Ch06supply Chain Integration 1

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McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 6

Supply Chain

Integration


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6.1 Introduction

6.1

Introduction


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6.2 Push, Pull, Push-Pull

Systems6.2 Push, Pull, Push-Pull

Systems


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Bull whip Effect

The bullwhip effect (or whiplash effect) is an observed phenomenon in forecast-driven distribution

channels. It refers to a trend of larger and larger swings in inventory in response to changes in

demand, as one looks at firms further back in the supply chain for a product.

Since the oscillating demand magnification upstream a supply chain is reminiscent of a cracking

whip, it became known as the bullwhip effect.

WHY BULL WHIP HAPPENS?

Because customer demand is rarely perfectly stable, businesses must forecast demand to

properly position inventory and other resources. Forecasts are based on statistics, and they are

rarely perfectly accurate. Because forecast errors are a given, companies often carry an inventory

buffer called "safety stock".

Moving up the supply chain from end-consumer to raw materials supplier, each supply chain

participant has greater observed variation in demand and thus greater need for safety stock. In

periods of rising demand, down-stream participants increase orders. In periods of falling demand,

orders fall or stop, thereby not reducing inventory. The effect is that variations are amplified as

one moves upstream in the supply chain (further from the customer)

Behavioral causes

* misuse of base-stock policies

* misapplication of trinomial theorem

* misperceptions of feedback and time delays

* panic ordering reactions after unmet demand


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Bull whip Cont'd

Operational causes * dependent demand processing

o Forecast Errors

o adjustment of inventory control parameters with each demand observation

* Lead time Variability (forecast error during replenishment lead time)

* lot-sizing/order synchronization

o consolidation of demands

o transaction motive

o quantity discount

* trade promotion and forward buying

* anticipation of shortages

o allocation rule of suppliers

o shortage gaming (including dereliction underBenford's Law)

o Lean and JIT style management of inventories and a chase production strategy


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Effect ofBull Whip

In addition to greater safety stocks, the

described effect can lead to either

inefficient production or excessive

inventory as the producer needs to fulfill

the demand of its predecessor in the

supply chain. This also leads to a low

utilization of the distribution channel. Inspite of having safety stocks there is still

the hazard of stock-outs which result in

poor customer service. Furthermore, the

Bullwhi effect leads to a row of financial


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Push-Based Supply Chains

Push-Based Supply Chains


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Bullwhip Effect in Push-Based

Supply ChainsBullwhip Effect in Push-Based

Supply Chains


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Pull-Based Supply Chains

Pull-Based Supply Chains


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Implementation of Pull-Based

SystemsImplementation of Pull-Based

Systems


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Push-Pull Strategy

Push-Pull Strategy


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Supply Chain Timeline

FIGURE 6-8:Push-pull supply chains


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General Strategy

General Strategy


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Identifying the Appropriate Supply

Chain Strategy

FIGURE 6-9:Push-pull supply chains


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Impact of Demand Uncertainty and

Economies of Scale

Impact of Demand Uncertainty and

Economies of Scale


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Implementing a PushPull Strategy

Implementing a PushPull Strategy


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mpac o e us - u

Strategy

Impact of the Push-Pull Strategy


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Pull portion High uncertainty

Simple supply chain structure

Short cycle time Focus on service level.

Achieved by deploying a flexible and

responsive supply chain

Order-fulfillment processes are applied

Impact of the Push-Pull Strategy


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Characteristics of the Push and

Pull Portions of the Supply Chain

Portion Push Pull

Objective Minimize cost Maximize service level

Complexity High Low

Focus Resource allocation Responsiveness

Lead time Long Short

Processes Supply chain planning Order fulfillment


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Interactions of the Two Portions

Interactions of the Two Portions


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6.3 The Impact ofLead Time

6.3 The Impact ofLead Time


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Impact ofLead Time

FIGURE 6-10:Matching supply chain strategies with products:

the impact of lead time and demand uncertainty


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Impact ofLead Time

Impact ofLead Time


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6.4 Demand-Driven Strategies

6.4 Demand-Driven Strategies


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Forecast Errors Are Always Present!

Forecast Errors Are AlwaysPresent!


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6.5 The Impact of the Internet on

Supply Chain Strategies

6.5 The Impact of the Internet on

Supply Chain Strategies


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Successes and Failures

Successes and Failures


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E-Business

E-Business


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Key Observations

Key Observations


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Grocery Industry

Grocery Industry


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Book Industry

Book Industry


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General Retail Industry

General Retail Industry


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Traditional Fulfillment Versus e-

Fulfillment

Traditional fulfillment E-fulfillment

Supply chain strategy Push Pushpull

Shipment Bulk Parcel

Reverse logistics Small part of the business Important and highly complex

Delivery destination Small number of storesLarge number of geographicallydispersed customers

Lead times Relatively long Relatively short


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Summary

Summary

Documents

Ch06supply Chain Integration 1