Supply Chain Integration ©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi.

Supply Chain Integration

©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi


Outline of the Presentation

The Bullwhip Effect

Distribution Strategies and Information Systems

Supply Chain Management: Pitfalls and Opportunities


The Bullwhip Effect and its Impact on the Supply Chain

• Consider the order pattern of a single color television model sold by a large electronics manufacturer to one of its accounts, a national retailer.

Figure 1. Order Stream

Huang at el. (1996), Working paper, Philips Lab


Figure 2. Point-of-sales Data-Original

Figure 3. POS Data After Removing Promotions

The Bullwhip Effect and its Impact on the Supply Chain


Figure 4. POS Data After Removing Promotion & Trend

The Bullwhip Effectand its Impact on the Supply Chain


Higher Variability in Orders Placed by Computer Retailer to Manufacturer Than Actual Sales

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review


Increasing Variability of Orders Up the Supply Chain

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review


We Conclude ….

• Order Variability is amplified up the supply chain; upstream echelons face higher variability.

• What you see is not what they face.


What are the Causes….

• Promotional sales• Inflated orders

- IBM Aptiva orders increased by 2-3 times when retailers though that IBM would be out of stock over Christmas- Same with Motorola’s Cellular phones

• Demand Forecast• Long cycle times• Order Batching


• Single retailer, single manufacturer.– Retailer observes customer demand,

Dt.

– Retailer orders qt from manufacturer.

– Lead time + 1 = L.

What are the Causes….

Retailer ManufacturerDt qt

L


The Bullwhip Effect

2

2221

)(

)(

P

L

P

L

DVar

QVar


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


Consequences….

• Increased safety stock• Reduced service level• Inefficient allocation of resources• Increased transportation costs


Multi-Stage Supply Chains

Consider a multi-stage supply chain: – Stage i places order qi to stage

i+1.

– Li is lead time between stage i and i+1.

RetailerStage 1

Manufacturer Stage 2

Supplier Stage 3

qo=D q1 q2

L1 L2


Formula

1

12

2

2

2

11

221

)(

)(

)(2)(21

)(

)(

k

i

iiK

k

ii

k

iiK

p

L

p

L

DVar

QVar

p

L

p

L

DVar

QVar


Multi-Stage Systems:Var(qk)/Var(D)

0

5

10

15

20

25

30

0 5 10 15 20 25

Dec, k=5

Cen, k=5

Dec, k=3

Cen, k=3

k=1


The Bullwhip Effect:Managerial Insights

• Exists, in part, due to the retailer’s need to estimate the mean and variance of demand.

• The increase in variability is an increasing function of the lead time.

• The more complicated the demand models and the forecasting techniques, the greater the increase.

• Centralized demand information can reduce the bullwhip effect, but will not eliminate it.


Coping with the Bullwhip Effect

• Reduce Variability and Uncertainty- POS- Sharing Information- Year-round low pricing

• Reduce Lead Times- EDI- Cross Docking

• Alliance Arrangements– Vendor managed inventory– On-site vendor representatives


Example: Quick Response at Benetton

• Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy.

• Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion.

• Many attribute Benetton’s success to successful use of communication and information technologies.


Example:Quick Response at Benetton

• 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.

• Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors.


How Does BenettonCope with the Bullwhip Effect?

1. Integrated Information Systems• Global EDI network that links agents with production

and inventory information• EDI order transmission to HQ• EDI linkage with air carriers• Data linked to manufacturing

2. Coordinated Planning• Frequent review allows fast reaction• Integrated distribution strategy


Distribution Strategiesand Information Systems

Pull Vs. Push Strategies

Push Strategies• Production decisions based on forecasts• Manual purchase orders and invoices are

employed• Ordering decisions based on inventory &

forecasts.


Push Strategies

• Single retailer, single manufacturer.– Retailer observes customer

demand, Dt.

– Retailer orders qt from manufacturer.Retailer ManufacturerDt qt

L


Problems with Push Strategies:

• Excess finished goods inventory • Inefficient production• Inefficient operations, high costs, low

service levels- Excess capacity- Low utilization of resources- High transportation cost

Distribution Strategiesand Information Systems


Pull Strategies

• Single retailer, single manufacturer.– Retailer observes customer demand, Dt.

– Retailer orders qt from manufacturer.

POS Data

Retailer ManufacturerDt qt

L


Pull Strategies• Production is demand driven• Faster information flow mechanisms are

used• Inventory levels are reduced• Distribution facilities are transformed from

storage points to coordinators of flow.• But:

– Harder to leverage economies of scale– Doesn’t work in all cases

Distribution Strategies and Information Systems


Push and Pull Systems

• To take advantage of both• How can this be accomplished?


Distribution Strategies

• Warehousing• Direct Shipping

– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects


Cross Docking

In 1979, Kmart was the king of the retail industry with 1891 stores and average revenues per store of $7.25 million

• At that time Wal-Mart was a small niche retailer in the South with only 229 stores and average revenues about half of those Kmart stores.

• Ten years later, Wal-Mart transformed itself; it has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. Today Wal-Mart is the largest and highest profit retailer in the world.


What accounts for Wal-Mart’s remarkable success

• The starting point was a relentless focus on satisfying customer needs; Wal-Mart goal was simply to provide customers access to goods when and where they want them and to develop cost structures that enable competitive pricing

• The key to achieving this goal was to make the way the company replenished inventory the centerpiece of its strategy.


What accounts for Wal-Mart’s remarkable success?

• This was obtained by using a logistics technique known as cross-docking. Here goods are continuously delivered to Wal-Mart’s warehouses where they are dispatched to stores without ever sitting in inventory.

• This strategy reduced Wal-Mart’s cost of sales significantly and made it possible to offer everyday low prices to their customers.


Characteristics of Cross-Docking:

• Goods spend at most 48 hours in the warehouse,

• Avoids inventory and handling costs,• Wal-Mart delivers about 85% of its

goods through its warehouse system, compared to about 50% for Kmart,

• Stores trigger orders for products.


System Characteristics:

• Very difficult to manage,• Requires linking Wal-Mart’s distribution

centers, suppliers and stores to guarantee that any order is processed and executed in a matter of hours,

• Wal-Mart operates a private 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


System Characteristics:

• Need a fast and responsive transportation system:

• Wal-Mart has a dedicated fleet of 2000 truck that serve their 19 warehouses

• This allows them to – ship goods from warehouses to stores

in less than 48 hours– replenish stores twice a week on

average.


Distribution Strategies

StrategyAttribute

DirectShipment

CrossDocking

Inventory atWarehouses

RiskPooling

TakeAdvantage

TransportationCosts

ReducedInbound Costs

ReducedInbound Costs

HoldingCosts

No WarehouseCosts

No HoldingCosts

DemandVariability

DelayedAllocation

DelayedAllocation


Transshipment

• What is the value of this?• What tools are needed?• What if the system is

decentralized?


Supply Chain Integration - Dealing with Conflicting Goals

• Lot Size vs. Inventory• Inventory vs. Transportation• Lead Time vs. Transportation• Product Variety vs. Inventory• Cost vs. Customer Service


Supply Chain Management:Pitfalls and Opportunities

Conflicting Objectives in the Supply Chain

1. Purchasing• Stable volume requirements• Flexible delivery time• little variation in mix• large quantities

2. Manufacturing• Long run production• High quality• High productivity• Low production cost


Supply Chain Management:Pitfalls and Opportunities

3. Warehousing• Low inventory• Reduced transportation costs• Quick replenishment capability

4. Customers• Short order lead time• High in stock• Enormous variety of products• Low prices


Symptoms of Supply Chain Problems

• Stock-outs and High Inventory• Long Cycle Times• High Returns• High Costs• Poor Service Level


Common Pitfalls

1. Information and Management• No Supply Chain Metrics• Inadequate Definition of Customer Service• Inaccurate Delivery Status Data• Inefficient Information Systems

2. Operational Control• Ignoring the Impact of Uncertainties• Simplistic Inventory Stocking Policies• Discrimination against Internal Customers• Poor Coordination


Common Pitfalls

3. Design and Strategy• Incomplete Shipment Methods Analysis• Incorrect Assessment of Inventory Costs• Product and Process Design without SC

Consideration• Focus on Incomplete Supply Chain

Supply Chain Integration ©Copyright 1999 D. Simchi-Levi, P. Kaminsky & E. Simchi-Levi.

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