Information as an Enabler to Supply Chain
Value of Information <ul><li>“In modern supply chains, information replaces inventory” </li></ul><ul><ul><li>Why is this t...
Types of Information <ul><li>Supplier information </li></ul><ul><li>Manufacturing information </li></ul><ul><li>Distributi...
Characteristics of good information <ul><li>Information must be accurate </li></ul><ul><li>Information must be accessible ...
Value of Information <ul><li>Information </li></ul><ul><ul><li>Helps reduce variability </li></ul></ul><ul><ul><li>Helps i...
Information for Coordination of Systems <ul><li>Information is required to move from local to global optimization </li></u...
Increasing Variability Upstream the Supply Chain –Bullwhip Effect
Bullwhip Effect Increasing propagation of variability upstream through the supply chain
We Conclude …. <ul><li>Order variability is amplified up the supply chain; upstream echelons face higher variability. </li...
What are the Causes…. <ul><li>Demand forecasting </li></ul><ul><ul><li>Min-max inventory level </li></ul></ul><ul><ul><li>...
What are the Causes…. <ul><li>Price fluctuation </li></ul><ul><ul><li>Promotional sales </li></ul></ul><ul><ul><li>Forward...
  What are the Causes….  <ul><li>Single retailer, single manufacturer. </li></ul><ul><ul><li>Retailer observes customer de...
Consequences…. <ul><li>Increased safety stock </li></ul><ul><li>Reduced service level </li></ul><ul><li>Inefficient alloca...
Ways to Cope with the Bullwhip Effect <ul><li>Reducing uncertainty </li></ul><ul><ul><li>Centralizing demand information <...
Coping with the Bullwhip Effect  in Leading Companies <ul><li>Reduce uncertainty </li></ul><ul><ul><li>POS </li></ul></ul>...
Information for Effective Forecasts <ul><li>Pricing, promotion, new products </li></ul><ul><ul><li>Different parties have ...
Locating Desired Products <ul><li>How can demand be met if products are not in inventory? </li></ul><ul><ul><li>Locating p...
Lead-Time Reduction <ul><li>Why? </li></ul><ul><ul><li>Customer orders are filled quickly </li></ul></ul><ul><ul><li>Bullw...
Information to Address Conflicts <ul><li>Lot Size – Inventory:  </li></ul><ul><ul><li>Advanced manufacturing systems </li>...
Impact of the Bullwhip Effect
Bull Whip Effect -  Operational Obstacles (Batching) <ul><li>Contributing factors </li></ul><ul><ul><li>High Order Cost </...
Bull Whip Effect -  Pricing Obstacles <ul><li>Contributing factors </li></ul><ul><ul><li>High-Low Pricing leading to forwa...
The Bullwhip Effect:  Information Processing Obstacles <ul><li>Contributing factors </li></ul><ul><ul><li>No visibility of...
Bull Whip Effect -  Operational Obstacles <ul><li>Contributing factors </li></ul><ul><ul><li>Proportional rationing scheme...
Managerial Implications of the Bull Whip Effect -  Behavioral Factors <ul><li>Contributing factors </li></ul><ul><ul><li>L...
The Bullwhip Effect: Managerial Insights <ul><li>Exists, in part, due to the retailer’s need to estimate the mean and vari...
Steps in Cycle Time Reduction <ul><li>Establish a cycle-time reduction team </li></ul><ul><li>Develop an understanding of ...
CSF of Cycle Time Reduction <ul><li>Top management support </li></ul><ul><li>Commitment to significant cycle time reductio...
Locating Desired Products <ul><li>How can demand be met if products are not in inventory? </li></ul><ul><ul><li>Locating p...
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Value of Information in SC

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  • Notes: Also seen in NOVA; access to sell-thru data by manufacturer allows him to schedule production based on sales rather than orders. Reduce transaction costs - EDI - CAO - McKesson’s “Economost” Discounts for ordering assortments rather than single product full-truckloads. Coordination of delivery schedules. Third party logistics can consolidate orders from multiple retailers.
  • Notes: EDLP Synchronize delivery and purchase. That is, manufacturer may give hi-lo prices and retailers may order large quantities, but mfr. will deliver them over multiple periods. Special Purchase contracts - E.g., discounts for total minimum commitments.
  • Notes: Direct marketing channels not subject to bull whip effect due to demand signal processing. E.g., Dell-Direct of Dell Computers. The manufacturer has control of the entire supply chain.
  • Notes: Allocate supply in proportion to retailers market share in previous period. GM, TI, HP … Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing. Special contracts that restrict ordering (e.g., HP, SUN) - our paper on forecasts and flexibility - reserve capacity (Seagate reserves a portion of supplier’s capacity) Free return policies and generous order cancellation can lead to gaming.
  • Notes: Allocate supply in proportion to retailers market share in previous period. GM, TI, HP … Real shortage vs. Perception of shortage. Perception of shortage can be avoided by information sharing. Special contracts that restrict ordering (e.g., HP, SUN) - our paper on forecasts and flexibility - reserve capacity (Seagate reserves a portion of supplier’s capacity) Free return policies and generous order cancellation can lead to gaming.
  • Value of Information in SC

    1. 1. Information as an Enabler to Supply Chain
    2. 2. Value of Information <ul><li>“In modern supply chains, information replaces inventory” </li></ul><ul><ul><li>Why is this true? </li></ul></ul><ul><ul><li>Why is this false? </li></ul></ul><ul><li>Information is always better than no information. Why? </li></ul><ul><li>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 </li></ul>
    3. 3. Types of Information <ul><li>Supplier information </li></ul><ul><li>Manufacturing information </li></ul><ul><li>Distribution and retailing information </li></ul><ul><li>Demand information </li></ul>
    4. 4. Characteristics of good information <ul><li>Information must be accurate </li></ul><ul><li>Information must be accessible in a timely fashion </li></ul><ul><li>Information must be of the right kind </li></ul>
    5. 5. Value of Information <ul><li>Information </li></ul><ul><ul><li>Helps reduce variability </li></ul></ul><ul><ul><li>Helps improve forecasts </li></ul></ul><ul><ul><li>Enables coordination of systems and strategies </li></ul></ul><ul><ul><li>Improves customer service </li></ul></ul><ul><ul><li>Facilitates lead time reductions </li></ul></ul><ul><ul><li>Enables firms to react more quickly to changing market conditions </li></ul></ul>
    6. 6. Information for Coordination of Systems <ul><li>Information is required to move from local to global optimization </li></ul><ul><li>Information is needed : </li></ul><ul><ul><li>Production status and costs </li></ul></ul><ul><ul><li>Transportation availability and costs </li></ul></ul><ul><ul><li>Inventory information </li></ul></ul><ul><ul><li>Capacity information </li></ul></ul><ul><ul><li>Demand information </li></ul></ul>
    7. 7. Increasing Variability Upstream the Supply Chain –Bullwhip Effect
    8. 8. Bullwhip Effect Increasing propagation of variability upstream through the supply chain
    9. 9. We Conclude …. <ul><li>Order variability is amplified up the supply chain; upstream echelons face higher variability. </li></ul><ul><li>What you see is not what they face. </li></ul>
    10. 10. What are the Causes…. <ul><li>Demand forecasting </li></ul><ul><ul><li>Min-max inventory level </li></ul></ul><ul><ul><li>Order-up-to level </li></ul></ul><ul><ul><li>orders increase more than forecasts </li></ul></ul><ul><li>Long cycle times </li></ul><ul><ul><li>Long lead times magnify this effect </li></ul></ul><ul><ul><li>Impact on safety stock </li></ul></ul><ul><ul><li>Product life cycle </li></ul></ul><ul><li>Batch ordering </li></ul><ul><ul><li>Volume & transportation discount </li></ul></ul>
    11. 11. What are the Causes…. <ul><li>Price fluctuation </li></ul><ul><ul><li>Promotional sales </li></ul></ul><ul><ul><li>Forward buying </li></ul></ul><ul><li>Inflated orders </li></ul><ul><ul><li>Orders placed increase during shortage periods </li></ul></ul><ul><ul><li>IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas </li></ul></ul>
    12. 12. What are the Causes…. <ul><li>Single retailer, single manufacturer. </li></ul><ul><ul><li>Retailer observes customer demand, Dt. </li></ul></ul><ul><ul><li>Retailer orders q t from manufacturer. </li></ul></ul>Retailer Manufacturer D t q t L
    13. 13. Consequences…. <ul><li>Increased safety stock </li></ul><ul><li>Reduced service level </li></ul><ul><li>Inefficient allocation of resources </li></ul><ul><li>Increased transportation costs </li></ul>
    14. 14. Ways to Cope with the Bullwhip Effect <ul><li>Reducing uncertainty </li></ul><ul><ul><li>Centralizing demand information </li></ul></ul><ul><ul><li>Bullwhip inherent in use of various forecasting techniques </li></ul></ul><ul><li>Reducing variability </li></ul><ul><ul><li>Use of EDLP strategy (Payless) </li></ul></ul><ul><li>Lead time reduction </li></ul><ul><ul><li>Order lead time (time to produce and ship) </li></ul></ul><ul><ul><li>Information lead time (time to process order) </li></ul></ul><ul><ul><li>Efficient network distribution design </li></ul></ul><ul><li>Strategic partnership </li></ul><ul><ul><li>Vendor managed inventory (VMI) </li></ul></ul><ul><ul><li>Sharing of customer information </li></ul></ul><ul><ul><li>Collaborative forecasting </li></ul></ul>
    15. 15. Coping with the Bullwhip Effect in Leading Companies <ul><li>Reduce uncertainty </li></ul><ul><ul><li>POS </li></ul></ul><ul><ul><li>Sharing information </li></ul></ul><ul><ul><li>Sharing forecasts and policies </li></ul></ul><ul><li>Reduce variability </li></ul><ul><ul><li>Eliminate promotions </li></ul></ul><ul><ul><li>Year-round low pricing </li></ul></ul><ul><li>Reduce lead times </li></ul><ul><ul><li>EDI </li></ul></ul><ul><ul><li>Cross docking </li></ul></ul><ul><ul><li>Transmitting POS data upstream </li></ul></ul><ul><li>Strategic partnerships </li></ul><ul><ul><li>Vendor managed inventory </li></ul></ul><ul><ul><li>Data sharing </li></ul></ul>
    16. 16. Information for Effective Forecasts <ul><li>Pricing, promotion, new products </li></ul><ul><ul><li>Different parties have this information </li></ul></ul><ul><ul><li>Retailers may set pricing or promotion without telling distributor </li></ul></ul><ul><ul><li>Distributor/Manufacturer might have new product or availability information </li></ul></ul><ul><li>Collaborative Forecasting addresses these issues. </li></ul>
    17. 17. Locating Desired Products <ul><li>How can demand be met if products are not in inventory? </li></ul><ul><ul><li>Locating products at other stores </li></ul></ul><ul><ul><li>What about at other dealers? </li></ul></ul><ul><li>What level of customer service will be perceived? </li></ul>
    18. 18. Lead-Time Reduction <ul><li>Why? </li></ul><ul><ul><li>Customer orders are filled quickly </li></ul></ul><ul><ul><li>Bullwhip effect is reduced </li></ul></ul><ul><ul><li>Forecasts are more accurate </li></ul></ul><ul><ul><li>Inventory levels are reduced </li></ul></ul><ul><li>How? </li></ul><ul><ul><li>EDI </li></ul></ul><ul><ul><li>POS data leading to anticipating incoming orders. </li></ul></ul>
    19. 19. Information to Address Conflicts <ul><li>Lot Size – Inventory: </li></ul><ul><ul><li>Advanced manufacturing systems </li></ul></ul><ul><ul><li>POS data for advance warnings </li></ul></ul><ul><li>Inventory -- Transportation: </li></ul><ul><ul><li>Lead time reduction for batching </li></ul></ul><ul><ul><li>Information systems for combining shipments </li></ul></ul><ul><ul><li>Cross docking </li></ul></ul><ul><ul><li>Advanced DSS </li></ul></ul><ul><li>Lead Time – Transportation: </li></ul><ul><ul><li>Lower transportation costs </li></ul></ul><ul><ul><li>Improved forecasting </li></ul></ul><ul><ul><li>Lower order lead times </li></ul></ul><ul><li>Product Variety – Inventory: </li></ul><ul><ul><li>Delayed differentiation </li></ul></ul><ul><li>Cost – Customer Service: </li></ul><ul><ul><li>Transshipment </li></ul></ul>
    20. 20. Impact of the Bullwhip Effect
    21. 21. Bull Whip Effect - Operational Obstacles (Batching) <ul><li>Contributing factors </li></ul><ul><ul><li>High Order Cost </li></ul></ul><ul><ul><li>Full TL economies </li></ul></ul><ul><ul><li>Random or correlated ordering </li></ul></ul><ul><li>Counter Measures </li></ul><ul><ul><li>EDI & Computer Assisted Ordering (CAO) </li></ul></ul><ul><ul><li>Discounted on Assorted Truckload, consolidated by 3rd party logistics </li></ul></ul><ul><ul><li>Regular delivery appointment </li></ul></ul><ul><ul><li>Volume and not lot size discounts </li></ul></ul><ul><li>State of Practice </li></ul><ul><ul><li>McKesson, Nabisco, ... </li></ul></ul><ul><ul><li>3rd party logistics in Europe, emerging in the U.S. </li></ul></ul><ul><ul><li>P & G </li></ul></ul>
    22. 22. Bull Whip Effect - Pricing Obstacles <ul><li>Contributing factors </li></ul><ul><ul><li>High-Low Pricing leading to forward buy </li></ul></ul><ul><ul><li>Delivery and Purchase not synchronized </li></ul></ul><ul><li>Counter Measures </li></ul><ul><ul><li>EDLP </li></ul></ul><ul><ul><li>Limited purchase quantities </li></ul></ul><ul><ul><li>Scan based promotions </li></ul></ul><ul><li>State of Practice </li></ul><ul><ul><li>P&G (resisted by some retailers) </li></ul></ul><ul><ul><li>Scan based promotion </li></ul></ul>
    23. 23. The Bullwhip Effect: Information Processing Obstacles <ul><li>Contributing factors </li></ul><ul><ul><li>No visibility of end demand </li></ul></ul><ul><ul><li>Multiple forecasts </li></ul></ul><ul><ul><li>Long lead-time </li></ul></ul><ul><li>Counter Measures </li></ul><ul><ul><li>Access sell-thru or POS data </li></ul></ul><ul><ul><li>Direct sales (natural on web) </li></ul></ul><ul><ul><li>Single control of replenishment </li></ul></ul><ul><ul><li>Lead time reduction </li></ul></ul><ul><li>State of Practice </li></ul><ul><ul><li>Sell-thru data in contracts (e.g., HP, Apple, IBM) </li></ul></ul><ul><ul><li>CFAR, CPFR, CRP, VMI (P&G and Wal-Mart) </li></ul></ul><ul><ul><li>Quick Response Mfg. Strategy </li></ul></ul>
    24. 24. Bull Whip Effect - Operational Obstacles <ul><li>Contributing factors </li></ul><ul><ul><li>Proportional rationing scheme </li></ul></ul><ul><ul><li>Ignorance of supply conditions </li></ul></ul><ul><ul><li>Unrestricted orders & free return policy </li></ul></ul><ul><li>Counter Measures </li></ul><ul><ul><li>Allocation based on past sales. </li></ul></ul><ul><ul><li>Shared Capacity and Supply Information </li></ul></ul><ul><ul><li>Flexibility Limited over time, capacity reservation </li></ul></ul><ul><li>State of Practice </li></ul><ul><ul><li>Saturn, HP </li></ul></ul><ul><ul><li>Schedule Sharing (HP with TI and Motorola) </li></ul></ul><ul><ul><li>HP, Sun, Seagate </li></ul></ul>
    25. 25. Managerial Implications of the Bull Whip Effect - Behavioral Factors <ul><li>Contributing factors </li></ul><ul><ul><li>Lack of trust </li></ul></ul><ul><ul><li>Local reaction </li></ul></ul><ul><li>Counter Measures </li></ul><ul><ul><li>Building trust and partnership </li></ul></ul><ul><li>State of Practice </li></ul><ul><ul><li>Wal-Mart and P&G with CFAR </li></ul></ul>
    26. 26. The Bullwhip Effect: Managerial Insights <ul><li>Exists, in part, due to the retailer’s need to estimate the mean and variance of demand. </li></ul><ul><li>The increase in variability is an increasing function of the lead time. </li></ul><ul><li>The more complicated the demand models and the forecasting techniques, the greater the increase. </li></ul><ul><li>Centralized demand information can significantly reduce the bullwhip effect, but will not eliminate it. </li></ul>
    27. 27. Steps in Cycle Time Reduction <ul><li>Establish a cycle-time reduction team </li></ul><ul><li>Develop an understanding of given SC processes and current cycle time performance </li></ul><ul><li>Identify opportunities for cycle time reduction </li></ul><ul><li>Develop and implement recommendations for cycle time reduction </li></ul><ul><li>Measure process cycle time reduction </li></ul><ul><li>Conduct CI efforts for process cycle time reduction </li></ul>
    28. 28. CSF of Cycle Time Reduction <ul><li>Top management support </li></ul><ul><li>Commitment to significant cycle time reduction </li></ul><ul><li>Use of cross function teams </li></ul><ul><li>Application of TQM tools </li></ul><ul><li>Training in cycle time reduction approaches </li></ul><ul><li>Establish, monitor, and report cycle time performance measures </li></ul><ul><li>Collaboration with supply chain member </li></ul>
    29. 29. Locating Desired Products <ul><li>How can demand be met if products are not in inventory? </li></ul><ul><ul><li>Locating products at other stores </li></ul></ul><ul><ul><li>What about at other dealers? </li></ul></ul><ul><li>What level of customer service will be perceived? </li></ul>
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