Value Of Information


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

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