Information as an Enabler to Supply Chain

1. Information as an Enabler to Supply Chain

2. Value of Information • “In modern supply chains, information replaces inventory” • Why is this true? • Why is this false? • Information is always better than no information. Why? • Information is the supply chain driver that serves as a glue allowing the other drivers to work together to create an integrated, coordinated supply chain

3. Types of Information • Supplier information • Manufacturing information • Distribution and retailing information • Demand information

4. Characteristics of good information • Information must be accurate • Information must be accessible in a timely fashion • Information must be of the right kind

5. Value of Information • Information • Helps reduce variability • Helps improve forecasts • Enables coordination of systems and strategies • Improves customer service • Facilitates lead time reductions • Enables firms to react more quickly to changing market conditions

6. Information for Coordination of Systems • Information is required to move from local to global optimization • Information is needed : • Production status and costs • Transportation availability and costs • Inventory information • Capacity information • Demand information

7. Increasing Variability Upstream the Supply Chain –Bullwhip Effect

8. Bullwhip Effect Increasing propagation of variability upstream through the supply chain

9. We Conclude …. • Order variability is amplified up the supply chain; upstream echelons face higher variability. • What you see is not what they face.

10. What are the Causes…. • Demand forecasting • Min-max inventory level • Order-up-to level • orders increase more than forecasts • Long cycle times • Long lead times magnify this effect • Impact on safety stock • Product life cycle • Batch ordering • Volume & transportation discount

11. What are the Causes…. • Price fluctuation • Promotional sales • Forward buying • Inflated orders • Orders placed increase during shortage periods • IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas

12. What are the Causes…. • Single retailer, single manufacturer. • Retailer observes customer demand, Dt. • Retailer orders qt from manufacturer. Dt qt Retailer Manufacturer L

13. Consequences…. • Increased safety stock • Reduced service level • Inefficient allocation of resources • Increased transportation costs

14. Ways to Cope with the Bullwhip Effect • Reducing uncertainty • Centralizing demand information • Bullwhip inherent in use of various forecasting techniques • Reducing variability • Use of EDLP strategy (Payless) • Lead time reduction • Order lead time (time to produce and ship) • Information lead time (time to process order) • Efficient network distribution design • Strategic partnership • Vendor managed inventory (VMI) • Sharing of customer information • Collaborative forecasting

15. Coping with the Bullwhip Effect in Leading Companies • Reduce uncertainty • POS • Sharing information • Sharing forecasts and policies • Reduce variability • Eliminate promotions • Year-round low pricing • Reduce lead times • EDI • Cross docking • Transmitting POS data upstream • Strategic partnerships • Vendor managed inventory • Data sharing

16. Information for Effective Forecasts • Pricing, promotion, new products • Different parties have this information • Retailers may set pricing or promotion without telling distributor • Distributor/Manufacturer might have new product or availability information • Collaborative Forecasting addresses these issues.

17. Locating Desired Products • How can demand be met if products are not in inventory? • Locating products at other stores • What about at other dealers? • What level of customer service will be perceived?

18. Lead-Time Reduction • Why? • Customer orders are filled quickly • Bullwhip effect is reduced • Forecasts are more accurate • Inventory levels are reduced • How? • EDI • POS data leading to anticipating incoming orders.

19. Information to Address Conflicts • Lot Size – Inventory: • Advanced manufacturing systems • POS data for advance warnings • Inventory -- Transportation: • Lead time reduction for batching • Information systems for combining shipments • Cross docking • Advanced DSS • Lead Time – Transportation: • Lower transportation costs • Improved forecasting • Lower order lead times • Product Variety – Inventory: • Delayed differentiation • Cost – Customer Service: • Transshipment

20. Impact of the Bullwhip Effect

21. Bull Whip Effect - Operational Obstacles (Batching) • Contributing factors • High Order Cost • Full TL economies • Random or correlated ordering • Counter Measures • EDI & Computer Assisted Ordering (CAO) • Discounted on Assorted Truckload, consolidated by 3rd party logistics • Regular delivery appointment • Volume and not lot size discounts • Stateof Practice • McKesson, Nabisco, ... • 3rd party logistics in Europe, emerging in the U.S. • P & G

22. Bull Whip Effect - Pricing Obstacles • Contributing factors • High-Low Pricing leading to forward buy • Delivery and Purchase not synchronized • Counter Measures • EDLP • Limited purchase quantities • Scan based promotions • Stateof Practice • P&G (resisted by some retailers) • Scan based promotion

23. The Bullwhip Effect: Information Processing Obstacles • Contributing factors • No visibility of end demand • Multiple forecasts • Long lead-time • Counter Measures • Access sell-thru or POS data • Direct sales (natural on web) • Single control of replenishment • Lead time reduction • Stateof Practice • Sell-thru data in contracts (e.g., HP, Apple, IBM) • CFAR, CPFR, CRP, VMI (P&G and Wal-Mart) • Quick Response Mfg. Strategy

24. Bull Whip Effect - Operational Obstacles • Contributing factors • Proportional rationing scheme • Ignorance of supply conditions • Unrestricted orders & free return policy • Counter Measures • Allocation based on past sales. • Shared Capacity and Supply Information • Flexibility Limited over time, capacity reservation • Stateof Practice • Saturn, HP • Schedule Sharing (HP with TI and Motorola) • HP, Sun, Seagate

25. Managerial Implications of the Bull Whip Effect - Behavioral Factors • Contributing factors • Lack of trust • Local reaction • Counter Measures • Building trust and partnership • Stateof Practice • Wal-Mart and P&G with CFAR

26. The Bullwhip Effect:Managerial Insights • Exists, in part, due to the retailer’s 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 significantly reduce the bullwhip effect, but will not eliminate it.

27. Steps in Cycle Time Reduction • Establish a cycle-time reduction team • Develop an understanding of given SC processes and current cycle time performance • Identify opportunities for cycle time reduction • Develop and implement recommendations for cycle time reduction • Measure process cycle time reduction • Conduct CI efforts for process cycle time reduction

28. CSF of Cycle Time Reduction • Top management support • Commitment to significant cycle time reduction • Use of cross function teams • Application of TQM tools • Training in cycle time reduction approaches • Establish, monitor, and report cycle time performance measures • Collaboration with supply chain member

29. Locating Desired Products • How can demand be met if products are not in inventory? • Locating products at other stores • What about at other dealers? • What level of customer service will be perceived?