Supply Chain Integration

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Supply Chain Integration

• Ranjan Ghosh
• Indian Institute of Management Calcutta

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Outline of the Presentation

• The Bullwhip Effect
• Distribution Strategies and Information Systems
• Supply Chain Management Pitfalls and
  Opportunities

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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 national
  retailer.

Figure 1. Order Stream
Huang at el. (1996), Working Paper, Philips Lab
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The Bullwhip Effect and its Impact on the Supply
Chain
Figure 2. Point-of-sales Data-Original
Figure 3. POS Data After Removing Promotions
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The Bullwhip Effectand its Impact on the Supply
Chain
Figure 4. POS Data After Removing Promotion
Trend
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Higher Variability in Orders Placed by Computer
Retailer to Manufacturer Than Actual Sales
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan
Management Review
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Increasing Variability of Orders Up the Supply
Chain
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan
Management Review
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We Conclude .

• Order Variability is amplified up the supply
  chain upstream echelons face higher variability.
• What you see is not what they face.

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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

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What are the Causes.

• Single retailer, single manufacturer.
• Retailer observes customer demand, Dt.
• Retailer orders qt from manufacturer.

Dt
qt
Retailer
Manufacturer
L
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What are the Causes.

• Promotional sales
• Volume and Transportation Discounts
• Inflated orders
• - IBM Aptiva orders increased by 2-3 times when
  retailers though that IBM would be out of stock
  over Christmas
• - Same with Motorolas Cellular phones
• Demand Forecast
• Long cycle times

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What are the Causes.

• Single retailer, single manufacturer.
• Retailer observes customer demand, Dt.
• Retailer orders qt from manufacturer.

Dt
qt
Retailer
Manufacturer
L
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Var(q)/Var(D)For Various Lead Times

• Lead time of the manufacturer L so that an
  order placed by the retailer at the end of period
  t is received in the beginning of period (tL).
• In every period, the retailer calculates a new
  mean and standard deviation, based on the p most
  recent observations of demand. If the variance of
  the customer demand seen by the retailer 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 )

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Var(q)/Var(D)For Various Lead Times
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L5
L5
12
10
L3
L3
8
6
L1
4
L1
2
0
0
5
10
15
20
25
30
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Consequences.

• Increased safety stock
• Reduced service level
• Inefficient allocation of resources
• Increased transportation costs

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Consequences.

• Single retailer, single manufacturer.
• Retailer observes customer demand, Dt.
• Retailer orders qt from manufacturer.

Dt
qt
Retailer
Manufacturer
L
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Consequences.

• Increased safety stock
• Reduced service level
• Inefficient allocation of resources
• Increased transportation costs

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Multi-Stage Supply Chains

• Consider a multi-stage supply chain
• Stage i places order qi to stage i1.
• Li is lead time between stage i and i1.

qoD
q1
q2
Retailer Stage 1
Manufacturer Stage 2
Supplier Stage 3
L1
L2
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Multi-Stage SystemsVar(qk)/Var(D)

• Supply Chain with Centralized Demand Information
• The variance of the orders placed by the kth
  stage of the supply chain, Var(qk), relative to
  the variance of the customer demand, Var(D), is
• k k
• Var(qk) / Var(D) 1 (2 S Li / p) 2( ? Li
  )2 / p2
• i1
  i1
• where Li is the lead time between stage i and
  stage (i1).

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Multi-Stage SystemsVar(qk)/Var(D)

• Supply Chain with Decentralized Demand
  Information
• The variance of the orders placed by the kth
  stage of the supply chain, Var(qk), relative to
  the variance of the customer demand, Var(D), is
• k
  
• Var(qk) / Var(D) ? 1 (2 Li / p) 2( Li2
  / p2)
• i1
  
• where Li is the lead time between stage i and
  stage (i1).

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Multi-Stage SystemsVar(qk)/Var(D)
Dec, k5
Cen, k5
Dec, k3
Cen, k3
k1
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The Bullwhip EffectManagerial Insights

• Exists, in part, due to the retailers 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.

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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

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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
  use of communication and information technologies.

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ExampleQuick Response at Benetton

• Benetton uses an effective strategy, referred to
  as Quick Response, in which manufacturing,
  warehousing, sales and retailers are linked
  together. In this strategy a Benetton retailer
  reorders a product through a direct link with
  Benettons mainframe computer in Italy.
• Using this strategy, Benetton is capable of
  shipping a new order in only four weeks, several
  week earlier than most of its competitors.

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How Does Benetton Cope with the Bullwhip Effect?

• 1. Integrated Information Systems
• Global EDI network that links agents with
  production
• 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

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Distribution Strategies

• Warehousing
• Direct Shipping
• No DC needed
• Lead times reduced
• smaller trucks
• no risk pooling effects
• Cross-Docking

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Cross Docking

• In 1979, Kmart was the king of the retail
  industry with 1891 stores and average revenues
  per store of 7.25 million
• At that time Wal-Mart was a small niche retailer
  in the South with only 229 stores and average
  revenues about half of those Kmart stores.
• Ten years later, Wal-Mart transformed itself it
  has the highest sales per square foot, inventory
  turnover and operating profit of any discount
  retailer. Today Wal-Mart is the largest and
  highest profit retailer in the world.

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What accounts for Wal-Marts remarkable success

• The starting point was a relentless focus on
  satisfying customer needs Wal-Mart goal was
  simply to provide customers access to goods when
  and where they want them and to develop cost
  structures that enable competitive pricing
• The key to achieving this goal was to make the
  way the company replenished inventory the
  centerpiece of its strategy.

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What accounts for Wal-Marts remarkable success?

• This was obtained by using a logistics technique
  known as cross-docking. Here goods are
  continuously delivered to Wal-Marts warehouses
  where they are dispatched to stores without ever
  sitting in inventory.
• This strategy reduced Wal-Marts cost of sales
  significantly and made it possible to offer
  everyday low prices to their customers.

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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 goods through
  its warehouse system, compared to about 50 for
  Kmart,
• Stores trigger orders for products.

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System Characteristics

• Very difficult to manage,
• Requires linking Wal-Marts 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-communicatio
  ns system that sends point-of-sale data to all
  its vendors allowing them to have a clear vision
  of sales at the stores

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System Characteristics

• Need a fast and responsive transportation system
• 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 less than
  48 hours
• replenish stores twice a week on average.

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Distribution Strategies
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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