP printer division to HP’s IC
division show even larger fluctuation
SCM: Information distortion 4
Demand variability and information distortion
• The Barilla Supply Chain– Show similar pattern of variability in the supply
chain
SCM: Information distortion 5
Consequences of variability in the supply chain
SCM: Information distortion 6
Common symptoms of information distortion in SC
• excessive inventory
• poor product forecast
• insufficient or excessive capacities
• poor customer service (unavailable product or long backlogs)
• uncertain product planning
SCM: Information distortion 7
Consequences of variability in the supply chain
• Manufacturers– not able to see the actual sales from the
retailers, thus product forecasting, capacity planning, inventory control and production scheduling are based on distorted data.
• not able to meet actual demand or excessive inventory
• insufficient capacities or high proportion of idle capacities
SCM: Information distortion 8
Consequences of variability in the supply chain
• The supply chain – excessive inventory in every stage of the supply
chain while still unable to meet customers’ demand
– Every partner in the supply chain is burnt
SCM: Information distortion 9
Consequences of variability in the supply chain
• the grocery industry
• the computer industry
• the Pharmaceutical industry
over 100 days of supply in the supply chain, if the raw material of the suppliers are included, it could well over a year of supply.
SCM: Information distortion 10
What caused the Bullwhip?
SCM: Information distortion 11
What caused the Bullwhip?
• Decision makers’ irrational behavior in decision making
• their misconception about demand information and inventory information– better training for the decision makers
SCM: Information distortion 12
What caused the Bullwhip?
• Consequence of rational behavior in the supply chain’s infrastructure– to mitigate the Bullwhip effect, we need to
modify the supply chain infrastructure and related processes, rather than the decision makers’ behavior.
SCM: Information distortion 13
Causes of bullwhip
Causes Contributing Factors
Multiple dataprocessing
No visibility of end demand,multiple forecases, long lead time
Order batching High order cost, full truckload,long lead time
Price fluctuation Hi-low pricing, promotion
Shortage gaming Proportional rationing, ignoranceof supply information
SCM: Information distortion 14
Demand forecasting
• forecasting is often based on the ordering history from the immediate customers of the firm, it then projects the future demand for the lead time plus the safety stock required for the period
• the decision process is repeated as one moves up the chain, thus amplifying the variability– the longer the lead-time, the more pronounced
is the fluctuation
SCM: Information distortion 15
Order batching
• “Manual” ordering is too costly– P&G estimate : each invoice to customers is around
US$35-$75– place orders when a firm runs its MRP system
• Economy of transportation– full truckload (FTL) get better rates than less FTL
• Push ordering – salespersons push sale in time when they are evaluated by
their company
SCM: Information distortion 16
Price fluctuation
• manufacturer induced forward buying by offering discounts or during promotion– retailer buy more when price is low and stop
buying until inventory is depleted when price returns to normal (P. Sellers, “The Dumbest Marketing Ploy”, Fortune, Vol. 126, 5 Oct. 1992, pp88-93)
SCM: Information distortion 17
Rationing and shortage gaming
• If demand is greater than supply, allocation scheme used by supplier may induce gaming:– exaggerate demand when item is selling hot, in
anticipation of rationing and inventory shortage– cancel orders when demand becomes cool
• e.g., DRAM chips in 80’s, HP LaserJet III printer, IBM Aptiva PC in October 1994, etc
SCM: Information distortion 18
Mitigating the bullwhip effect
SCM: Information distortion 19
Mitigating the bullwhip effectCauses Mitigating strategies
Multiple dataprocessing
POS data, Sell-through data,VMI, CRP, leadtime reduction,consumer direct ordering
Order batching Consolidation, EDI, setupreduction, 3rd party logistics,
Price fluctuation Every day low price, moreaccurate accounting systems
Shortage gaming New allocation rules, capacity &inventory sharing,
SCM: Information distortion 20
Avoid multiple demand forecasting
• make demand data downstream available to the upstream site– computer manufacturers request sell-through data on withdrawn
stocks in the retailers’ central warehouse (IBM, HP, Apple, etc)
• Increase use of EDI facilitate data commission• vendor managed inventory (VMI)or continuous
replenishment program(CRP), (P&G with Wal-Mart, Campbell Soup)
• get demand data by bypassing downstream site (consumer direct program of Apple, Dell Computers)
SCM: Information distortion 21
Break order batches• Use electronic Data Interchange (EDI) ordering -
lower ordering cost• 3rd party logistics for competitors in the same
region or for different supplier in the same region
• manufacturer induces distributors order mixed product in a truckload (at FTL discount rate), e.g., P&G gives discounts to distributors to order mixed SKU’s
SCM: Information distortion 22
Stabilize prices
• Reduce the frequency and level of wholesale price discounting (P&G, Kraft use EDLP),
• More accurate accounting systems, e.g., activity-based costing (ABC)
SCM: Information distortion 23
Eliminate gaming in shortage situation
• allocate product according to past sale records, not proportional to orders, e.g., GM used it, HP and TI are switching to it
• Sharing of capacity and inventory information - to alleviate customer anxiety
• more stringent order cancellation policy
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