The document discusses key concepts in supply chain management including product postponement, collaboration and coordination, controlling inventories, hierarchical production planning, and the bullwhip effect. It summarizes Forrester's 1958 research which first illustrated the bullwhip effect - how demand fluctuations can amplify as orders move up the supply chain resembling a whip lash. The causes of the bullwhip effect are discussed as well as countermeasures that can be taken.

1. Supply Chain Dynamics Mihir Kumar Jhaveri

2. Introduction Oliver and Webber coined SCM in 1982 Their Thesis: Top Management alone can ensure non-conflicting functional objectives along SCN An integrated systems strategy be developed and implemented Coordination of M-I-F flows is challenging yet rewarding

3. Decisions in SCM Academic work on Integration and Coordination started much before 1982: Product Postponement (Alderson 1957) Collaboration and Cooperation (Bowersox 1969) Location and Control of Inventories in SCN's (Hanssmann 1959) Hierarchical Production Planning (Hax and Meal 1975) Bullwhip effect in SCN's (Forrestor 1958)

4. 1. Product Postponement Product postponement occurs in two ways: Manufacturing PP: Changes in form and identity occur @ the latest possible point in the SCN Logistics PP: Changes in inventory location occur @ the latest possible point in time HP Deskjet Printers: Power cords, Voltage requirements, fonts, etc.

5. Product Postponement (contd) Advantages of PP: Hedge against uncertain customer demand Reduce inventory holding cost Reduce Logistics/Warehousing costs Minimize imbalance in stock distribution Eliminate stages in Manufacturing Eg: packaging, customer does assembly etc.

6. Features of PP Loss of Economies of Scale! Requires quick set ups and agile procurement Reduced risk of product obsolescence Requires increased capability to process, transmit, and deliver orders Product should be "DFPP" (Should be technically and economically feasible)

7. 2. Collaboration and Coordination Individual objectives of different functional units within a firm may jeopardize overall efficiency Manufacturing: Long production runs Procurement: Lowest procurement costs Marketing: Infinite assortments Finance: Low inventories Logistics: Full Truck Loads

8. Collaboration and Coordination (contd) Information Sharing (Transparency) using ICT SCM/ERP Solutions B2B Markeplaces B2C and CRM

9. 3. Location and Control of Inventories Supply Rationing Problem: Given shortage in supplies, how to allocate stock across echelons Threshold policies for high priority customers (Ha 1997) Minimize total imbalance in stock distribution s.t. service level constraints (Van der Heijden 1997) Hundreds of articles in various journals including OR, MS, EJOR, JORS, IJPR, IJPDLM, JOM, etc.

10. 4. Hierarchical Production/Distribution Planning Hierarchical integration of production planning and scheduling Provide effective decision support for different DM levels within a hierarchical organization Based on the following scheme: Decompose to get hierarchical structure (Stgc-Tac-Opn) Do Aggregation where possible (eg. Forecasts: agg. on time,products,markets; Capacity: agg. On resources) Hierarchical coordination (by setting targets+getting f/b)

11. 5. Bullwhip Effect in Supply Chains Forrestor: Industrial Dynamics, HBR, 36:4, 1958 First research paper to illustrate systems dynamics in SCN's Base for developing Distribution Games "BWE" coined by P&G BWE describes the increasing amplification of orders occuring within a SC Resembles a whip lash Occurs even if end-item demand is fairly stable! Forrestor studied a simulation model of the simplest tandem supply chain with four entities: Retailer, DC, W/H, Plant

12. Bullwhip Effect (contd) Assumptions of Forrestor's model: Each entity can make use of only locally available info Time delays between ordering and receipt of order It takes 3 weeks for retailer to process the order, half a week to transmit it to DC The DC takes 1 week to process the order and one week to ship to the retailer, who takes one week to ship to end customer; assumptions for other entities likewise.. To study impact of a one time +10% change in retail sales on orders placed and inventory levels

13. Bullwhip Effect (contd) Forrestor's results: "...A sudden 10% increase in retail sales implies a peaking of 34% on orders @ 14th week in factory w/h, resulting in factory output peaking in 21 st week (including a 6 week lead time) by a whopping 45%.." Amplified and out of phase fluctuations in ordering and inventory levels Avoidable inventory and shortage costs; Unstable system RELEVANT EVEN TODAY! Replace week by day in the above analysis

14. Bullwhip Effect: Some Illustrations

15. Bullwhip Effect: Some Illustrations

16. Bullwhip Effect (contd) Causes of BWE: (Empirical: Lee et al: 1997; Analytical: Chen et al: 2000) Demand Signal Processing (frequent updates of forecasts; only next echelon orders considered) Order Batching (to realise logistics EoS+Reducing order processing costs) Price Fluctuations (resulting in over-reactions) Supply Rationing (Proportionate rationing; unrestricted order acceptance+free return policy)

17. Counter-Measures for BWE Avoid multiple demand forecasts Order based on ultimate customer demand Use EDI+POS+VMI Choose a good forecasting method (PLC has a major say) Move from decentralized DM to centralized planning (visibility+control is better) Remove layers in channel if possible Eg: HP, Apple, IBM, P&G/Walmart

18. Counter-Measures for BWE (contd) Break order batches Increase frequency of ordering (OP costs reduced by EDI) Resort to standardization to minmize OP costs Use 3PL to make small batch replenishments economical Aggregate across retail outlets to utilize FTL EoS Reduce safety stocks by cutting lead times Eg: 3PL using Fedex, P&G

19. Counter-Measures for BWE (contd) Stabilize prices EDLP (P&G) Special purchase contracts Eliminate shortage gaming Allocate based on past sales (Sun) Share capacity and information (HP, Motorola) Limit flexibility wrt time (HP, Seagate)

20. The Distribution Game "Beer Distribution Game" Bounded rationality depicts decision makers Orders based on current inventory status, amount ordered by direct successors, past performance Over-reaction; increases steadily towards u/s end of SCN http://sudarshana.mgmt.iisc.ernet.in:8080/enter.html