Information Coordination: The Bullwhip Effect

Consumer Sales at Retailer

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Retailer's Orders to Wholesaler

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Wholesaler's Orders to Manufacturer

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Manufacturer's Orders with Supplier

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Demand forecast updating◦ Amplification depends on lead time and forecasting method

Order Batching◦ Upstream parties place orders with suppliers less frequently than

they receive customer orders

◦ Uses inventory to meet frequent customer orders and only replenishes when inventory is low due to costs of ordering/holding and quantity discounts

Price Fluctuations◦ Change downstream party purchasing behavior

Rationing and Shortage Gaming◦ Downstream parties try to maximize order fulfillment by padding

orders

Four Common Factors that Contribute to Bullwhip Effect

Information Sharing:◦ Point of sales systems◦ Electronic Data Interchange (EDI)

◦ Radio Frequency Identification Tags Channel Alignment

◦ Centralized supply chain: single stage control of replenishment

◦ Vendor-managed inventory ◦ Drop shipping◦ Cross-docking; logistics outsourcing ◦ Order fulfillment based on past sales◦ Collaborative planning, forecasting and replenishment (CPFR)

Operational Efficiency & Lead-time Reduction◦ Postponement ◦ Standardization◦ Every day low pricing

Coordinating the Supply-Chain

Low High

Price ResponsivenessCustomer Need

Implied Demand Uncertainty

Functional Products:Detergent, Gas

Innovative Products:High Fashion, AppleWatch

Responsiveness: the ability to◦ Respond to wide ranges of quantities demanded◦ Meet short lead times◦ Handle a large variety of products◦ Build highly innovative products◦ Meet a very high service level

Efficiency: ◦ Minimize the cost of making and delivering a

product to the customer

Supply Chain Characteristics

Efficient –vs- Responsive Chains

Efficient Chain Responsive Chain

Primary Goal Low Cost Quick Response

Pricing Strategy Lower Margins Higher Margins

Manufacturing Strategy

High Utilization Maintain Capacity Flexibility

Inventory Strategy Minimize Inventory Maintain Safety Inventory

Lead Time Strategy Reduce if possible Aggressively Reduce

Transportation Strategy Low Cost Modes Responsive Modes

Supplier Strategy Select based on Cost and Quality

Select based on Speed, Flexibility and Quality

Supply Chain Coordination

Collaborate; centralize; share info to cut costs

Achieve speed and flexibility

Tactic 1. Reduce total number of

suppliers

Certify suppliers

Ask for JIT delivery from key suppliers

Involve key suppliers in new product design

Develop software linkages to suppliers

Results Average 20% reduction in 5

years

Almost 40% of all companies surveyed were themselves currently certified

About 60% ask for this; about 54% do this

Almost 80% claim to do this

About 50% claim this; about 15% more than have EDI links to suppliers

Purchasing Trends

© 2011 Pearson Education, Inc. publishing as Prentice Hall

Measuring Supply-Chain Performance

Table 11.6

Typical FirmsBenchmark

Firms

Lead time (weeks) 15 8

Time spent placing an order 42 minutes 15 minutes

Percentage of late deliveries 33% 2%

Percentage of rejected material 1.5% .0001%

Number of shortages per year 400 4