Supply Chain Dynamics Flashcards
What is the bullwhip effect
The tendency of supply chains to amplify relatively small changes at the demand side of the supply chain, such that the disruption at the supply end is much greater (lee at al, 1997) information flows from consumer to manufacturer and product flows opposite way.
Three patterns of bull whip
Oscillation
Phase lag
Amplification
What is oscillation
When orders and inventories are dominated by large amplitude fluctuations
What is amplification?
Where the amplitude and variance of orders increases steadily from customers to retailer to factories. The peak order rate at factory is on average more than double the peak order rate at retail
What is phase lag?
Where the order rate tends to peak later as it moves from the retailer to factory.
Bullwhip example
Economic crisis, leading to uncertainty and drop in sales by X%. Retailer cut orders by 2X% from wholesaler, to reduce current inventory and with expectation of future low sales. Wholesaler cut their orders by 4X% and keeps on amplifying.
Causes of bullwhip effect
- panic ordering
- forecasting errors
- no transparency/communication/co ordination
- long lead times
What is panic ordering and it’s consequences
Large increase in demand, so retailers panic order more stock to prevent stockout or they predicted future shortage so buy more to compensate for now and hold it.
Consequence is stock outs, inventory holding costs, distributors upping shipping so more costs, manu hire more staff or pay overtime.
What are forecast errors and it’s consequences
Difference between actual demand and forecasted demand.
E.g. when Nike used new planning system which led to huge errors. 100 million loss in revenue and huge inventory shortfall and excesses.
What is no communication and it’s consequences
No communication between sc is the stages not informing each other of changes they should be aware of.
Consequences are poor service, longer lead times and panic ordering
Consequences of bullwhip
Lengthened lead time Poor service Stock outs Excess inventory Decreased revenue Higher costs
Strategies to reduce bullwhip
- Vendor Managed Inventory (VMI)
- Improved forecasting
- Electronic Data Exchange (EDI)
- improved communication and transparency
What is VMI
The goal to provide mutually beneficial relationships where both sides can more accurately and smoothly control the availability and flow of goods.
E.g Wal-Mart excelled at this, have transparency and allows suppliers to schedule ops more productively as they monitor customer inventory too and weekly basis.
What is EDI
Adopting lean production by using quicker electronic data exchange between stages of SC. Administrative cost savings, reduces lead time.
What is improved forecasting?
Invest in more capable forecasting capabilities that reduce forecasts errors.
E.g. Heineken employed JDA, they used intelligent fulfilment that improves their forecasting by doing weekly.
