Week 4: Value of information

Question 1

Name five effects of Vendor-Managed Inventory (VMI) systems:

Answer 1

• Lower operating costs at retailer
• Increase in P&G’s market share (more room at Walmart)
• Providing POS (Point-of-sale) data to suppliers to allow suppliers to better plan production and deliver materials on just-in-time bases
• Demand driven supply chain
• Everybody in supply chain had access to same data

Question 2

What is the bullwhip effect?

Answer 2

Order variability keeps amplifying as we move up to supply chain (in the direction of customers)

Question 3

Name the four main causes of the bullwhip effect

Answer 3

1. Forecasting based on order and not customer demand
2. Ordering in large lots
3. Price fluctuations (buying forward); people/ retailers/distributors buy more now for a lower per unit price so that they can buy less next time. This increases order variability
4. False orders

Question 4

Name the steps of the actual bullwhip effect in a decentralized supply chain?

Answer 4

• Decentralized: each stage bases order on previous stage’s demand
  1. Retailer: doesn’t share demand forecast with wholesaler
  2. Wholesaler: forecasts demand by retailer’s orders
  3. Distributor: forecasts demand by wholesaler’s orders

Question 5

What are the four countermeasures against the bullwhip effect?

Answer 5

1. Avoid independent demand forecasting by different supply chain actors
2. Break order batches
3. Stabilize prices
4. Eliminate false orders

Question 6

Give three managerial insights on the value of information and the bullwhip effect?

Answer 6

1. Variance increases up the supply chain in both centralized and decentralized cases
2. Variance increases:
   - Additively with centralized case
   - Multiplicatively with decentralized case
3. Centralizing can significantly reduce the bullwhip effect
   - Cannot completely eliminate it

Question 7

Give three reasons why order batches should be broken?

Answer 7

1. Reduce replenishment costs
2. Economies of scale in transportation
3. Use third-party logistics companies

Question 8

Name three assumptions of short term discounting?

Answer 8

1. Discount will only be offered once
2. Order quantity Qd is multiple of Q*
3. Retailer takes no action to influence demand