Bullwhip Effect – Case study Procter & Gamble P&G examined order patterns forPampers. Its sales at retail stores were fluctuating, but the variability wasnot excessive. For the distri
14-Sep-21 LOGO Chapter 7: SC design and integration MsC Bui Thi Bich Lien Contents MsC Bui Thi Bich Lien Bullwhip Effect Pull-Push Strategy Supply Chain design 14-Sep-21 Bullwhip Effect – Case study Procter & Gamble (P&G) examined order patterns for Pampers Its sales at retail stores were fluctuating, but the variability was not excessive For the distributors' orders, P&G was surprised by the greater degree of variability When they looked at P&G's orders of materials to their suppliers, such as 3M, the swings were even greater While babies consumed diapers at a steady rate, the demand order variability in the supply chain was amplified as we move up the supply chain P&G called this phenomenon the "bullwhip" effect ECR: Potential $30 billion opportunity Efficient Consumer Response (ECR) initiative One motivation for the initiative was the excessive amount of inventory in the supply chain Studies found more than 100 days of inventory supply from production lines to retailers' shelves Distorted information led to stockpiling because of demand uncertainty and variability MsC Bui Thi Bich Lien 14-Sep-21 Bullwhip As we move further away from the endcustomer in the supply chain, Distortion in demand information, Increase in variance of orders Information Coordination: The Bullwhip Effect Consumer Sales at Retailer Retailer's Orders to Wholesaler 900 800 800 300 Wholesaler's Orders to Manufacturer 41 39 37 35 33 31 29 27 25 23 21 Manufacturer's Orders with Supplier 1000 1000 Manufacturer Order 900 800 700 600 500 400 300 200 100 900 800 700 600 500 400 300 200 100 MsC Bui Thi Bich Lien 40 37 34 31 28 25 22 19 16 13 10 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 11 1 Wholesaler Order 19 41 39 37 35 33 31 29 27 25 23 21 19 17 15 13 11 100 17 200 100 15 200 400 300 500 13 400 600 11 500 700 600 700 Retailer Order 1000 900 Consumer demand 1000 14-Sep-21 Causes of the Bullwhip Effect Best illustration of the bullwhip effect is "beer game." Participants play the roles of customers, retailers, wholesalers, and suppliers of a popular brand of beer Supplier They cannot communicate with each other and must make order decisions based only on orders from the Manufacturer next downstream player The ordering patterns share a common, recurring Distributor theme: the variability of an upstream site is always greater than those of the downstream site, a simple, yet Retailer powerful illustration of the bullwhip effect the bullwhip effect is a consequence of the players' Customer rational behavior within the supply chains infrastructure So What? When a supply chain is plagued with a bullwhip effect and demand information is distorted, It results in MsC Bui Thi Bich Lien excessive inventory poor product forecasts insufficient or excessive capacities poor customer service Uncertain and costly production high costs for corrections (expedited shipments and overtime) 14-Sep-21 What are the causes and solutions for Bullwhip Effect? Pull and Push System MsC Bui Thi Bich Lien 14-Sep-21 Pull Strategy - Coordinate production and distribution based on actual needs and orders Receiving orders – Sourcing – Producing/assembling – Delivering Meet the requirement of market, quick response and high quality service Reduce stagnant capital, increase inventory turnover Strict requirements: flexible organization, scientific production management, integrated information system, on time Characteristics of products and market - Production and distribution based on forecasting - Low volatile demand - Low customized - High Economies of scale MsC Bui Thi Bich Lien - Production and distribution based on real demand - High volatile demand - Customized products - Low Economies of scale 14-Sep-21 Characteristics of Supply chain Objective Push system Pull system Minimize cost Maximize cus service High Complex level Focus Low Resource Allocation Responsiveness Process Supply chain planning Order processing Storage Many Few Order time Short Long Adaptive level Pull Slow adaption High Non-stable demand Low economies of scale Customization Push Stable market Low economies of scale Non-stable demand Large scale market Stable market High economies of scale Standardized products and processes Low Low Pull MsC Bui Thi Bich Lien Fast and flexible High Push PUSH OR PULL 14-Sep-21 - Make to order Many time per day, at the Assembly line Supplier’s warehouse Dell’s production department Customers Suppliers - Buying based on demand forecast All components are attached to the orders No finish product is assembled before the order comes - Dell’s production department only stores a small amount of components and they comes before few hours The responsiveness of Dell depends directly on supplier’s competence Absolute synchronization between production and sales, keep the supply chain always balanced and smooth MsC Bui Thi Bich Lien 14-Sep-21 Why is there such a change? Push and Pull Strategy Define the boundary - Push and pull Coordination: take the advantages of strategies - The first part of the chain: Push - Store components based on long term forecasting - Semi – products are assemble to modules - The last part of the chain: Pull - Assemble based on real demand - Complete products after receiving orders Forecasting the customer demand Push strategy Raw material MsC Bui Thi Bich Lien Pull – push Boundar y Real demand orders Pull strategy Receiving orders point of time End users 14-Sep-21 MTS MTO less volatility Customization ATO ETO Customers Suppliers Standardization more volatility Receiving Order point of time Supply Chain Design Supply chain strategy must be aligned with overall corporate strategies Supply chain performance goals must be stated in operational terms: projected market coverage, sales and service support, sale volume, profitability, inventory turns, cash to cash cycle times and return on investment Supply chain strategies: intensity of distribution, use of direct or indirect channels, services of intermediaries in each geographic area and implementation plans MsC Bui Thi Bich Lien 10 14-Sep-21 Order cycle The elapses between the customer’s order placement and the time product is received Speed and consistency of the order cycle are prime factors in SC design Most customers prefer consistent service to fast service The former allows them to plan inventory levels to a greater extent than is possible with a fast but highly variable order cycle Communication Firm’s ability to supply timely information to the customer regarding such factors as: order status, order tracking, back-order status, order confirmation, product substitution, product shortages, and product information requests Automated information system usually results in fewer errors in shipping, picking, packing, labeling and documentation MsC Bui Thi Bich Lien 14 14-Sep-21 Phase 2: Selecting a supply chain strategy A supply chain strategy can be defined as a strategy required to manage the integration of all the supply chain activities through improved supply chain relationships in order to achieve a competitive advantage for the supply chain (Hines, 2004: 5) Supply chain strategies may be designed to be more efficient and/or to be more responsive Requirement in design a supply chain Suitable Strategies Simplicity Consistency Throughout from the origin to the destination Suitable Strategies Adapt to important priorities in competitive strategy Supply chain makes the Cost difference MsC Bui Thi Bich Lien Competition Strategy SC’ Strategy SC’ structure Efficiecy Effective Responsi -veness 15 14-Sep-21 Simplicity Postponement >< Delay ??? Postponement makes SC: More Flexible Reduce cost due to reduce the complexity Postponement ways: Manufacturing Postponement Logistics Postponement Consistency Objectives Application and process Data and IT system High Reliability Collaboration Throughout from the origin to the destination Process and IT are integrated inside and outside the firm to the customers and main suppliers Production capacity and inventory are optimized throughout the SC Performance indicators and qualitative objectives are shared throughout the SC MsC Bui Thi Bich Lien 16 14-Sep-21 Efficient (or lean) supply chains An efficient (or lean) supply chain is a set of organizations directly linked by flows of information, products and finances that work collaboratively to reduce cost and waste Non-value-added activities should be eliminated, scale economies should be pursued and optimization techniques should be deployed to get the best capacity utilization in production and distribution Lean supply chains are thus appropriate for and match functional products Responsive (or agile) supply chains The focus of agile supply chains is on time compression and quick response and on eliminating the barriers to quick response Supply chain agility is the ability of the supply chain as a whole to rapidly align the network and its operations to the dynamic and turbulent requirements of customers’ demands Agile supply chains are relevant for innovative products MsC Bui Thi Bich Lien 17 14-Sep-21 Supply chain strategies Efficient Supply chain Responsive Supply chain Main goal Distribution strategy Operation management Inventory management Response time Supplier selection New product design MsC Bui Thi Bich Lien 18 14-Sep-21 Competition Strategies Innovation Strategies and Structure of SC SC supports to introduce new product Outsource, expand the size quickly Suppliers join in designing product process Product and operational procedures standardization Cost Integrating and controlling supply source Quality Quality management Service Integrating process and customer system Market Segmentation Product Origin Traceability SC’ Strategy Simplicity Product standardization Reduce the number of suppliers Process Standardization Establishing general process applied to all member in SC Postponement variety of products at the end stage Shell supplied inventories automatically to Bayer Bayer does not need to order Bayer does not fear of shortage of bunker E - payment solution for inventory management MsC Bui Thi Bich Lien 19 14-Sep-21 A combination of lean and agile supply chains Hybrid (or ‘leagile’) supply chains exploit the benefits of both lean and agile supply chains The decoupling point is the point in the product ow stream to which the customer’s order penetrates and where real time data and forecast- driven activities meet What is the organisation’s position in terms of the decoupling point? Which supply chain strategy should be adopted by the organisation? MsC Bui Thi Bich Lien 20