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  1. 1. Marketing Channels Value of Information Distribution Strategies 8 January
  2. 2. Agenda <ul><li>The Bullwhip Effect </li></ul><ul><li>Distribution Strategies and Information Systems </li></ul><ul><li>Supply Chain Management: Pitfalls and Opportunities </li></ul><ul><li>“ New technologies for supply chain management and flexible manufacturing imply that businesses can perceive imbalances in inventories at a very early stage.” - Alan Greenspan (Feb 2001) </li></ul>
  3. 3. The Bullwhip Effect and its Impact on the Supply Chain <ul><li>Consider the order pattern of a single color television model sold by a large electronics manufacturer to one of its accounts, a national retailer. </li></ul>Figure 1. Order Stream Huang at el. (1996), Working paper, Philips Lab
  4. 4. The Bullwhip Effect and its Impact on the Supply Chain Figure 2. Point-of-sales Data-Original Figure 3. POS Data After Removing Promotions
  5. 5. The Bullwhip Effect and its Impact on the Supply Chain Figure 4. POS Data After Removing Promotion & Trend
  6. 6. Higher Variability in Orders Placed by Computer Retailer to Manufacturer Than Actual Sales Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
  7. 7. Increasing Variability of Orders Up the Supply Chain Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
  8. 8. Any conclusions …? <ul><li>Information about the demand for a product becomes distorted as it moves along the supply chain. </li></ul><ul><li>Order Variability is amplified up the supply chain; upstream echelons face higher variability. </li></ul><ul><li>What you see as an upstream member of the supply chain is not what the retailer actually faces. </li></ul>
  9. 9. What are the Causes…? <ul><li>Promotional sales </li></ul><ul><li>Inflated orders – “gaming” </li></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><li>- Same with Motorola’s Cellular phones </li></ul><ul><li>Demand Forecast </li></ul><ul><li>Long cycle times </li></ul><ul><li>Order Batching </li></ul>
  10. 10. Demand <ul><li>Orders as signal of product demand </li></ul><ul><li>Forecasting that may rely too much on recent demand </li></ul><ul><li>Safety stock that depends on erratic demand </li></ul><ul><li>Long lead times </li></ul>
  11. 11. Order batching – “Gaming” <ul><li>Economies of scale in ordering costs and manufacturing setups </li></ul><ul><li>MRP periodic ordering </li></ul><ul><li>Economies of scale in transportation </li></ul><ul><li>Push strategies in order to reduce inventory and/or enhance short-term financial measures </li></ul>
  12. 12. <ul><li>Single retailer, single manufacturer. </li></ul><ul><ul><li>Retailer observes customer demand, Dt . </li></ul></ul><ul><ul><li>Retailer orders qt from manufacturer. </li></ul></ul><ul><ul><li>Lead time + 1 = L. </li></ul></ul>OVAVariabilityn What are the Causes…. Retailer Manufacturer D t q t L
  13. 13. The Bullwhip Effect
  14. 14. Var(q)/Var(D): For Various Lead Times L=5 L=3 L=1 0 2 4 6 8 10 12 14 0 5 10 15 20 25 30 L=5 L=3 L=1
  15. 15. 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>
  16. 16. Multi-Stage Supply Chains <ul><li>Consider a multi-stage supply chain: </li></ul><ul><ul><li>Stage i places order q i to stage i+1 . </li></ul></ul><ul><ul><li>L i is lead time between stage i and i+1 . </li></ul></ul>Retailer Stage 1 Manufacturer Stage 2 Supplier Stage 3 q o =D q 1 q 2 L 1 L 2
  17. 17. Formula (to memorize…)
  18. 18. Multi-Stage Systems: Var(q k )/Var(D) Dec, k=5 Cen, k=5 Dec, k=3 Cen, k=3 k=1
  19. 19. The Bullwhip Effect: Managerial Insights <ul><li>Exists, in part, due to the retailer’s need to estimate the mean and variance of customer 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 reduce the bullwhip effect, but will not eliminate it. </li></ul>
  20. 20. Coping with the Bullwhip Effect <ul><li>Reduce Variability and Uncertainty </li></ul><ul><ul><li>POS </li></ul></ul><ul><ul><li>Sharing Information </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><li>Alliance Arrangements </li></ul><ul><ul><li>Vendor managed inventory (VMI) </li></ul></ul><ul><ul><li>On-site vendor representatives </li></ul></ul><ul><ul><ul><li>Continuous Replenishment Programs </li></ul></ul></ul>
  21. 21. Coping with the Bullwhip Effect <ul><li>Use of 3PL/4PL </li></ul><ul><li>Customer management </li></ul><ul><li>Activity Based Costing </li></ul><ul><li>Strategy: Everyday low cost Everyday low price </li></ul><ul><li>Order return and cancellation policy (reduce gaming) </li></ul><ul><li>Placing orders before peak periods </li></ul>
  22. 22. In summary… <ul><li>Avoid multiple demand forecast updates </li></ul><ul><li>Stabilize prices </li></ul><ul><li>Eliminate gaming </li></ul>
  23. 23. Example: Quick Response at Benetton <ul><li>Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy. </li></ul><ul><li>Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion. </li></ul><ul><li>Many attribute Benetton’s success to successful use of communication and information technologies. </li></ul>
  24. 24. Example: Quick Response at Benetton <ul><li>Benetton uses an effective strategy, referred to as Quick Response , in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton’s mainframe computer in Italy. </li></ul><ul><li>Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors. </li></ul>
  25. 25. How Does Benetton Cope with the Bullwhip Effect? <ul><li>1. Integrated Information Systems </li></ul><ul><li>• Global EDI network that links agents with production </li></ul><ul><li>and inventory information </li></ul><ul><li>• EDI order transmission to HQ </li></ul><ul><li>• EDI linkage with air carriers </li></ul><ul><li>• Data linked to manufacturing </li></ul><ul><li>2. Coordinated Planning </li></ul><ul><li>• Frequent review allows fast reaction </li></ul><ul><li>• Integrated distribution strategy </li></ul>
  26. 26. Distribution Strategies and Information Systems <ul><li>Pull Vs. Push Strategies </li></ul><ul><li>Push Strategies: </li></ul><ul><li>Production decisions based on forecasts </li></ul><ul><li>Manual purchase orders and invoices are employed </li></ul><ul><li>Ordering decisions based on inventory & forecasts. </li></ul>
  27. 27. Push Strategies <ul><li>Single retailer, single manufacturer. </li></ul><ul><ul><li>Retailer observes customer demand, D t . </li></ul></ul><ul><ul><li>Retailer orders q t from manufacturer. </li></ul></ul>Retailer Manufacturer D t q t L
  28. 28. Distribution Strategies <ul><li>Direct Shipping </li></ul><ul><ul><li>No DC needed </li></ul></ul><ul><ul><li>Lead times reduced </li></ul></ul><ul><ul><li>“ smaller and more frequent trucks” leading to transportation cost increases </li></ul></ul><ul><ul><li>no risk pooling effects </li></ul></ul><ul><li>Warehousing </li></ul><ul><li>Cross-docking </li></ul><ul><ul><li>High inventory throughput </li></ul></ul><ul><ul><li>Decreased lead times </li></ul></ul>
  29. 29. Characteristics of Cross-Docking: <ul><li>Goods spend at most 12-15 hours in the warehouse, </li></ul><ul><li>Avoids high inventory handling costs, </li></ul><ul><li>Example: Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for Kmart, </li></ul><ul><li>Stores trigger orders for products. </li></ul>
  30. 30. System Characteristics: <ul><li>Very difficult to manage, </li></ul><ul><li>Requires linking distribution centers, suppliers and stores to guarantee that any order is processed and executed in a matter of hours, </li></ul><ul><li>Wal-Mart, Home Depot, etc., operate a satellite-communications system that sends point-of-sale data to all its vendors allowing them to have a clear vision of sales at the stores. </li></ul>
  31. 31. Transshipment <ul><li>What is the value of transshipment? </li></ul><ul><li>What tools are needed? </li></ul><ul><li>What if the network system is decentralized? </li></ul>
  32. 32. <ul><li>Push Strategies : </li></ul><ul><li>Excess finished goods inventory </li></ul><ul><li>Inefficient production </li></ul><ul><li>Inefficient operations, high costs, low service levels </li></ul><ul><li>- Excess capacity </li></ul><ul><li>- Low utilization of resources </li></ul><ul><li>- High transportation cost </li></ul> Distribution Strategies
  33. 33. Pull Strategies <ul><li>Single retailer, single manufacturer. </li></ul><ul><ul><li>Retailer observes customer demand, D t . </li></ul></ul><ul><ul><li>Retailer orders q t from manufacturer. </li></ul></ul><ul><li>POS Data </li></ul>Retailer Manufacturer D t q t L
  34. 34. <ul><li>Pull Strategies </li></ul><ul><li>Production is demand driven </li></ul><ul><li>Faster information flow mechanisms are used </li></ul><ul><li>Inventory levels are reduced </li></ul><ul><li>Distribution facilities are transformed from storage points to coordinators of flow. </li></ul><ul><li>But: </li></ul><ul><ul><li>Harder to leverage economies of scale </li></ul></ul><ul><ul><li>Doesn’t work in all cases </li></ul></ul>Distribution Strategies
  35. 35. Push and Pull Systems <ul><li>How can a supply chain take advantage of both the push and pull systems? </li></ul>
  36. 36. Supply Chain Integration – Dealing with Conflicting Goals <ul><li>Lot Size vs. Inventory </li></ul><ul><li>Inventory vs. Transportation </li></ul><ul><li>Lead Time vs. Transportation </li></ul><ul><li>Product Variety vs. Inventory </li></ul><ul><li>Cost vs. Customer Service </li></ul>
  37. 37. Supply Chain Management: Pitfalls and Opportunities <ul><li>Conflicting Objectives in the Supply Chain </li></ul><ul><li>1. Purchasing </li></ul><ul><li>• Stable volume requirements </li></ul><ul><li>• Flexible delivery time </li></ul><ul><li>• Little variation in mix </li></ul><ul><li>• Large quantities </li></ul><ul><li>2. Manufacturing </li></ul><ul><li>• Long run production </li></ul><ul><li>• High quality </li></ul><ul><li>• High productivity </li></ul><ul><li>• Low production cost </li></ul>
  38. 38. Supply Chain Management: Pitfalls and Opportunities <ul><li>3. Warehousing </li></ul><ul><li>• Low inventory </li></ul><ul><li>• Reduced transportation costs </li></ul><ul><li>• Quick replenishment capability </li></ul><ul><li>4. Customers </li></ul><ul><li>• Short order lead time </li></ul><ul><li>• High in stock </li></ul><ul><li>• Enormous variety of products </li></ul><ul><li>• Low prices </li></ul>
  39. 39. Symptoms of Supply Chain Problems <ul><li>Stock-outs and High Inventory </li></ul><ul><li>Long Cycle Times </li></ul><ul><li>High Returns </li></ul><ul><li>High Costs </li></ul><ul><li>Poor Service Level </li></ul>
  40. 40. Common Pitfalls <ul><li>1. Information and Management </li></ul><ul><li>• No Supply Chain Metrics </li></ul><ul><li>• Inadequate Definition of Customer Service </li></ul><ul><li>• Inaccurate Delivery Status Data </li></ul><ul><li>• Inefficient Information Systems </li></ul><ul><li>2. Operational Control </li></ul><ul><li>• Ignoring the Impact of Uncertainties </li></ul><ul><li>• Simplistic Inventory Stocking Policies </li></ul><ul><li>• Discrimination against Internal Customers </li></ul><ul><li>• Poor Coordination </li></ul>
  41. 41. Common Pitfalls <ul><li>3. Design and Strategy </li></ul><ul><li>• Incomplete Shipment Methods Analysis </li></ul><ul><li>• Incorrect Assessment of Inventory Costs </li></ul><ul><li>• Product and Process Design without SC Consideration </li></ul><ul><li>• Focus on Incomplete Supply Chain </li></ul>