1. SCM: Information distortion1 Supply Chain Management Demand Variability and Coordination in a Supply Chain

2. SCM: Information distortion2 Demand variability and information distortion The Pampers Supply Chain (P&G) Babies Customers Retailers Wholesalers P & G3 M

3. SCM: Information distortion3 Demand variability and information distortion HP printer HP executives found: – Sales at major resellers show some fluctuation –Orders from these resellers show much larger fluctuation –Orders from HP printer division to HP’s IC division show even larger fluctuation

4. SCM: Information distortion4 Demand variability and information distortion The Barilla Supply Chain –Show similar pattern of variability in the supply chain

5. SCM: Information distortion5 Consequences of variability in the supply chain

6. SCM: Information distortion6 Common symptoms of information distortion in SC excessive inventory poor product forecast insufficient or excessive capacities poor customer service (unavailable product or long backlogs) uncertain product planning

7. SCM: Information distortion7 Consequences of variability in the supply chain Manufacturers –not able to see the actual sales from the retailers, thus product forecasting, capacity planning, inventory control and production scheduling are based on distorted data. not able to meet actual demand or excessive inventory insufficient capacities or high proportion of idle capacities

8. SCM: Information distortion8 Consequences of variability in the supply chain The supply chain –excessive inventory in every stage of the supply chain while still unable to meet customers’ demand –Every partner in the supply chain is burnt

9. SCM: Information distortion9 Consequences of variability in the supply chain the grocery industry the computer industry the Pharmaceutical industry over 100 days of supply in the supply chain, if the raw material of the suppliers are included, it could well over a year of supply.

10. SCM: Information distortion10 What caused the Bullwhip?

11. SCM: Information distortion11 What caused the Bullwhip? Decision makers’ irrational behavior in decision making their misconception about demand information and inventory information –better training for the decision makers

12. SCM: Information distortion12 What caused the Bullwhip? Consequence of rational behavior in the supply chain’s infrastructure –to mitigate the Bullwhip effect, we need to modify the supply chain infrastructure and related processes, rather than the decision makers’ behavior.

13. SCM: Information distortion13 Causes of bullwhip

14. SCM: Information distortion14 Demand forecasting forecasting is often based on the ordering history from the immediate customers of the firm, it then projects the future demand for the lead time plus the safety stock required for the period the decision process is repeated as one moves up the chain, thus amplifying the variability –the longer the lead-time, the more pronounced is the fluctuation

15. SCM: Information distortion15 Order batching “Manual” ordering is too costly –P&G estimate : each invoice to customers is around US$35-$75 –place orders when a firm runs its MRP system Economy of transportation –full truckload (FTL) get better rates than less FTL Push ordering –salespersons push sale in time when they are evaluated by their company

16. SCM: Information distortion16 Price fluctuation manufacturer induced forward buying by offering discounts or during promotion –retailer buy more when price is low and stop buying until inventory is depleted when price returns to normal (P. Sellers, “The Dumbest Marketing Ploy”, Fortune, Vol. 126, 5 Oct. 1992, pp88-93)

17. SCM: Information distortion17 Rationing and shortage gaming If demand is greater than supply, allocation scheme used by supplier may induce gaming: –exaggerate demand when item is selling hot, in anticipation of rationing and inventory shortage –cancel orders when demand becomes cool e.g., DRAM chips in 80’s, HP LaserJet III printer, IBM Aptiva PC in October 1994, etc

18. SCM: Information distortion18 Mitigating the bullwhip effect

19. SCM: Information distortion19 Mitigating the bullwhip effect

20. SCM: Information distortion20 Avoid multiple demand forecasting make demand data downstream available to the upstream site –computer manufacturers request sell-through data on withdrawn stocks in the retailers’ central warehouse (IBM, HP, Apple, etc) Increase use of EDI facilitate data commission vendor managed inventory (VMI)or continuous replenishment program(CRP), (P&G with Wal-Mart, Campbell Soup) get demand data by bypassing downstream site (consumer direct program of Apple, Dell Computers)

21. SCM: Information distortion21 Break order batches Use electronic Data Interchange (EDI) ordering - lower ordering cost 3rd party logistics for competitors in the same region or for different supplier in the same region manufacturer induces distributors order mixed product in a truckload (at FTL discount rate), e.g., P&G gives discounts to distributors to order mixed SKU’s

22. SCM: Information distortion22 Stabilize prices Reduce the frequency and level of wholesale price discounting (P&G, Kraft use EDLP), More accurate accounting systems, e.g., activity-based costing (ABC)

23. SCM: Information distortion23 Eliminate gaming in shortage situation allocate product according to past sale records, not proportional to orders, e.g., GM used it, HP and TI are switching to it Sharing of capacity and inventory information - to alleviate customer anxiety more stringent order cancellation policy