ISQA 458/558 Distribution & Replenishment Professor Mellie Pullman

Point-of-sales Data: Original POS Data After Removing Promotions Promotions and their Impact on the Supply Chain

POS Data After Removing Promotion & Trend Promotion & Trend Impact on the Supply Chain

Increasing Variability of Orders Up the Supply Chain = Bullwhip Effect Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

We Conclude …. Order Variability is amplified up the supply chain; upstream echelons face higher variability. What one member experiences is not what upstream members face.

What are the Causes…. Promotional sales Inflated orders to manage risk - IBM Aptiva orders increased by 2-3 times when retailers though that IBM would be out of stock over Christmas Demand Forecast Long cycle times Order Batching

Consequences…. Increased safety stock Reduced service level Inefficient allocation of resources Increased transportation costs

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 reduce the bullwhip effect, but will not eliminate it.

Coping with the Bullwhip Effect Reduce Variability and Uncertainty - POS - Sharing Information - Year-round low pricing (Every day Low Prices EDLP) Reduce Lead Times - EDI - Cross Docking Alliance Arrangements –Vendor managed inventory –On-site vendor representatives

Distribution Strategies and Information Systems Pull Vs. Push Strategies

Push Strategies Single retailer, single manufacturer. –Retailer observes customer demand, D t. –Retailer orders q t from manufacturer. RetailerManufacturer DtDt qtqt L

Problems with Push Strategies: Excess finished goods inventory Inefficient production Inefficient operations, high costs, low service levels - Excess capacity - Low utilization of resources - High transportation cost Distribution Strategies and Information Systems

Pull Strategies POS Data RetailerManufacturer DtDt qtqt L

Pull Strategies Production is demand driven Faster information flow mechanisms are used Inventory levels are reduced Distribution facilities are transformed from storage points to coordinators of flow. But: –Harder to leverage economies of scale –Doesn ’ t work in all cases Distribution Strategies and Information Systems

Distribution Strategies Warehousing Direct Shipping –No DC needed –Lead times reduced –“smaller trucks” –no risk pooling effects

Distribution Strategies

Supply Chain Management: Pitfalls and Opportunities Conflicting Objectives in the Supply Chain 1. Purchasing Stable volume requirements Flexible delivery time little variation in mix large quantities 2. Manufacturing Long run production High quality High productivity Low production cost

Supply Chain Management: Pitfalls and Opportunities 3. Warehousing Low inventory Reduced transportation costs Quick replenishment capability 4. Customers Short order lead time High in stock Enormous variety of products Low prices