Lean Supply Chains: The Foundation System’s Perspective Understand supply chain dynamics and adopt a holistic view. Consider the business ecosystem in which you are operating. Supply Chain Dynamics Enterprises can experience huge variations at each step in the chain, with variations typically more pronounced the further upstream the enterprise is from the ultimate user.

Simulation Settings Overly simplified supply chain Roles Selling kegs of beer Roles Factory (warehouse) Distributor Wholesaler Retailer

Supply Channels From shop floor Transport delays Order Order Order processing delays Order To Consumers

Retailer Order beer from wholesaler Manages inventory levels Sells/ships beer to fill end-consumer’s orders

Wholesaler Order beer from distributor Manages inventory levels Sells/ships beer to fill retailer’s orders

Distributor Order beer from factory warehouse Manages inventory levels Sells/ships beer to fill wholesaler’s orders

Factory Schedule beer production in factory Manages finished goods inventory levels Sells/ships beer to fill distributor’s orders

Leadtimes Order processing delay Transportation delay Unit cycle time: 2 weeks

Cost structure Inventory holding cost: Lost of sales cost $1 for each keg of beer in the inventory at the end of each week Lost of sales cost $2 for each keg of beer that is backlogged at the end of each week

What you should do every week Receive beer from upstream supplier Receive order from downstream customer Ship the beer to fill the demand as much as possible, as inventory permit Backlogged orders must be filled in subsequent week, as inventory permit Send an order to your upstream supplier Objective: Minimize your total cost

Bebrief

 The Beer Game Underscores the importance of understanding supply chain dynamics and applying systems thinking to coordinate activities within and between enterprises. Explains the crucial role lead times play in enhancing or inhibiting competitiveness Elaborates on the role of information systems in the lean supply chain.  

Assumptions Assumes a linear SC, 4 enterprises, one type of beer Goal is to manage demand as imposed by it’s customer Each enterprise has only one manager Runs for 36 wks. Retailer Factory Distributor Wholesaler

Assumptions Each week, an enterprise receives an order from downstream customers and places an order upstream. Two week lead time between when an order is placed and when it is received. Each enterprise starts with 12 cases of beer.

Playing the game Everyone acts in their own self interest on the basis of their own forecasts The system is in a steady state with demand at four cases each week. In week 5, demand is disrupted to 8 cases a week and remains constant. Player’s ordering policy?

Bullwhip Effect Fluctuations in orders increase as they move up the supply chain from retailers to wholesalers to manufacturers to suppliers Distorts demand information within the supply chain Results from a loss of supply chain coordination

Demand Distortion Results in: Larger inventory carrying costs Lost sales from stock outs Lack of responsiveness to customer demand

Demand at Different Stages

Bullwhip Effect Most demand distortion is caused by the supply chain itself, not by the customer. Results in: excessive inventory investment poor customer service lost revenues misguided capacity planning ineffective transportation Ineffective production schedules.

The variation doubles at each stage. Retailer Wholesaler Distributor Factory 200% 1,600% 400% 800% The variation doubles at each stage. However, of the xx-case increase in the factory's orders, only four cases were directly attributable to a change in consumer demand. The lead times present in this value stream created 94 percent of the variation observed in the factory’s orders.

The Implications of Lead Time on the Bullwhip Effect Retailers Warehouses/ Distributors Manufacturers Lead times significantly exacerbate the bullwhip effect Reducing lead time, in combination with improved visibility along the supply chain, can significantly and positively relieve the bullwhip effect 21

The Impact of Information on the Bullwhip Effect Perfect forecasting does not eliminate the bullwhip effect Lesson: The bullwhip effect is present even if there is perfect information about the future that is shared among all channel partners. 22

The Impact of Lead Time on the Bullwhip Effect Lead times can multiply the variation in demand and so everyone in the supply chain should be working to reduce lead times. The implications of Little's Law are that when inventory in the supply chain is high, lead times increase, and, conversely, longer lead times result in more inventories in the pipeline. This problematic and cyclical relationship between lead times and inventory is a powerful reason for reducing lead times. 23

Structure Drives Behavior: Causes of the Bullwhip Effect Lack of visibility Long lead time Many stages in the supply chain Lack of pull signals Order batching Price discount and promotions Forward buying Rationing 24

Other Behaviors that Cause the Bullwhip Effect Over-reaction to backlogs Neglecting to order to reduce inventory Demand forecast inaccuracies Attempts to meet end-of-month metrics 25

Ways to Mitigate the Bullwhip Effect Reduce lead times Use/sharing of POS data Smaller orders Work with suppliers on more frequent deliveries of smaller order increments Use stable pricing, “everyday low prices” Levels out customer demand Allocation based on past sales 26

Coordination in a Supply Chain

Lack of Supply Chain Coordination and the Bullwhip Effect Supply chain coordination – all stages of the chain take actions that are aligned and increase total supply chain surplus Requires that each stage share information and take into account the effects of its actions on the other stages Lack of coordination results when: Objectives of different stages conflict Information moving between stages is delayed or distorted

Incentive Obstacles Occur when incentives offered to different stages or participants in a supply chain lead to actions that increase variability and reduce total supply chain profits Local optimization within functions or stages of a supply chain Sales force incentives

Information Processing Obstacles When demand information is distorted as it moves between different stages of the supply chain, leading to increased variability in orders within the supply chain Forecasting based on orders, not customer demand Lack of information sharing

Operational Obstacles Occur when placing and filling orders lead to an increase in variability Ordering in large lots Large replenishment lead times Rationing and shortage gaming

Operational Obstacles

Pricing Obstacles When pricing policies for a product lead to an increase in variability of orders placed Lot-size based quantity decisions Price fluctuations

Pricing Obstacles

Behavioral Obstacles Problems in learning within organizations that contribute to information distortion Each stage of the supply chain views its actions locally and is unable to see the impact of its actions on other stages Different stages of the supply chain react to the current local situation rather than trying to identify the root causes Different stages of the supply chain blame one another for the fluctuations No stage of the supply chain learns from its actions over time A lack of trust among supply chain partners causes them to be opportunistic at the expense of overall supply chain performance

Managerial Levers to Achieve Coordination Aligning goals and incentives Improving information accuracy Improving operational performance Designing pricing strategies to stabilize orders Building strategic partnerships and trust

Aligning Goals and Incentives Align goals and incentives so that every participant in supply chain activities works to maximize total supply chain profits Align goals across the supply chain Align incentives across functions Pricing for coordination Alter sales force incentives from sell-in (to the retailer) to sell-through (by the retailer)

Improving Information Visibility and Accuracy Sharing point of sale data Implementing collaborative forecasting and planning Designing single-stage control of replenishment Continuous replenishment programs (CRP) Vendor managed inventory (VMI)

Improving Operational Performance Reducing replenishment lead time Reducing lot sizes Rationing based on past sales and sharing information to limit gaming

Designing Pricing Strategies to Stabilize Orders Encouraging retailers to order in smaller lots and reduce forward buying Moving from lot size-based to volume-based quantity discounts Stabilizing pricing Building strategic partnerships and trust

Continuous Replenishment and Vendor-Managed Inventories A single point of replenishment CRP – wholesaler or manufacturer replenishes based on POS data VMI – manufacturer or supplier is responsible for all decisions regarding inventory Substitutes

Collaborative Planning, Forecasting, and Replenishment (CPFR) Sellers and buyers in a supply chain may collaborate along any or all of the following Strategy and planning Demand and supply management Execution Analysis Retail event collaboration DC replenishment collaboration

Achieving Coordination in Practice Quantify the bullwhip effect Get top management commitment for coordination Devote resources to coordination Focus on communication with other stages Try to achieve coordination in the entire supply chain network Use technology to improve connectivity in the supply chain Share the benefits of coordination equitably