Lecture supply chain management chapter 7 sc design and integration

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

1 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 theexcessive amount of inventory in the supplychain

Studies found more than 100 days ofinventory supply from production lines toretailers' shelves

Distorted information led to stockpilingbecause of demand uncertainty andvariability

As we move further away from the customer in the supply chain,

2. Increase in variance of orders

Information Coordination: The Bullwhip Effect

Consumer Sales at Retailer

0 100 200 300 400 500 600 700 800 900 1000

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.

 They cannot communicate with each other and must make order decisions based only on orders from the next downstream player.

 The ordering patterns share a common, recurring theme: the variability of an upstream site is always greater than those of the downstream site, a simple, yet powerful illustration of the bullwhip effect.

 the bullwhip effect is a consequence of the players' rational behavior within the supply chains infrastructure.

Customer Retailer

Manufacturer Supplier

 poor product forecasts

 insufficient or excessive capacities

 poor customer service

 Uncertain and costly production

 high costs for corrections (expedited shipments and overtime)

What are the causes and solutions for Bullwhip Effect?

2 Pull and Push System

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

- Production and distribution based on real demand

- High volatile demand

- Customized products

- Low Economies of scale

Characteristics of Supply chain

Resource Allocation Responsiveness

Supply chain planning Order processing

 Customization

 Non-stable demand

 Large scale market

 Stable market

 Low economies of scale

 Stable market

 High economies of scale

 Standardized products and processes

Pull Push

High

Low

Push Pull

Dell’s production department

Many time per day, at the Assembly line

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

Why is there such a change?

Push and Pull Strategy

- Push and pull Coordination: take the advantages of 2 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

Define the boundary

Forecasting the customer demand

Real demand orders

-Raw material

End users

Receiving orders point

of time Push strategy Pull strategy

Pull – push Boundar y

less volatility more volatility

Receiving Order point of time

3 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

3 Supply Chain Design

Phase 1: Understanding end customer

Phase 2: Choosing best SC’s strategy

Phase 3: Scoping the SC’s structure

Phase 1: understand the need of customer

The customer is the ultimate judge of the supplychain’s performance

Organizations must understand the nature of theirproducts and be able to devise a supply chainstrategy that best fits their customers’ needs ordemands

Primarily functional or primarily innovativeproducts

Customer service objectives

The level of product availability

The speed and consistency of the customer’sorder cycle

The communication that takes place betweenseller and customer

Reflecting the customer’s view of customerservice And the product’s importance to thecustomer and the customer importance to thecompany

The former allows them to plan inventory levels

to a greater extent than is possible with a fastbut highly variable order cycle

Communication

Firm’s ability to supply timely information tothe customer regarding such factors as: orderstatus, order tracking, back-order status, orderconfirmation, product substitution, productshortages, and product information requests

Automated information system usually results

in fewer errors in shipping, picking, packing,labeling and documentation

Phase 2: Selecting a supply chain strategy

A supply chain strategy can be defined as astrategy required to manage the integration ofall the supply chain activities throughimproved supply chain relationships in order toachieve a competitive advantage for the supplychain (Hines, 2004: 5)

Supply chain strategies may be designed to bemore efficient and/or to be more responsive

SC’ structure SC’ Strategy

Competition StrategyRequirement in design a supply chain

Postponement >< Delay ???

Postponement makes SC:

More Flexible Reduce cost due to reduce the complexity

Postponement ways:

Manufacturing Postponement Logistics Postponement

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

Efficient (or lean) supply chains

An efficient (or lean) supply chain is a set oforganizations directly linked by flows ofinformation, products and finances that workcollaboratively to reduce cost and waste

eliminated, scale economies should be pursuedand optimization techniques should be deployed

to get the best capacity utilization in productionand distribution

Lean supply chains are thus appropriate for andmatch functional products

Responsive (or agile) supply chains

The focus of agile supply chains is on timecompression and quick response and oneliminating the barriers to quick response

Supply chain agility is the ability of the supplychain as a whole to rapidly align the network andits operations to the dynamic and turbulentrequirements of customers’ demands

Agile supply chains are relevant for innovativeproducts

Supply chain strategies

Efficient Supply

Main goal Distribution strategy Operation management Inventory management Response time Supplier selection New product design

Strategies and Structure of SC

SC’ Strategy

Competition Strategies Innovation

Product and operational procedures standardization Integrating and controlling supply source

Quality management

Product Origin Traceability

Integrating process and customer system Market Segmentation

Simplicity

Product standardization Reduce the number of suppliers Process Standardization Establishing general process applied to all member in SC

Shell supplied inventories automatically to Bayer

Postponement variety of products at the end stage

Bayer does not fear of shortage of bunker

E - payment Bayer does not need to order

solution for inventory management

A combination of lean and agile supply chains

Hybrid (or ‘leagile’) supply chains exploitthe benefits of both lean and agile supplychains

The decoupling point is the point in theproduct ow stream to which the customer’sorder penetrates and where real time data andforecast- driven activities meet

What is the organisation’s position in terms

of the decoupling point?

Which supply chain strategy should beadopted by the organisation?

Phase 3: Scoping the supply chain structure

The supply chain structure implies theintegration of the links between supply chainmembers

Identifying and collaborating with only thecritical primary supply chain members (whichcan be beyond tier one) allows an organization toshare relevant information and to concentrate itstime and resources on managing the importantprocess links, enabling the supply chain toperform well

Market coverage objectives

 Customer buying behavior: potential customer segment

 Ability to link up processes,

 Ability to grow with the business

 Competing supply chain

 Control: other members to ensure product quality or purchase services for long – term profitability

post-Product characteristics

The product’s value

The technicality of the product

The degree of market acceptance

The degree of substitutability

The product’s bulk

The product’s perishability

The degree of market concentration

Seasonality

The width and depth of the product line

Value of the product

High per unit cost  large inventoryinvestment  require shorter supply chains

Low unit cost  longer supply chain

Low value: shipped by rail, ships and stored

in field warehouse

High value: shipped by air freight tominimize in-transit inventories to reduce ICCand markdowns

Technicality

High technicality products: demonstration by

a sale-person as well as pre-purchase andpost-purchase service

Ex: home computer, high – priced stereocomponents, expensive cameras and videoequipment, imported sports cars…

Direct channels and selective or exclusivedistribution policies are used

Market acceptance

A leading manufacturers offers a newproduct and plans significant introductoryadvertising, customer acceptance will behigh and intermediaries will want to carrythe product

New product with little market acceptanceand low brand identification requireaggressive selling

Substitutability

Related to brand loyalty:

 Low brand loyalty: product substitution islikely and intensive distribution is required,firms place a premium on point of purchasedisplays in high traffic areas

 To gain support from wholesalers or retailers,the producer may offer higher than normalmargins: selective or exclusive distributionmakes product support easier

Low value, high – weight products arerestricted to markets close to the point ofproduction, require special material handlingskills

Low weight and small cubes: more units can beshipped in a truck, rail, container  reduce theper – unit cost of transportation

Perishability

Refers to physical deterioration or to productobsolescene caused by changing customerbuying patterns or technological change

Perishable products are usually sold on a directbasis in order to move product through thesupply chain more quickly and reduce thepotential for inventory loss

Manufacturers might offer a seasonal discount

or consignment inventories to wholesalers orretailers who agree to take early delivery

Width and depth of supplier’s product line

 A manufacturer of products with low per –unit values may use intensive distributionwith direct sales if the product line is broadenough to result in a relatively large averagesales volume

Ex: Vinmart, …

A manufacturer of a limited line of productswill use wholesalers to achive adequatemarket coverage at a reasonable cost

Value proposition to meet customers’ needs

A value proposition is a statement of how, whereand when value is to be created for specificcustomers

Value is created when core competencies (orcapabilities) are built

A core competency is de ned as a bundle of skillsand capabilities that enable an organisation toprovide a particular bene t to customers

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