Session V

Role of Information
in the SC
Bullwhip Effect in Supply Chains
Forrestor: Industrial Dynamics,
HBR, 36:4, 1958
First research paper to illustrate
systems dynamics in SCN's
Base for developing
Distribution Games
"BWE" coined by P&G
 BWE describes the increasing
amplification of orders occurring
within a SC
Resembles a whip lash
Occurs even if end-item demand is
fairly stable!
Forrestor studied a simulation
model of the simplest tandem
supply chain with four entities:
Retailer, DC, W/H, Plant
 Assumptions of Forrestor's model:
Each entity can make use of
only locally available info
Time delays between ordering
and receipt of order
It takes 3 weeks for retailer to
process the order, half a week
to transmit it to DC
 The DC takes 1 week to
process the order and one
week to ship to the retailer, who
takes one week to ship to end
customer; assumptions for
other entities likewise..

To study impact of a one time

+10% change in retail sales on
orders placed and inventory levels
 Forrestor's results:
"...A sudden 10% increase in
retail sales implies a peaking of
34% on orders @ 14th week in
factory w/h, resulting in factory
output peaking in 21st week
(including a 6 week lead time) by
a whopping 45%..
 Amplified and out of phase
fluctuations in ordering and
inventory levels
Avoidable inventory and
shortage costs; Unstable
system
RELEVANT EVEN TODAY!
Replace week by day in
the above analysis
Bullwhip Effect: Some Illustrations
Bullwhip Effect: Some Illustrations
 Causes of BWE: (Empirical: Lee et
al: 1997; Analytical: Chen et al:
2000)
Demand Signal Processing
(frequent updates of forecasts;
only next echelon orders
considered)
Order Batching (to realise
logistics EoS+Reducing order
processing costs)
Price Fluctuations (resulting in
over-reactions)
Supply Rationing (Proportionate
rationing; unrestricted order
acceptance + free return policy)
Counter-Measures for BWE
Avoid multiple demand forecasts
Order based on ultimate
customer demand
Use EDI+POS+VMI
Choose a good forecasting
method (PLC has a major say)
Move from decentralized DM to
centralized planning
(visibility+control is better)
 Remove layers in channel if
possible
Eg: HP, Apple, IBM, P&G/Walmart
Reduce safety stocks by cutting
lead times
Eg: 3PL using Fedex, P&G
Break order batches
Increase frequency of ordering
(OP costs reduced by EDI)
 Resort to standardization to
minmize OP costs
Use 3PL to make small batch
replenishments economical
Aggregate across retail outlets to
utilize FTL EoS
Stabilize prices
EDLP (P&G)
Special purchase contracts
 Eliminate shortage gaming
Allocate based on past sales
(Sun)
Share capacity and information
(HP, Motorola)
Limit flexibility wrt time (HP,
Seagate)
The Distribution Game
Sterman: Modeling managerial
behavior-Misperceptions of f/b in a
dynamic DM expt, Management
Science, 35:3, 1989
"Beer Distribution Game"
Bounded rationality depicts
decision makers
The Distribution Game
Orders based on current
inventory status, amount ordered
by direct successors, past
performance
Over-reaction; increases steadily
towards u/s end of SCN
Information Functionality
Strategic
Alliance
Strategic Formulation
Planning

Development and
refinement of capabilities
and opportunities

Focused/profit-based customer service

analysis

Decision Vehicle routing and scheduling

Analysis Inventory levels and management
Network/facility location and integration
Vertical integration vs. third-party/outsourcing

Management
Control Quality Measurement
Financial measurement: cost
Productivity Measurement
Asset management
Customer Service Measurement
Transaction
Systems Order entry Order Selection Customer Inquiry
Inventory Assignment Shipping Pricing and Invoicing
SCIS Characteristics and Justification

Characteristics Justification
Strategic
Planning Competitive Advantage
High Risk
Extensive Identification and evaluation of competitive
Options Decision alternatives
Analysis/evaluation Analysis
Significant user expertise and
training
Measurement of
competitive capability and
Effectiveness-driven Management addition of potential
activity focus improvement areas
Control
Performance control systems
Feedback for performance evaluation Competitive
qualification
Proactive direction to users Transaction
High hardware and software systems cost Systems
Structured training for a large number of users
Efficiency-driven activity focus
Integrated Supply Chain
Headquarters
Supply Chain
EDI
Sales Info Vendors
Internet
Host / ERP

EDI
Forecasting Internet
Systems

Manufacturing Plant

Advanced
EDI Host / ERP Exchange
Planning Internet OMS Portal
System
EDI
Internet POS
Scanner Data
TMS
Manufacturing
Execution
System Retail Customers
With POS Scanners
RFDC or Barcode EDI EDI RFDC or Pager
Scanner or Pager Internet Internet
or RFDC or RFDC

YMS Transportation
YMS
Transportation Warehouse Warehouse to Customer
Warehouse EDI
Manufacturing to Warehouse
(WMS) Internet (WMS)
RFDC

RFDC RFDC

Scanners
 7-25

Enterprise Resource Planning

Headquarters
Supply Chain
EDI
Sales Info Vendors
Internet
Host / ERP

EDI
Forecasting Internet
Systems

Manufacturing Plant

Advanced
EDI Host / ERP Exchange
Planning Internet OMS Portal
System
EDI
Internet POS
Scanner Data
TMS
Manufacturing
Execution
System Retail Customers
With POS Scanners
RFDC or Barcode EDI EDI RFDC or Pager
Scanner or Pager Internet Internet
or RFDC or RFDC

YMS Transportation
YMS
Transportation Warehouse Warehouse to Customer
Warehouse EDI
Manufacturing to Warehouse
(WMS) Internet (WMS)
RFDC

RFDC RFDC

Scanners
Capabilities of ERP Systems
Traditional Capabilities Emerging Capabilities
Bill of materials Enterprise
A/P and A/R application
General ledger integration
Inventory control Visibility
Collaborative
Order Entry
planning,
Purchasing forecasting and
Project requirements replenishment
planning Customer
Routings relationship
Capacity requirements management
planning Web-enabled
applications
Hosting