Supply and Demand Challenges

Question 1

What is the key point of the medical supplies simulation?

Answer 1

Individuals and organisation often make errors in judgement, people naturally look for an oscillating pattern; upward trajectories and favouring extreme trajectories when often these numbers represent the upper and lower limit of demand

Question 2

What is oscillation as a pattern of behaviour?

Answer 2

Orders and inventories are dominated by large amplitude fluctuations - we over predict and then under predict

Question 3

What is amplification as a pattern of behaviour?

Answer 3

The amplitude and variance of orders increases steadily from customer to retailer to factory - the peak order rate at the factory is on average more than double the peak order rate at retail

Question 4

What is a phase lag as a pattern of behaviour?

Answer 4

The order rate tends to peak later as one moves from the retailer to the factory - the reaction occurs one week later and one week later as you do down the supply chain

Question 5

What is the bullwhip effect?

Answer 5

The tendency of supply chains to amplify relatively small changes on the demand side of the supply chain such as that the disruption at the supply end of the chain is much greater

The order going to the supplier is more volatile. Happens in many different supply chains e.g Campbell’s soup - product with stable demand

Question 6

What causes the bullwhip effect?

Answer 6

• Panic ordering: anticipation of shortages, causes actual shortages and disrupts supply
• Perceived risk of others’ bounded rationality - ordering more to cover their irrationality
• Forecast errors - using intuition
• Long lead times - delay the point of demand from the supply of the product or service e.g shipping delay makes us feel we should order more
• Lead time variability - creates uncertainty, try to combat this by ordering more
• Order batching - confuses supplier
• Price fluctuations - discounting: misinterpreted demand
• Quantity discounting and trade promotion
• Lean style management - sudden drops in demand
• Lack of communication

Question 7

How was the bullwhip effect present in Campbell’s soup?

Answer 7

Sales from store - marketing campaign created false demand signals, then demand fell, then 2 for 1 so demand spikes, then drops –> amplified down the supply chain, need to inform suppliers of the marketing campaigns

Also known as forester effect - often seen in functional projects

Question 8

What are the consequences of the bullwhip effect?

Answer 8

• Inventory carrying and stockout costs e.g refund, complaints
• Distributers need to expedite orders at higher shipping expenses e.g sending by plane
• Manufactureres need to adjust jobs e.g overtime
• All entities needing to invest into outsize facilities e.g warehouses to handle peaks of demand (CU problem)
• Hiring and firing of employees, rehiring to deal with irregular demand patterns
• Irregular, unpredictable production and delivery schedules also lengthen lead time, causing delay and customer dissatisfaction

Question 9

What methods are used to reduce the bullwhip effect?

Answer 9

• Improved forecasting
• Information sharing
• Strategic partnerships
• Reduction of stages in the supply chain
• Increased frequency and speed of refurbishment
• Vendor managed inventory (VMI)

Question 10

Why are the risks even greater with innovative products?

Answer 10

False signals and genuinely volatile demand as opposed to stable demand causes magnified versions of the bullwhip effect and its consequences

Need to avoid misinterpreting demand and perceiving it as fundamental rather than bullwhip