TOPIC TWO: SUPPLY CHAIN MANAGEMENT PROCESSES AND CASE ANALYSIS

SUPPLY CHAIN MANAGEMENT PROCESSES/ACTIVITIES

These are activities that are undertaken in managing the supply chain and the aspects that make
these processes possible. The supply chain management processes are;

 Managing relationships with customer – finding out what their needs are and working
to meet cost, with the shortest waiting times and maximum responsiveness and flexibility
to their needs.
 Managing demand – making sure that supply matches customer demand through
demand forecasting, synchronizing demand etc.
 Fulfilling customers’ orders efficiently, effectively and at the minimum cost.
 Managing manufacturing flow – that is all processes and activities needed to transform
inputs into finished goods and services.
 Managing relationships with suppliers (SRM – Supplier Relationship Management).
Are processes that focus on the interface between the firm and its suppliers. For example,
can be collaborative or adversarial.
 Developing products – all activities involved in the development and marketing of new
or existing products such as idea generation, concept development, product and process
design, production and delivery.
 Management returns – concerned with all activities relating to returning items, that is
items moving from the ultimate customer in the direction of the raw materials source.
This include collection of returnable items, their inspection and separation and the
application of range of disposition options including repair, reconditioning, upgrading,
remanufacture and recycling.

SUPPLY CHAIN MANAGEMENT ENABLERS

This process of managing supply chain needs “support”. This support is what is known as
“enablers” – that is aspects that have to be in place in order for supply chain management to be
possible and effective.

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Therefore, Enablers are aspects that make it possible to undertake supply chain management
activities. Marine E. J. (2000) identified 4 enablers, which have to be in place for SCM to
succeed. These 4 also become barriers to effective SCM if they are not in place.

 Organization infrastructure – How business units and functional areas are organized
and work together, how change management is handled, and how management functions
and make policies.
 Technology – The use of Information Technology (IT) within the firm to support
activities. Having operations, marketing and logistics data coordinated within the
company. Having data readily available to managers and the coordination of operations,
marketing and logistics data between SC members.
 Strategic alliances – Extended parties selected as business allies and how inter-company
relationships are built and managed (relationships will be discussed later).
 Human resource management – The right people need to be present to undertake the
supply chain management activities. They need to be managed and motivated. Important
aspects in managing human resources in supply chain management are;
(a) Sourcing, hiring and selecting skilled people at all management levels.
(b) Finding change agents to manage SCM implementation.
(c) Having compensation and incentive programs in place for SCM performance.
(d) Finding internal process facilitators knowledgeable about SCM.

PUSH AND PULL VIEW OF SUPPLY CHAIN PROCESSES

A ‘push’ system of manufacturing is one where goods are produced against the expectation of
demand, which includes both known demand in the form of existing orders and forecast demand.
In other words, goods are not produced specifically to order but are produced against a forecast
demand. One fundamental issue relates to the lead time gap: where the amount of time it takes to
source and manufacture goods is longer than the customer’s willingness to wait, especially in
today’s world of internet retailing. This gap has to be reduced, eliminated or filled with finished
goods inventory in order to satisfy customer demand in an acceptable timescale. In other words,
the lead time gap is the gap between the customer’s expectation and tolerance for waiting for
fulfillment of their order and the company’s ability to source, manufacture and deliver the order.

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Demand forecasting has to be carried out where raw material suppliers’ lead times for delivery
and customer delivery requirements have to be considered. If there is a one-month lead time for a
given raw material then it will be necessary to estimate what the level of production will be in
one month’s time in order to satisfy forecast demand for the product. These forecasts are usually
based on historical sales information. The difficulty arises when either there is a higher level of
demand than expected and sales are lost, or there is a lower level of demand and finished product
stocks grow too large. Lost revenue from missed sales opportunities is the result on the one hand,
and higher inventory carrying costs or product obsolescence costs are the result on the other.
MRPII (incorporating MRP) is a ‘push’ system.

A ‘pull’ system of manufacturing is one where goods are only produced against known customer
orders. This is because only actual orders from customers are being produced on the production
line. None of the goods are being made to keep as finished product stocks that may be sold at a
later date. Therefore, firm customer orders are ‘pulling’ all the materials through the process
from the material suppliers and culminating in the delivery to the final customer. Just-in-time is a
‘pull’ system.

BULLWHIP EFFECT IN SUPPLY CHAIN

Distorted information from one end of a supply chain to the other can lead to tremendous
inefficiencies: excessive inventory investment, poor customer service, lost revenues, misguided
capacity plans, ineffective transportation, and missed production schedules. How do exaggerated
order swings occur? What can companies do to mitigate them?

Definition of the Bullwhip effect:

The bullwhip effect (also known as the Forrester effect) is defined as the demand distortion that
travels upstream in the supply chain from the retailer through to the wholesaler and manufacturer
due to the variance of orders which may be larger than that of sales.

Causes of the Bullwhip Effect in Supply Chain

 Demand forecast updating: Members of the supply chain updating their demand
forecasting. As each entity along the chain places an order, it replenishes stock and

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 includes some safety stock. With long lead times, there may be weeks of safety stocks,
which make the fluctuation in demand more significant.
 Order batching: Members of the supply chain rounding up or down the quantity of
orders. Companies may place orders in batches, often to avoid the cost of processing
orders more frequently or the high transportation costs for less-than-truckload orders.
Suppliers, in turn, face erratic streams of orders, and the bullwhip effect occurs. When
order cycles overlap, the effect is even more pronounced.
 Price fluctuations: Usually driven by discounting resulting in larger quantities of
purchases. When prices return to normal, customers stop buying. As a result, their buying
pattern does not reflect their consumption pattern.
 Rationing and gaming: Buyers and sellers delivering over or under their order
quantities. If product demand exceeds supply, a manufacturer may ration its products.
Customers, in turn, may exaggerate their orders to counteract the rationing. Eventually,
orders will disappear and cancellations pour in, making it impossible for the
manufacturer to determine the real demand for its product.

An example of the bullwhip effect

Let’s consider a retailer sells on average 10 ice creams per day in the summer season. Following
a heat wave the retailer's sales increase to 30 units per day, in order to meet this new demand, the
retailer increases their demand forecast and places an increased order on the wholesaler to 40
units per day in order to meet the new customer demand levels and to buffer any potential further
increase in demand, this creates the first wave in the exaggerated demand being driven down the
supply chain.

The wholesaler noticing this increase in demand from the retailer may then also build an
incremental increase into their forecast so generating a larger order on the ice cream
manufacturer, rather than ordering 40 units to be manufactured, the wholesaler may order 60
units from the manufacturer, this will further exaggerate the demand down the supply chain and
so creates a second wave of demand increase.

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 The manufacturer also feeling the increase in demand from the wholesalers may also react to the
increase by increasing their manufacturing run to 80 units, this creates a third wave in the
exaggeration of demand.

The retailer may run out of stock during the heat wave whilst the manufacturer is producing new
stock and may take the option of switching to an alternative brand to meet customer demand, this
will then create a false demand situation as sales appear to slump to next to nothing so the
retailer may then not place further demand for the original ice cream brand even though the
manufacturer has increased their production runs. Alternatively, if the weather changes and the
end consumers slow down on purchasing ice creams, this could result in an overstock situation
across the supply chain as each tier of the supply chain has reacted to the heat wave sales and
increased their demand. This is an example of the waves and troughs in the bullwhip effect.

Graphical Illustration of the Bullwhip Effect in Supply Chain

Figure 1 Increasing Variability of Orders up the Supply Chain

Consumer Sales Retailer's Orders to Manufacturer

20 20

15 15

Q’tity
10 Q’tity 10

5 5

0 0

Time Time

Wholesaler's Orders to Manufacturer Manufacturer's Orders to Supplier

20 20

15 15

10 10

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5 5

0 0
 Q’tity Q’tity

Figure 2: Higher Variability in Orders from Dealer to Figure 3 Bullwhip Effect due to Seasonal Sales of Soup
Manufacturer than Actual Sales
800
60
700 Shipments from
50 Orders Placed Manufacturer to
Retailers'
600 Distributors
Sales
40
500
Actual Sales
30
400 52
20 Time Weeks
300
10
200
0
100
How the supply chain can reduce the bullwhip effect
0
The bullwhip effect in the supply chain can be reduced through shared knowledge with suppliers
1

and customers. If members of the supply chain can determine what information is causing the
overreactions this can be resolved. Communications and response times can be improved using
modern technology.

The bullwhip effect can also be mitigated through the following:

 Avoid multiple demand forecast updates: Ordinarily, every member of a supply chain
conducts some sort of forecasting in connection with its planning (e.g., the manufacturer
does the production planning, the wholesaler, the logistics planning, and so on). Bullwhip
effects are created when supply chain members process the demand input from their

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 immediate downstream member in producing their own forecasts. Demand input from the
immediate downstream member, of course, results from that member’s forecasting, with
input from its own downstream member. One remedy to the repetitive processing of
consumption data in a supply chain is to make demand data at a downstream site
available to the upstream site. Hence, both sites can update their forecasts with the same
raw data.
 Break order batches: Since order batching contributes to the bullwhip effect, companies
need to devise strategies that lead to smaller batches or more frequent resupply. In
addition, the counterstrategies we described earlier are useful. When an upstream
company receives consumption data on a fixed, periodic schedule from its downstream
customers, it will not be surprised by an unusually large batched order when there is a
demand surge. One reason that order batches are large or order frequencies low is the
relatively high cost of placing an order and replenishing it. EDI can reduce the cost of the
paperwork in generating an order.
 Stabilize prices: The simplest way to control the bullwhip effect caused by forward
buying and diversions is to reduce both the frequency and the level of wholesale price
discounting. The manufacturer can reduce the incentives for retail forward buying by
establishing a uniform wholesale pricing policy.
 Eliminate gaming in shortage situations: When a supplier faces a shortage, instead of
allocating products based on orders, it can allocate in proportion to past sales records.
Customers then have no incentive to exaggerate their orders. General Motors has long
used this method of allocation in cases of short supply, and other companies, such as
Texas Instruments and Hewlett-Packard, are switching to it. “Gaming” during shortages
peaks when customers have little information on the manufacturers’ supply situation.
 Reduced lead times.
 Integration of planning and performance measurement.

NB: The bullwhip effect can lead to excessive inventory investments throughout the supply
chain when the parties involved attempt to protect themselves against demand variations. It can
also lead to an accumulation of inventory at the manufacturer's end that will further increase
supply chain costs.

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SUPPLY CHAIN MANAGEMENT CASE ANALYSIS

NB: Read the handout on Supply Chain Management Case Studies.

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