4.

The Value of Information

Chapter 5
Designing and Managing the Supply Chain 3E
– D. Simchi-Levi – P. Kaminsky – E. Simchi-Levi

Source - https://wordart.com/edit/hp4nwm68e1yi
Supply Chain Management – The Value of Information by Punit Neb is licensed under CC BY-NC 4.0
Introduction

●
Information is the basic necessity for managerial decision-
making
●
Often information flow and accuracy was overlooked
because it was not viewed as being critical to customers
●
In today's times timely & accurate information has become
more critical in supply chain system design & operations
due to the following reasons
– Customers demand real-time information about order-
status, product availability, delivery tracking,& invoices
– Information can be used by managers to reduce
inventory, demand uncertainties, & human resource
requirements

5-2
… Introduction

– Information increases flexibility with regards to how, when & where

resources maybe to gain competitive advantage
– Information transfer & exchange utilizing IT tools and internet is
facilitating collaboration & redefining supply chain relationships
●
Primary role of information technology in supply chain management is integration
●
Achieved through the support of information technology in the following areas
– EDI
» Through communication networks which are wired or wireless

– Tracking of products / shipments

» Through GPS tracking of vehicles, barcodes & RFID

– ERP & Information Systems

– Inventory management
– E-procurement
– Credit checks and payments

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… Introduction

●
More information
– Helps reduce variability in the supply chain

– Helps suppliers make better forecasts, accounting

for promotions and market changes
– Enables the coordination of manufacturing and
distribution systems and strategies
– Enables retailers to better serve their customers by
offering tools for locating desired items
– Enables retailers to react and adapt to supply
problems more rapidly
– Enables lead time reductions

5-4
… Introduction

●
Class discussion
●
In modern supply chains, information
replaces inventory
●
Supply Chain – end to end visibility

5-5
Bullwhip Effect

Definition
●
The phenomenon wherein small changes in
demand at the demand end of a supply
chain get amplified as information flows
upstream
●
The amplification of the demand variance up the supply
chain, from the customer to factory, as demand
information passes through the supply chain
●
The amplification of information distortion as order
information travels up the supply chain
– AKA Whiplash effect
– Term coined by management of Procter & Gamble

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... Bullwhip Effect

– Phenomenon observed in forecast driven

distribution channels
– Change in demand moves backward in the form of
amplified oscillations upstream resembling the
flick of a whiplash
– Effect indicates a lack of synchronization among
supply chain members

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 ... Bullwhip Effect

Source – Designing and Managing the Supply Chain 3E

– D. Simchi-Levi – P. Kaminsky – E. Simchi-Levi Page 154 5-8
 ... Bullwhip Effect

Source – Designing and Managing the Supply Chain 3E

– D. Simchi-Levi – P. Kaminsky – E. Simchi-Levi Page 155 5-9
... Bullwhip Effect

●
Since customer demand is rarely perfectly stable, businesses must
forecast demand in order to properly position inventory and other
resources
●
Forecasts are based on statistics which are almost never perfectly
accurate
●
Hence supply chain participants often carry an inventory buffer stock
●
Moving up the supply chain from end-consumer to raw material
supplier, each supply chain participant has observed a variation in
demand and thus a greater safety stock
●
This demand variability alongwith time delays in transmitting
information upstream, delays in manufacturing & shipping together
cause bullwhip effect
●
It is estimated that the consequences of the bullwhip effect can
influence 30% of the profits for a manufacturing company

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... Bullwhip Effect

Factors that contribute to the variability

Demand Forecasting
●
Periodic review policy
– Characterized by a single parameter, the base-stock level

Base-stock level = Average demand during lead time and

review period + a multiple of the standard deviation of demand
during lead time and review period - safety stock
– Estimation of average demand and demand variability done
using standard forecast techniques
– Estimates get modified as more data becomes available
– Safety stock and base-stock level depends on these estimates
– Order quantities are changed accordingly increasing variability

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... Bullwhip Effect

Factors that contribute to the variability

Lead Time
●
Increase in variability magnified with increasing lead time
●
Safety stock and base-stock levels have a lead time
component in their estimations
●
With longer lead times
– A small change in the estimate of demand variability
implies a significant change in safety stock and base-
stock level, which implies significant changes in order
quantities
– Results in an increase in variability

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... Bullwhip Effect

Factors that contribute to the variability

Batch Ordering
●
Retailer uses batch ordering
●
Wholesaler observes a large order, followed by several
periods of no orders, followed by another large order,
and so on
●
Wholesaler sees a distorted and highly variable pattern
of orders
●
Such pattern is also a result of
– Transportation discounts with large orders
– Periodic sales quotas/incentives

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... Bullwhip Effect

Factors that contribute to the variability

Price Fluctuations
●
Retailers often attempt to stock up when prices
are lower
●
Accentuated by promotions and discounts at
certain times or for certain quantities
●
Such forward buying results in
– Large order during the discounts
– Relatively small orders at other time periods

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... Bullwhip Effect

Factors that contribute to the variability

Inflated Orders
●
Inflated orders during shortage periods are
common when retailers and distributors
suspect that a product will be in short supply
and therefore anticipate receiving supply
proportional to the amount ordered
●
After period of shortage, retailer goes back to
its standard orders which leads to all kinds of
distortions and variations in demand estimates

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... Bullwhip Effect

Methods for coping with bullwhip effect

Reducing uncertainty
●
Reducing uncertainty by providing each stage of
the supply chain with complete information on
actual customer demand
●
In practice even if complete information on
customer demand is shared, bullwhip effect will
continue to exist as each stage may use different
– Methods of demand forecasting
– Different buying practices

5 - 16
... Bullwhip Effect

Methods for coping with bullwhip effect

Reducing variability
●
Bullwhip effect can be diminished by reducing the
variability inherent in the customer demand process
●
Techniques such as Everyday Low Pricing (EDLP)
which
– Involves offering a product at a single consistent
price, rather than offering a regular price with
periodic price promotions
– Helps retailer in eliminating the dramatic shifts in
demand on account of promotions leading to mode
stable demand

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... Bullwhip Effect

Methods for coping with bullwhip effect

Lead-time reduction
●
Lead times magnify the increase in variability
due to demand forecasting
●
Two components of lead times
– Order lead times - can be reduced through
the use of cross-docking
– Information lead times - can be reduced
through the use of electronic data
interchange (EDI)

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... Bullwhip Effect

Methods for coping with bullwhip effect

Strategic partnerships
●
Changing the way information is shared and
inventory is managed
●
Vendor managed inventory (VMI)
– Manufacturer manages the inventory of its
product at the retailer outlet
– VMI the manufacturer does not rely on the
orders placed by a retailer, thus avoiding the
bullwhip effect entirely

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Vendor Managed Inventory (VMI)

●
A collaborative strategy between a buyer and supplier to
optimize the availability of products at minimal cost
●
A supply chain initiative where the supplier is authorized to
manage inventories of agreed-upon SKUs at customer
locations
●
Results in
– Minimization of distortion of demand information
(bullwhip effect) getting transferred from the downstream
supply-chain member (e.g., retailer) to the upstream
member (e.g., supplier)
– Less frequent stock-out situations
– Reduction in inventory-carrying costs

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… Vendor Managed Inventory (VMI)

How VMI works

●
The supplier tracks their customers’ product sales and inventory
levels, sending goods only when stocks run low
●
The decision to supply is taken by the supplier, not the customer
●
Decision based on the ability of the current level of inventory to satisfy
prevailing market demand, while factoring in the lead time to resupply
●
By emphasizing the supplier’s responsibility for maximising product
availability, VMI aims to achieve this with minimum inventories
●
To achieve these apparently conflicting goals, supplier accesses real-
time demand at the customer through EDI
●
Customer demand and inventory data are often processed through
software application to automate the application of decision rules and
identify SKUs that need replenishment

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Electronic Data Interchange [EDI]

●
The intercompany computer-to-computer
exchange of business documents / data in
standard format
●
A means of communicating information
between two organizations electronically
instead of via traditional mail, fax
●
Logistics information exchanged are inbound
materials flow, production status, product
inventories, customers' shipments, incoming
orders

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… Electronic Data Interchange [EDI]

●
Can be viewed from two perspectives
– External Perspective
Includes communication of order shipment,
inventory levels & billing information with
vendors, transport carriers & customers
– Internal Perspective
Includes communication of production
schedules, production levels and control
data with the organization's departments

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… Electronic Data Interchange [EDI]

Benefits of EDI
●
Increased internal productivity through reduced and faster information
transmission
●
Improved accuracy levels due to
– Reduction in number of times data entry is done
– Reduction in number of employees involved in data entry
●
Improved channel relationships
●
Increased external productivity
●
Increased ability to compete internationally
●
Decreased operating costs through
●
Reduced labour & material cost associated with printing, mailing & handling
paper-based transactions
– Reduced telephone and fax communications
– Reduced clerical costs

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