bullwhip and supplier relationship management

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Beyond Procurement :

Understand Bullwhip effect

Strategic Supplier Relationship Program for non-strategic materials

To Build Competitive Differentiation

By Deepak Ramawat

[email protected]





Outline

• Understanding Bullwhip effect specially in manufacturing Industries

• How to establish a strategic supplier relationship management program specially for non-strategic materials at grass root level

• Sharing a mutual commitment towards performance excellence

• Involvement of Internal Stakeholders & Taking ownership of their support





Definition A Bullwhip effect occurs when change in customer demand,

causes larger and larger inventory swing

Demand order variability in the supply chain amplified at each

stage with information flow





Example of Bullwhip Effect

0

50

100

150

200

250

300

350

400

1 2 3 4 5 6 7 8 9 10 11 12

Monthly Demand

Material Planning

Avg Demand





What Causes Bullwhip Effect?

Lack of Communication Lot Ordering

Price Variations Supply-Demand Constraints





Counteracting the Bullwhip effect

Close and Open Communication (Reducing Uncertainty)

Sharing correct information along the whole supply chain cycle by providing each stage with correct information on actual customer demand and reducing reliance on forecasting. This can be done by

• Meeting on regular intervals • Define requirement and Sharing • By use of communication channel • Discussing future requirement, projects, and

development plans





Counteracting the Bullwhip effect Rate and Blanket Contracts (Reducing Variability)

By reducing periodic price discounting, keeping consistent pricing strategy, which means offering a price as low as possible everyday, without periodic price promotion.





Counteracting the Bullwhip effect Optimizing And Analyzing Lead Time To optimize lead time in supply chain we need to concentrate on below points • Expected Demand • Service level requirement • Replenishment method (Lot ordering, Single item ordering etc) • Replenishment / lead time This will help to decide when to place the order and when it become available to satisfy demand





Counteracting the Bullwhip effect Supplier Partnership For Countering Bullwhip effect, Supplier Partnership is effective tool. Adopting SRM, for sharing information and effective inventory management along the whole Supply Chain can significantly reduce the bullwhip effect.





Supplier Relationship Management is working collaboratively with those suppliers that are vital to the success of

an organization to maximize the mutual values from those relationships – importantly, it need not always done

at corporate level, start at buyer levels;

Do you hear the following from your buyers: • Our suppliers do not listen / respond to us;

• Our suppliers do not deliver us what we request;

• Our suppliers would rather work with competitors rather than me / us;

• Our customers and system makes it difficult for my vendors;

• Our Accounts payable are slow, it does not help

• Our suppliers contact users directly, what can I do

Supplier Relationship Management





Steps in Relationship Management

Identification of Critical

Spares

Strategic Supplier Categorization

Contracts By Strategy

Relationship Management






Supplier categorization

As a buyer, have you realized or asked yourself these questions: • If this supplier delivered late, would it shut my customer’s production line down?

• If this supplier delivered late, would it affect my company’s obligations to customers ?

• If this supplier provided unacceptable quality, would it reflect failure of my company?

• If this supplier raised prices, would my company still purchase from same supplier?

• If this supplier provided poor service or response, would it affect my company ?

Hence, to have answers for above questions there is a need for SRM and to facilitate

our study we further extend our questions like

Which supplier?

What category of material?

Who are stake Holders?

What will be the potential impact?





1 2 3 4 5 6 7 8 9 10

1If this supplier delivered late, would it shut my company’s production line

down?

2If this supplier delivered late, would my company be unable to meet its

obligations to its customers or otherwise lose sales?

3If this supplier provided a product or service that was of unacceptable

quality, would it shut my company’s production line down?

4If this supplier provided a product or service that was of unacceptable

quality, would it result in a failure of my company to meet the quality

standards of its customers?

5If this supplier raised prices, would my company continue to purchase the

same products or services from that supplier, resulting in a reduction of

profit?

6

If this supplier provided poor service (e.g., failure to promptly answer a

question), would it result in my company providing unacceptably poor

service to its customers (e.g., failing to promptly answer a customer’s

question)

7 What will be the Potential impact on current and future costs?

8 What is the Expected length and continuity of contract?

9 Is the alternative avaialble in the market with the same setup / capability?

10 How much dependency we have on this contractor

11Our influence on contractor's strategy and directions on their overall

business & EMALLow; In specific areas Medium & limited to EMAL High and continuously evolving

Low; In specific areas Medium, multiple times High and continuously dependent

Limited / Not very important Limited / Not very important Limited / Not very important

2-5% increase/<USD 10,000p.a. & One time 5 -10% increase/<USD 50,000p.a. > 10% increase/<USD 100,000p.a.

One time - less than 6 months max One year; multiple qualified vendors in market One year & more; Limited vendors

No, diff vendors/models avail No but alternate source will take time & cost Yes but flexible to negotiate

not directly relevant to FG will affect work in progress and morale will affect our organization

No but will affect productivity Will affect overall efficiency and downtime directly afffect plant operations

Yes but replacement will help Yes but depends on replacement time/process Yes specially as time is limited

Overall Rating

Sr. No Evaluation Criteria

Strategic Supplier Categorization

Supplier Name and Rating

It will be transaction orders if it is 0-3 (depending on area and product/service specific)

It will be preferred orders if it is 4-7 (depending on area and product/service specific)

It will be Strategic orders if it is 8-10 (depending on area and product/service specific)

Rating Guideline

No but may affect schedule Result in stoppage to an extentwill directly delay the maint or oper schedule

not directly relevant to sales will affect work in progress and morale will affect our organization







Total number of Supplier considered 120

Total Supplier Screened 75

No. of Supplier selected 20

Time Period for Evaluation 1 year

Below is the result of Supplier categorization





2011 2012 2013 Critical SKUs plant wide identified 218 1419 3912

No. of contracts for SKU established 17 32 78

Total Line covered under above contract 7867 16943 22198

No. of Zero stock outs during the year 146 91 27

Payment in Day 90 80 40

0

5000

10000

15000

20000

25000

30000

20112012

20132014*

Results • Vendor feedback to Customer

• Vendor – Customer meeting frequency

• Value additions by vendors (Maintenance Support / extender Services)

• Payment cycle (concerned by vendors)

• Supplier confidence

• Improvement to Customer Service, Profits, cost





Performance Excellence

INVENTORY

KPI – Reduced Inventory; Improved

convenience

OPERATIONS

Signed SLAs with Deliverable

MAINTENANCE

Joint vendor audits &

assessments Support for best

practices

FINANCE

Facilitating improvised P2P

MUTUAL COMMITMENT WITH STAKEHOLDERS





CONSTRUCTIVE PARTNERSHIP ROLES BY STAKEHOLDERS

Deliverable and expectations of all stakeholders are different but each of them is important – necessity to align them to the overall bottom line concept

Have a set off for value realizations from SRM based approach;


Complete and consistent support to pursue this relentlessly – often it is time consuming;

Encourage consistent team efforts from Customer (Operations as well as Maintenance), Warehouse, Inventory, Finance, led by Buyers;

Realizing the NEED to have relationship management – Apart from ensuring availability, SRM takes care of the ripple periods in operating cycles

Collective approach = Value realization





Potential Benefits - Contracts By Strategy

Fixed Rate Contracts Quantity contracts Time based contracts Temporary Lease contract Freight Contracts

• Vendor Consignment Contracts

• Vendor managed warehouse contracts

• Indenter stock holding contracts

• Just in Time supply contracts

• Low Value High Consumption

contracts

• Time motion driven local business

contract

• “U” type SAP Contracts






Strongly recommend that each Buyer must set up their own SRM with their key

suppliers at their levels;

Strategically set, Relationship enhancement meeting (to be) thereafter

conducted periodically with all stake holders (Customer, Warehouse, Inventory

and Finance)

This is nothing but setting roots of a relationship management with their

(target segment) suppliers that drives “value” system upwards to

Organizational model ;

Positioning for future - Relationship Management





Thank you

bullwhip and supplier relationship management

Business