Case Studies 1

SUPPLY CHAIN MANAGEMENT WEEK 7-LECTURE 1

DR. ISMAIL CIVELEK

• Supply-Chain Management

• Measuring Supply-Chain Performance

• Bullwhip Effect

• What is the Right Supply Chain?

• Strategic Global Sourcing

SUPPLY CHAIN MANAGEMENT: LEARNING OBJECTIVES

A TYPICAL SUPPLY CHAIN

Retaile r

THREE MAIN QUESTIONS

Any supply chain must answer

•Who holds inventory?

•Where inventory is held?

•How inventory is held?

THREE MAIN QUESTIONS

Any supply chain must answer

•Who holds inventory?

•Where inventory is held?

•How inventory is held?

WHO SHOULD HOLD INVENTORY?

• If inventory is cheap, fast-moving, and easy to stock given the company’s infrastructure, might be better to stock it

• If inventory is hard to store, slow moving, or the wholesaler server wide range of customers and can better management its inventory, drop ship from the wholesaler and pay it a premium

THREE MAIN QUESTIONS

Any supply chain must answer

•Who holds inventory?

•Where inventory is held?

•How inventory is held?

WHERE SHOULD INVENTORY BE HELD?

• Trade off shipping costs, regional demand patterns, and inventory holding costs

• If the product cannot be bundled to save on shipping costs, there is less reason to worry about where it is held

• When product is very country-specific, it makes sense to stock in that country

THREE MAIN QUESTIONS

Any supply chain must answer

•Who holds inventory?

•Where inventory is held?

•How inventory is held?

HOLD COMPONENTS OR FINISHED GOODS?

Delayed differentiation

• HP makes printers from a common printer unit and a specialized power supply

• Dell’s “build-to-order” model

Why does delayed differentiation help?

• Offer more variety • Inventory pooling

THE ROLE OF INFORMATION AND COORDINATION IN SCM KEY DRIVER IS UNCERTAINTY, WHICH COMES IN TWO TYPES

Unpredictable = Uncertainty

Remaining Information Uncertainty

(SC-generated)

Customer Demand

Uncertainty

Information in dynamic system:

variability

Predictable (expected trends)

“Accurate Response”

“Bullwhip”

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Manufacturer’s Production

Small perturbation at the handle

Large swings at the tip

Order

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Order

Delivery

Delivery

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THE BULLWHIP EFFECT

THE BULLWHIP EFFECT What is it?

• The variance of orders is greater than that of sales, and the distortion increases as one moves upstream.

What causes it?

What are the solutions?

Behavioral

• Misperceptions of feedback Systemic: Consequence of poor supply chain design/structure

• Demand Forecasting • Order Batching • Price Variations • Rationing Game

WHAT CAUSES THE BULLWHIP EFFECT?

Behavioral

• Misperceptions of feedback Systemic

• Demand Forecasting • Order Batching • Price Variations • Rationing Game

WHAT CAUSES THE BULLWHIP EFFECT?

DEMAND FORECASTING

Contributing factors • Lag in information flow • Lack of information flow

Counter Measures • Shorten lead time • Better information

Current Practice / State-of-the-Art • Cross docking • Sharing sell-thru data required by contracts (e.g., HP, Apple, IBM) • Vendor Managed Inventory (VMI) (P&G and Wal-Mart) • Quick Response

CROSS-DOCKING Move product directly from receiving to shipping dock in the distribution center – no (or very little) interim storage

Warehouse

Automate Material Handling Equipment

Flow Through

CROSS-DOCKING

Freight is received, checked for accuracy & prepared for release to stores (bar coded labels are applied to cartons).

Cartons travel thru facility on conveyor system to reduce labor and speed transfer of goods.

Bar code reader identifies products and diverts cartons down appropriate loading line.

Cartons are loaded in trailer and shipped when trailer is full

VENDOR MANAGED INVENTORY

VMI: Vendors take control of inventory management at the retailers

VMI Success • Dillard Department Stores, JCPenney and Wal-Mart have shown sales

increases of 20 to 25%, and 30% inventory turnover improvements

 VMI Failure

 Buyers didn’t trust the suppliers enough, still monitored inventories and intervened at the slightest hint of trouble

 Suppliers didn’t do much to allay buyers’ fears

QUICK RESPONSE

Vendors receive POS data from retailers, and use this information to synchronize their production and inventory activities.

The retailers still prepare individual orders, but the POS data is used by the supplier to improve forecasting and scheduling.

QUICK RESPONSE VS. VMI

What’s the difference?

Who chooses the order quantity? • VMI: Supplier • QR: Retailer

Who chooses when to order? • VMI: Supplier • QR: Retailer

Sales information passed back to the supplier.

Bullwhip effect is reduced.

MORE ON BATTLING THE BULLWHIP EFFECT

Lead time reduction • Better information system

Better forecasting • Better information system

Strategic partnering • Information sharing • Risk sharing

• Product Transshipment

• Flexible delivery (3rd party logistics, truckload assortment discounts)

Behavioral

• Misperceptions of feedback Systemic

• Demand Forecasting • Order Batching • Price Variations • Rationing Game

WHAT CAUSES THE BULLWHIP EFFECT?

ORDER BATCHING

Contributing factors

• Sales quotas • Transportation discounts • Ordering costs • MRP systems

Counter Measures

• Computer Assisted Ordering (CAO) • Discounted on Assorted Truckload, consolidated by 3rd party

logistics • Regular delivery appointment

Minimum batch sizes can have a major impact on upstream order variability.

PRICE VARIATIONS It’s estimated that about 80% of transactions between manufacturers and distributors in the grocery industry are made in a “forward buy!!

Contributing factors

• Promotions • Quantity discounts

Retailers buy only when price drops. The retailer’s buying pattern does not reflect its consumption pattern

Counter Measures

• Everyday low price • No discount to retailers

 Current Practice: P&G: • Slashed prices 12-24% from 1991-4 • Direct discounts to consumers through coupons, no discounts to retailer