1. OPSM 305 Supply Chain Management
Koç University
OPSM 305 Supply Chain Management
Class 20:
Vendor Managed Inventory
Zeynep Aksin

2. 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.

3. Coping with the Bullwhip Effect in Leading Companies
Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
Reduce Lead Times
- EDI
- Cross Docking
Alliance Arrangements
Vendor managed inventory
On-site vendor representatives

4. Barilla SpA

5. Barilla SpA Part A
Barilla SpA is the world’s largest pasta manufacturer
The company sells to a wide range of Italian retailers, primarily through third party distributors
During the late 1980s, Barilla suffered increasing operational inefficiencies and cost penalties that resulted from large week-to-week variations in its distributors’ order patterns

7. Distribution Factories 25 %65 %35 800 SKU CDC 2 Depots 18 %10 %90 GDDO
14 days stock
Order delivery hrs
Zincir Mağazalar
Bağımsız marketler
Signora
Maria (Bakkal)
45% of dry products
%20
%35
12 days stock
10 days stock
14 days stock

8. Signora Maria (Bakkal)
Ordering Process
Fresh
Depots
Dry
8-10 days
Daily Orders
24-48 hours
Signora Maria (Bakkal)
Independent Markets
Chains

9. What is driving this order pattern?
Exhibit 12 Weekly Demand for Barilla Dry Products from Cortese’s Northeast Distribution Center to the Pedrignano CDC, 1989.

10. Causes for Demand Fluctuations
Transportation discounts
Volume discount
Promotional activity
No minimum or maximum order quantities
Product proliferation
Long order lead times
Poor customer service rates
Poor communication

11. How does Barilla compare to the beergame?

12. What is the impact of fluctuations?
Because of high product changeover: either inefficient production or excess finished goods inventory,
Inventory costs: finished goods yet also stockouts due to unexpected peaks in certain SKUs
Utilization of central distribution low, yet need to be prepared for fluctuations
Transportation costs high due to variability in demand for trucking
Excess capacity at distributor due to need to store items bought during promotions

13. Impact of Bullwhip in general
High inventory/lost sales/backlog cost
Low customer satisfaction
Low operational efficiency
- underutilization
- overtime
- expediting
Unnecessary capacity investment
Swings in working capital
Blaming others; frustration, helplessness

14. JITD
To address this problem, the director of logistics suggests the implementation of Just-in-Time Distribution (JITD), with Barilla’s distributors.
Under the proposed JITD system, decision-making authority for determining shipments from Barilla to a distributor would transfer from the distributor to Barilla.
Specifically, rather than simply filling orders specified by the distributor, Barilla would monitor the flow of its product through the distributor’s warehouse, and then decide what to ship to the distributor and when to ship it.

15. Basic premise of JITD
Replace Sequential optimization with Global optimization
Who will optimize?
Eliminate some of the ‘false’ economics that drive traditional ordering processes

16. Strategic Partnering Types of SP:
Quick Response: Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. In this strategy, the retailer still prepares individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.

17. Strategic Partnering
Continuous Replenishment: Vendors receive POS data and use it to prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory.
Wal-Mart
Advanced Continuous Replenishment: Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.

18. Strategic Partnering Vendor Managed Inventory (VMI):JITD
VMI Projects at Dillard Department Stores, J.C. Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements.

19. Requirements for Effective SP
Advanced information systems
Top management commitment
Mutual trust

20. Main Characteristics of SP