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 Long cycle times 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 Inflated orders 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. Dt qt Retailer Manufacturer L

Consequences…. Increased safety stock Reduced service level Inefficient allocation of resources Increased 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? How? 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

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 Notes: Also seen in NOVA; access to sell-thru data by manufacturer allows him to schedule production based on sales rather than orders. Reduce transaction costs - EDI - CAO - McKesson’s “Economost” Discounts for ordering assortments rather than single product full-truckloads. Coordination of delivery schedules. Third party logistics can consolidate orders from multiple retailers.

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 Notes: EDLP Synchronize delivery and purchase. That is, manufacturer may give hi-lo prices and retailers may order large quantities, but mfr. will deliver them over multiple periods. Special Purchase contracts - E.g., discounts for total minimum commitments.

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 Notes: Direct marketing channels not subject to bull whip effect due to demand signal processing. E.g., Dell-Direct of Dell Computers. The manufacturer has control of the entire supply chain.

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 Notes: Allocate supply in proportion to retailers market share in previous period. GM, TI, HP … Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing. Special contracts that restrict ordering (e.g., HP, SUN) - our paper on forecasts and flexibility - reserve capacity (Seagate reserves a portion of supplier’s capacity) Free return policies and generous order cancellation can lead to gaming.

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 Notes: Allocate supply in proportion to retailers market share in previous period. GM, TI, HP … Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing. Special contracts that restrict ordering (e.g., HP, SUN) - our paper on forecasts and flexibility - reserve capacity (Seagate reserves a portion of supplier’s capacity) Free return policies and generous order cancellation can lead to gaming.

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?