Information as an Enabler to Supply Chain

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

Types of Information

Supplier information Manufacturing information Distribution and retailing information Demand information

Characteristics of good information

Information must be accurate Information must be accessible in a timely

fashion Information must be of the right kind

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

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

Increasing Variability Upstream the Supply Chain –Bullwhip Effect

Bullwhip Effect

Increasing propagation of variability upstream through the supply chain

We Conclude ….

Order variability is amplified up the supply chain; upstream echelons face higher variability.

What you see is not what they face.

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

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

What are the Causes…. Single retailer, single manufacturer.

Retailer observes customer demand, Dt. Retailer orders qt from manufacturer.

Retailer ManufacturerDt qt

L

Consequences….

Increased safety stockReduced service levelInefficient allocation of

resourcesIncreased transportation costs

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

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

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.

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?

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.

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

Impact of the Bullwhip Effect

Performance Measure Impact on PerformanceManufacturing CostInventoriesLead TimeTransport CostShipping & Receiving CostCustomer Service LevelProfitability

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

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 P&G (resisted by some retailers) Scan based promotion

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 (P&G and Wal-Mart) Quick Response Mfg. Strategy

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

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 P&G with CFAR

The Bullwhip Effect:Managerial Insights Exists, in part, due to the retailer’s 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.

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

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

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?