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Supply Chain Management Bullwhip Effect
Supply Chain Management • Fluctuation in orders increase as they move up the supply chain • Demand information is distorted as it travels within the supply chain, so that different stages have different perspectives and estimates of the chain demand • The Bull Whip Effect is the uncertainty caused from distorted information flowing up and down the supply chain.
Supply Chain Management Who is Affected ? • Nearly at all industries are affected. • Firms that experience large variation is demand are at risk. • Firms that depend on supplier upstream or distributor or retailer down stream may be at risk.
Supply Chain Management Example • Company sales a FMCG item on open market, Retailer offer a sales promotion to boost sales of that item. • Retailer fail to notify of this sales to Manufacture. Company recognize that sales has increased. • Company increases inventory to allow for increased manufacturing of particular item. • Company notice to supplier for increase demand. • Supplier increase inventory to meet demand.
Supply Chain Management Bullwhip Effect
Supply Chain Management Result of Bullwhip Effect • Excess Inventory. • Problem with quality. • Increased raw material cost. • Over time expenses. • Increased shipping cost. • Lost customer service excellence. • Lost sales. • Un necessary adjust capacity.
Supply Chain Management Barrier to Coordination in a Supply Chain • Information Processing Barriers • Operational Barriers • Pricing Barriers • Incentive Barriers
Supply Chain Management Information Processing Barriers • Independent forecasting at each stage based on received orders • Lack of information sharing among the various stages of the chain
Supply Chain Management Potential Solutions • Sharing point of sale data • Collaborative forecasting and planning • Single stage control of replenishment • Continuous replenishment programs (CRP) • Vendor managed inventory (VMI)
Supply Chain Management Operational Barriers • Ordering in large lots in order to reduce the fixed costs associated with order placement and transportation. • Large replenishment lead times that expose the company to higher levels of variability, and raise the need for higher levels of safety stock. • Rationing and shortage gaming: Ordering larger quantities than necessary, in order to eventually get what you need.
Supply Chain Management Potential Solutions • Reduce replenishment lead times, by taking advantage of modern IT capabilities • Computer-assisted ordering • EDI • Reduce lot sizes • Computer-assisted ordering • Shipping in LTL sizes by combining shipments • Exploit technology and other methods to simplify receiving • Ration based on past sales and information sharing to limit gaming
Supply Chain Management Pricing Barriers • Lot size-based discounts • Price fluctuations (e.g., due to promotions) resulting in “forward buying”
Supply Chain Management Potential Solutions • Move from lot size-based to volume-based quantity discounts (consider total purchases over a specified period) • Stabilize pricing • Eliminate promotions (EDLP) • Limit quantity purchased during a promotion
Supply Chain Management Incentive Barriers • E.g., sales force incentives based on the amount of sells during an evaluation period in a month or quarter. • “Sell-in” rather than “sell-through” based evaluation. • Local optimization within functions or stages of the supply chain (e.g., the shipping department trying to control the transportation cost by reducing the frequency of the shipments, ignoring the impact of this decision on the inventory costs and the customer service)
Supply Chain Management Potential Solutions • Align incentives across functions • Alter sales force incentives from sell-in to sell-through • Pricing for coordination, e.g., • Buy-back contracts • Quantity-flexibility contracts • Build strategic partnerships and trust!
Supply Chain Management Best way for tackling Bullwhip effect is Supply Chain Visibility
Supply Chain Management End of Topic