1. Information as an Enabler to Supply Chain

2. 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

3. Types of Information Supplier information Manufacturing information
Distribution and retailing information
Demand information

4. Characteristics of good information
Information must be accurate
Information must be accessible in a timely fashion
Information must be of the right kind

5. 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

6. 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

7. Increasing Variability Upstream the Supply Chain –Bullwhip Effect

8. Bullwhip Effect
Increasing propagation of variability upstream through the supply chain

9. We Conclude ….
Order variability is amplified up the supply chain; upstream echelons face higher variability.
What you see is not what they face.

10. 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

11. 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

12. What are the Causes…. Single retailer, single manufacturer.
Retailer observes customer demand, Dt.
Retailer orders qt from manufacturer. Dt qt
Retailer
Manufacturer L

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

14. 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

15. 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

16. 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.

17. 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?

18. 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.

19. 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

20. Impact of the Bullwhip Effect

21. 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.

22. 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.

23. 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.

24. 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.

25. 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.

26. 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.

27. 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

28. 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

29. 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?