ISO-8859-1__Supply Chain Integration - RG

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Supply Chain Integration



Outline of the Presentation

The Bullwhip Effect

Distribution Strategies and InformationSystems

Supply Chain Management: Pitfalls andOpportunities



The Bullwhip Effect

and its Impact on the Supply Chain

Consider the order pattern of a single color television model sold by a large electronics

manufacturer to one of its accounts, a nationalretailer.

Figure 1. Order Stream

Huang at el. (1996), Working Paper, Philips Lab



Figure 2. Point-of-sales

Data-Original

Figure 3. POS Data After

Removing Promotions

The Bullwhip Effect




Figure 4. POS Data After Removing Promotion & Trend

The Bullwhip Effect




Higher Variability in Orders Placed by

Computer Retailer to Manufacturer Than Actual

Sales

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review



Increasing Variability of Orders

Up the Supply Chain

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review



We Conclude «.

Order Variability is amplified up the supplychain; upstream echelons face higher

variability.

What you see is not what they face.



What are the Causes«.

Promotional sales

Volume and Transportation Discounts

Inflated orders- IBM Aptiva orders increased by 2-3 times

when retailers thought that IBM would be out

of stock over Christmas

- Same with Motorolas Cellular phones




Single retailer, single manufacturer.

±Retailer observes customer demand, Dt .

±Retailer orders qt from manufacturer.

Retailer Manufacturer Dt qt

L




Promotional sales

Volume and Transportation Discounts

Inflated orders

- IBM Aptiva orders increased by 2-3 times whenretailers though that IBM would be out of stockover Christmas

- Same with Motorola s Cellular phones

Demand Forecast

Long cycle times








L



Var(q)/Var(D):

For Various Lead Times Lead time of the manufacturer = L so that anorder placed by the retailer at the end of period tis received in the beginning of period (t+L).

In every period, the retailer calculates a newmean and standard deviation, based on the pmost recent observations of demand. If thevariance of the customer demand seen by theretailer is Var(D), then the variance of the orders

placed by the retailer to the manufacturer,Var(q), relative to the value of the customer demand, satisfies

Var(q)/Var(D) 1 + ( 2L/p ) + ( 2L2/p2 )



Var(q)/Var(D):

For Various Lead Times

L=5

L=3

L=1

0

2

4

6

8

10

12

14

0 5 10 15 20 25 30

L=5

L=3

L=1



Consequences«.

Increased safety stock

Reduced service level

Inefficient allocation of resources

Increased transportation costs






Consequences«.


L



Consequences«.

Increased safety stock

Reduced service level

Inefficient allocation of resources

Increased transportation costs



Multi-Stage Supply Chains

Consider a multi-stage supply chain:

±Stage i places order qi to stage i+1.

±Li is lead time between stage i and i+1.

Retailer Stage 1

Manufacturer Stage 2

Supplier Stage 3

qo

=D q1

q2

L1 L2



Multi-Stage

Systems:Var(qk)/Var(D)

Supply Chain with Centralized DemandInformation

The variance of the orders placed by the kth stageof the supply chain, Var(qk), relative to thevariance of the customer demand, Var(D), is

k k

Var(qk) / Var(D) 1 + (2 Li » p) + 2( Li )2 » p2

i=1 i=1

where Li is the lead time between stage i andstage (i+1).



Multi-Stage

Systems:Var(qk)/Var(D)

Supply Chain with Decentralized DemandInformation

The variance of the orders placed by the kthstage of the supply chain, Var(qk), relative to thevariance of the customer demand, Var(D), is

k

Var(qk) / Var(D) [1 + (2 Li » p) + 2( Li2 » p2)]

i=1

where Li is the lead time between stage i andstage (i+1).



Multi-Stage

Systems:Var(qk

)/Var(D)

0

5

10

15

20

25

30

0 5 10 15 20 25

Dec, k=5

Cen, k=5

Dec, k=3

Cen, k=3

k=1



The Bullwhip Effect:

Managerial Insights

Exists, in part, due to the retailer s need to estimate themean and variance of demand.

The increase in variability is an increasing function of thelead time.

The more complicated the demand models and theforecasting techniques, the greater the increase.

Centralized demand information can reduce the bullwhipeffect, but will not eliminate it.



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



Example:

Quick Response at Benetton Benetton, the Italian sportswear manufacturer, was

founded in 1964. In 1975 Benetton had 200 stores

across Italy. Ten years later, the company expanded to the U.S.,

Japan and Eastern Europe. Sales in 1991 reached 2

trillion.

Many attribute Benettons success to successful useof communication and information technologies.



Example:

Quick Response at Benetton

Benetton uses an effective strategy, referred toas Quick Response, in which manufacturing,warehousing, sales and retailers are linkedtogether. In this strategy a Benetton retailer reorders a product through a direct link withBenetton s mainframe computer in Italy.

Using this strategy, Benetton is capable of shipping a new order in only four weeks, severalweek earlier than most of its competitors.



How Does Benetton Cope

with the Bullwhip Effect?1. Integrated Information Systems

Global EDI network that links agents withproduction

and inventory information

EDI order transmission to HQ

EDI linkage with air carriers

Data linked to manufacturing

2. Coordinated Planning

Frequent review allows fast reaction

Integrated distribution strategy



Distribution Strategies

Warehousing

Direct Shipping

± No DC needed ± Lead times reduced

± ³smaller trucks´

± no risk pooling effects

Cross-Docking



Cross Docking

In 1979, Kmart was the king of the retail industry with1891 stores and average revenues per store of $7.25million

At that time Wal-Mart was a small niche retailer in theSouth with only 229 stores and average revenues abouthalf of those Kmart stores.

Ten years later, Wal-Mart transformed itself; it has thehighest sales per square foot, inventory turnover and

operating profit of any discount retailer. Today Wal-Martis the largest and highest profit retailer in the world.



What accounts for Wal-Mart¶s

remarkable success

The starting point was a relentless focus on satisfyingcustomer needs; Wal-Mart goal was simply to providecustomers access to goods when and where they wantthem and to develop cost structures that enablecompetitive pricing

The key to achieving this goal was to make the way thecompany replenished inventory the centerpiece of itsstrategy.



What accounts for Wal-Mart¶s

remarkable success?

This was obtained by using a logistics technique knownas cross-docking. Here goods are continuously deliveredto Wal-Mart s warehouses where they are dispatched tostores without ever sitting in inventory.

This strategy reduced Wal-Mart s cost of salessignificantly and made it possible to offer everyday low

prices to their customers.



Characteristics of Cross-Docking:

Goods spend at most 48 hours in the warehouse,

Avoids inventory and handling costs,

Wal-Mart delivers about 85% of its goodsthrough its warehouse system, compared toabout 50% for Kmart,

Stores trigger orders for products.



System Characteristics:

Very difficult to manage, Requires linking Wal-Mart s distribution centers,

suppliers and stores to guarantee that any order

is processed and executed in a matter of hours, Wal-Mart operates a private satellite-

communications system that sends point-of-saledata to all its vendors allowing them to have a

clear vision of sales at the stores



System Characteristics:

Need a fast and responsive transportationsystem:

Wal-Mart has a dedicated fleet of 2000 truck that

serve their 19 warehouses This allows them to

± ship goods from warehouses to stores in lessthan 48 hours

± replenish stores twice a week on average.



Distribution Strategies

Strategy

Attribute

Direct

Shipment

Cross

Docking

Inventory at

Warehouses

Risk

Pooling

Take

Advantage

Transportation

Costs

Reduced

Inbound Costs

Reduced

Inbound Costs

Holding

Costs

No Warehouse

Costs

No Holding

Costs

Demand

Variability

Delayed

Allocation

Delayed

Allocation



Supply Chain Integration ±Dealing with Conflicting Goals

Lot Size vs. Inventory

Inventory vs. Transportation Lead Time vs. Transportation

Product Variety vs. Inventory

Cost vs. Customer Service

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ISO-8859-1__Supply Chain Integration - RG