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Value Of Information



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  • Being developed by VICS, an inter-industry consortium that is creating standard processes for collaborative forecasting


  • 1. SE 492: Supply Chain Systems Modeling The Value of Information Dr. Mohamed Ben Daya Professor of Industrial Engineering & Operations Research
  • 2. Introduction
    • Information age
      • Databases, EDI, DSS, Internet, Intranets, …
      • Implication of availability of information on effective design and management of the integrated supply chain.
    • This abundant information:
      • Helps reduce variability in the SC
      • Helps suppliers make better forecasts
      • Enables the coordination of manufacturing and distribution systems and strategies
      • Enables retailers to better serve their customers by offering tools for locating desired items
      • Enables lead time reductions
  • 3. Can valid information be a substitute for inventory? Information Informed managers Less uncertainty Better decisions Less inventory Why focus on information? It costs less than inventory and poses fewer risks.
  • 4. Bullwhip Effect
    • In recent years, many suppliers and retailers have observed that while customer demand for specific products does not vary much, inventory and back-order levels fluctuate considerably across their supply chain
    • Ex: Pampers disposal diapers
    • This increase in variability as we travel up the SC is referred to as the bullwhip effect
  • 5. Bullwhip Effect The magnification of variability in orders in the supply-chain Order Quantity Time Retailer’s Orders A lot of retailers each with little variability in their orders…. Order Quantity Time Wholesaler’s Orders … can lead to greater variability for a fewer number of wholesalers, and … Order Quantity Time Manufacturer’s Orders … can lead to even greater variability for a single manufacturer.
  • 6. Impact of increase in variation on SC
    • Consider the second stage: Wholesaler
    • Wholesaler receives orders from the retailer and places orders to the Distributor
    • Uses orders placed by the retailer to perform his forecasting
    • Variability in orders placed by the retailer is significantly higher than variability in customer demand  wholesaler is forced to carry more safety stock than the retailer to meet same service level
    • This analysis can be carried over to the distributor as well as the factory, resulting in higher inventory levels and therefore higher costs
  • 7. Causes
    • Demand forecasting
    • Lead time
    • Batch ordering
    • Price fluctuations
    • Inflated orders (gaming)
  • 8. Demand forecasting
    • Min-max inventory policy
    • Reorder point = average demand during lead time + safety stock
    • Safety stock = multiple of the standard deviation of demand during lead time
  • 9. Lead time
    • With longer lead times, a small change in the estimate of demand variability implies a significant change in safety stock, reorder level, and thus in order quantity
  • 10. Batch ordering
    • If the retailer uses batch ordering, the wholesaler will observe a distorted and highly variable pattern.
    • There are several reasons for batch ordering:
      • Fixed ordering cost
      • Transportation discounts
      • Sales
  • 11. Price fluctuation
    • Retailers attempt to stock up when prices are lower
    • Promotions and discounts
  • 12. Inflated orders
    • Inflated orders placed by retailers during shortage periods
    • Suspect that a product will be in short supply
    • Gaming
  • 13. Coping with the bullwhip effect
    • Reducing uncertainty
    • Reducing variability
    • Lead time reduction
    • Strategic partnership
  • 14. Reducing uncertainty
    • Reduce uncertainty by centralizing demand information
    • Centralizing demand information can significantly reduce the bullwhip effect
  • 15. Reducing variability
    • Reduce the variability of customer demand
    • EDLP: by eliminating price promotions, retailer can eliminate many of the dramatic shifts in demand
  • 16. Lead time reduction
    • Lead time magnify the increase in demand variability
      • Order lead time: the time it takes to produce and ship the item
        • Cross-docking
      • Information lead time: the time it takes to process an order
        • EDI
  • 17. Strategic partnership
    • VMI : the manufacturer manages the inventory of its product at the retailer outlet and therefore determines for itself how much inventory to ship to the retailer in each period
    • In VMI the manufacturer does not rely on the retailer orders, thus avoiding the bullwhip effect entirely.
  • 18. Using information to improve SC performance
    • Effective forecasts
    • Information for the coordination of systems
    • Locating desired products
    • Lead time reduction
    • Integrating the supply chain
  • 19. Planning personnel often act as “expeditors” - reacting to supply constraints and fighting fires instead of planning! Effective Forecasts Sales: we can sell 200 Marketing: the promotion will sell 400 Finance: we have budget of 300 Manufacturing: they will only sell 150 Various departments have conflicting goals or make inconsistent plans! Poor communication, lack of visibility Planning Dept. Planning 20% Responding 80% Disconnect between planning and execution
  • 20. Effective forecasts
    • Information leads to more effective forecasts
      • Retailers forecasts (pricing, promotions, release of new products, …). Some of these issues are controlled by the retailer but some are controlled by the distributor, wholesaler, manufacturer, or the competitors.
      • Distributor and manufacturer forecasts are influenced by factors under retailer control.
      • Manufacturer or distributor has fewer products to consider  more information about these products
      • Cooperative forecasting systems: sophisticated information system involving participation of all
  • 21. Produce a consensus forecast for the supply chain
    • Collaborative planning, forecasting, and replenishment
      • A strategy intended to improve communication throughout the retail supply chain, and, in particular enable better forecasting between partners
      • With CPFR, retailers give suppliers freer access to point-of-sale data
        • Such information is necessary for making joint forecasting and replenishment programs work more effectively
      • The goal - to give the supplier/manufacturer more upfront time and more information so that they can make better informed manufacturing plans
        • Share plans for sales and promotions
        • Provide seasonality change information
  • 22. How CPFR Impacts Sales and SC Costs
    • Promotional Planning : better estimates of demand response to promotions, and better timing of replenishment with advertising
    • Service Levels : fewer stock-outs, higher percentage of orders delivered on time due to advanced forecasting and planning prior to order
  • 23. CPFR Impacts, cont.
    • Inventories : reduced safety stocks because of greater confidence in forecasting and planning process
    • Production smoothing : removal of promotional spikes that result in ramping up costs followed by underutilization
  • 24. CPFR Impacts, cont.
    • Average Improvements for Manufacturers Through CPFR
  • 25. Information for the coordination of systems
    • Supply chain systems:
      • Manufacturing systems
      • Storage systems
      • Transportation systems
      • Retail systems
    • Managing any of these systems involves a series of complex trade-offs
    • These systems are connected
      • Output of mftg  input transportation or storage sys.
    • Need to consider the entire system and coordinate decisions
    • Common owner versus different owners
  • 26. Coordination of systems (contd’)
    • Whose best interest is it to reduce overall system cost and how saving are shared?
    • System not coordinated  local optimization
    • Global optimization : What is best for the entire system
      • Who will optimize?
      • How the savings are shared?
    • Information must be available:
      • Production status and costs, transportation availability, quantity discounts, inventory costs, inventory levels, various capacities and customer demand, etc.
  • 27. Locating desired products
    • There is more than one way to meet customer demand
      • Being able to locate ( info ) and deliver goods is sometimes as effective as having them in stock
      • لا يؤمن أحدكم حتى يحب لأخيه ما يحب لنفسه
    • Distributor integration
      • DI used to create a large pool of inventory across the entire network.
      • Dealers are contractually bound to exchange parts
    •  lower inv. Cost & higher service level
  • 28. Lead time reduction
    • Lead time reduction leads to:
      • Ability to quickly fill customer orders
      • Reduction in bullwhip effect
      • More accurate forecasts (decreased forecast horizon)
      • Reduction in finished goods inventory
    • Distribution network design.
    • Effective information systems (EDI, Internet, Intranet, …)
      • Effective IS cut lead time by reducing order processing, stock picking, transportation delays, etc.
    • Strategic partnership
  • 29. Information and SC trade-offs
    • Challenge: replace sequential planning with global optimization
      • Sequential planning: Each stage optimizes its profit with no regard to the impact of its decision on other stages.
      • Global optimization: The objective is to coordinate SC activities to maximize SC performance
    • Different stages have conflicting goals
      • It is necessary to find incentives to bring about integration of SC facilities
  • 30. Integrating the supply chain
    • Conflicting objectives in the SC
      • Information allow SC to be designed to come closer to meeting the apparently conflicting goals
    • Designing the SC for conflicting goals
      • The lot size-inventory trade-off
      • The inventory - Transportation cost trade-off
      • The lead time - transportation cost
      • The product variety – inventory trade-off
      • The cost-customer service trade-off
  • 31. Designing the SC for conflicting goals
    • In the past for some of these goals to be met, others have to be sacrificed.
    • Through the use of advanced information technology and creative network design, conflicts can be eliminated or reduced
  • 32. The lot size inventory trade-off
    • Manufacturers would like to have large lot sizes
        •  per unit setup costs are reduced, expertise increase, processes are easier to control
        •  Typical demand does not come in large lot sizes  smaller lot sizes is the trend lately
    • Solutions:
        • Setup time reduction and other modern manufacturing practices geared towards reducing inventory and improving system responsiveness
        • Retailers and distributors would like shorter lead times and wide variety of products
    • Information availability
        • Manufacturers have time to react to the needs of downstream SC members
        • Retailers and Distributors can quote lead times more accurately and reduce inventory
  • 33. Inventory - Transportation
    • Full track loads
      •  minimize transportation cost.
      •  higher inventory costs
    • IT can be use to reduce the effect of this conflict
      • Combine shipment of # products
      • Cross-docking
  • 34. Lead time - Transportation
    • Transportation is one of the components of lead time
      • Full track loads  longer lead times
      • Transportation right after production  reduce lead time
    • Information can be used to reduce its effects
  • 35. Product variety - Inventory
    • Product variety increases both transportation and warehousing cost
    • Solution:
        • Delayed differentiation
        • Ship a generic product to the warehouse that will be customized later according to customer demand
  • 36. Cost – customer service
    • Reducing inventories, manufacturing costs, transportations costs typically come at the expense of customer service
    • Solutions:
        • Transshipping
        • Direct shipping
        • Mass customization: delivering highly specialized goods and services at reasonable prices and at high volume