全英文课《DesigningandManagingSupplyChainSystem》授课教案Chapter5 (Lecture 8)Bullwhip effect &the valueof informationOBJECTIVESstudent should understand the following issues:(1) The main of bullwhip effect;(2) The factors causing the bullwhip effect;(3)Themeasurestoreducethebullwhipeffectoreliminateitsimpact.TEACHING CONTENT5.1IntroductionWe live in the “Information Age." Data warehouses, web services, XML, wireless, theInternet, and portals are just a few of the technologies dominating the business page of thedailynewspaper.The implications of this abundance of available information are enormous. The supplychain pundits and consultants like to use the phrase In modern supply chains, informationreplaces inventory.We don't dispute this idea, but its meaning is vague. After all, at somepoint the customer needs products, not just information! Nevertheless, information changesthe way supply chains can and should be effectively managed, and these changes may lead to,among other things, lower inventories. Indeed, our objective in this chapter is to characterizehow information affects the design and operation of the supply chain.It shows that byeffectively harnessing the information now available, one can design and operate the supplychain much more efficiently and effectively than ever before.It should be apparent to the reader that having accurate information about inventorylevels, orders,production, and delivery status throughout the supply chain should not makethe managers of a supply chain less effective than if this information were not available.Afterall,they could chooseto ignore it.As we will see, however,this information provides atremendous opportunity to improve theway the supply chain is designed and managed.Unfortunately, using this information effectively does make the design and management ofthe supply chain more complex because many more issues must be considered.We argue here that this abundant information:1)Helps reduce variability in the supply chain.2)Helps suppliers make better forecasts, accounting for promotions and market changes.3)Enables the coordination ofmanufacturing and distribution systems and strategies4)Enables retailers to better serve their customers by offering tools for locating desireditems5)Enables retailerstoreactand adapttosupplyproblemsmorerapidlyEnables lead time reductions
全英文课《Designing and Managing Supply Chain System》 授课教案 Chapter 5 (Lecture 8) Bullwhip effect &the value of information OBJECTIVES student should understand the following issues： (1) The main of bullwhip effect; (2) The factors causing the bullwhip effect; (3) The measures to reduce the bullwhip effect or eliminate its impact. TEACHING CONTENT 5.1 Introduction We live in the “Information Age.” Data warehouses, web services, XML, wireless, the Internet, and portals are just a few of the technologies dominating the business page of the daily newspaper. The implications of this abundance of available information are enormous. The supply chain pundits and consultants like to use the phrase In modern supply chains, information replaces inventory. We don't dispute this idea, but its meaning is vague. After all, at some point the customer needs products, not just information! Nevertheless, information changes the way supply chains can and should be effectively managed, and these changes may lead to, among other things, lower inventories. Indeed, our objective in this chapter is to characterize how information affects the design and operation of the supply chain. It shows that by effectively harnessing the information now available, one can design and operate the supply chain much more efficiently and effectively than ever before. It should be apparent to the reader that having accurate information about inventory levels, orders,production, and delivery status throughout the supply chain should not make the managers of a supply chain less effective than if this information were not available. After all, they could choose to ignore it. As we will see, however, this information provides a tremendous opportunity to improve the way the supply chain is designed and managed. Unfortunately, using this information effectively does make the design and management of the supply chain more complex because many more issues must be considered. We argue here that this abundant information: 1)Helps reduce variability in the supply chain. 2)Helps suppliers make better forecasts, accounting for promotions and market changes. 3)Enables the coordination of manufacturing and distribution systems and strategies. 4)Enables retailers to better serve their customers by offering tools for locating desired items.5)Enables retailers to react and adapt to supply problems more rapidly. Enables lead time reductions
全英文课《DesigningandManagingSupplyChainSystem》授课教案5.2BullwhipEffect5.2.1The main of bullwhip effectThrough the history data, we can find inventory and back-order levels fluctuateconsiderably across their supply chain while customer demand for specific products does notvary much.For instance, in examining the demand for Pampers disposable diapers,executivesatProcter&Gamblenoticedan interestingphenomenon.Asexpected,retail salesof theproduct werefairlyuniform; there is no particulardayormonth inwhich the demandis significantly higher or lower than any other. However, the executives noticed thatdistributors'orders placed to the factory fluctuated much more than retail sales.In addition,P&G's orders to itssuppliersfluctuated evenmore.This increase invariability aswetravelup in the supply chain is referred to as the bullwhip effectFIGURE5-5Thesupplychain.Extemal DemandRetailerOrder lead timeDelivery lead timeWholesalerOrderlead timeDeliveryleadtimeDistributor.Orderlead timeDelivery lead timeFactoryProductiFigure 5-1 illustrates a simple four-stage supply chain: a single retailer, a singlewholesaler,a single distributor,and a single factory.The retailer observes customer demandand places orders to the wholesaler.The wholesaler receives products from the distributor,who places orders to the factory. Figure 5-6 provides a graphical representation of orders, asa function of time,placed by different facilities. The figure clearly shows the increase invariability across the supply chainTounderstandtheimpactoftheincreaseinvariabilityonthesupplychain,considerthesecond stage in our example,the wholesaler.The wholesaler receives orders from the retailerand places orders to his supplier, the distributor. To determine these order quantities, thewholesalermustforecasttheretailer'sdemand.Ifthewholesalerdoesnothaveaccesstothecustomer'sdemand data,hemust use ordersplacedby theretailertoperformhisforecasting.Since variability in orders placed by the retailer is significantly higher than variability incustomerdemand.asFigure 5-6 shows,the wholesaler isforced to carrymore safety stockthan the retailer or else to maintain higher capacity than the retailer in order tomeet the sameservice level as the retailer. This analysis can be carried over to the distributor as well as thefactory,resulting in even higher inventory levels and therefore higher costs at these facilities
全英文课《Designing and Managing Supply Chain System》 授课教案 5.2 Bullwhip Effect 5.2.1 The main of bullwhip effect Through the history data, we can find inventory and back-order levels fluctuate considerably across their supply chain while customer demand for specific products does not vary much. For instance, in examining the demand for Pampers disposable diapers, executives at Procter & Gamble noticed an interesting phenomenon. As expected, retail sales of the product were fairly uniform; there is no particular day or month in which the demand is significantly higher or lower than any other. However, the executives noticed that distributors' orders placed to the factory fluctuated much more than retail sales. In addition, P&G's orders to its suppliers fluctuated even more. This increase in variability as we travel up in the supply chain is referred to as the bullwhip effect. Figure 5-1 illustrates a simple four-stage supply chain: a single retailer, a single wholesaler, a single distributor, and a single factory. The retailer observes customer demand and places orders to the wholesaler.The wholesaler receives products from the distributor, who places orders to the factory. Figure 5-6 provides a graphical representation of orders, as a function of time, placed by different facilities. The figure clearly shows the increase in variability across the supply chain. To understand the impact of the increase in variability on the supply chain, consider the second stage in our example, the wholesaler. The wholesaler receives orders from the retailer and places orders to his supplier, the distributor. To determine these order quantities, the wholesaler must forecast the retailer's demand. If the wholesaler does not have access to the customer's demand data, he must use orders placed by the retailer to perform his forecasting. Since variability in orders placed by the retailer is significantly higher than variability in customer demand,as Figure 5-6 shows, the wholesaler is forced to carry more safety stock than the retailer or else to maintain higher capacity than the retailer in order to meet the same service level as the retailer. This analysis can be carried over to the distributor as well as the factory, resulting in even higher inventory levels and therefore higher costs at these facilities
全英文课《DesigningandManagingSupplyChainSystem》授课教案FIGURE5-6The increase in variability in the supply chain.Ordervariabilityinthesupplychain807060Factory50DistributorsapioWholesaler40Retailer30Customer1927Week5.2.2 The the Causes of the Variability1) Demand forecasting. To explain the connection between forecasting and thebullwhip effect, we need to revisit inventory control strategies in supply chains.Thewarehouse determines a target inventory level, the base-stock level, and each review periodthe inventory position is reviewed, and the warehouse orders enough to raise the inventoryposition to the base-stock level.The base-stock level is typically set equal to the averagedemand duringlead time and review period plus safety stock. Typically,managers usestandard forecast smoothing techniques to estimate average demand and demand variabilityAn important characteristic of all forecasting techniques is that as more data are observed,theestimatesofthemeanandthestandarddeviation(orvariability)ofcustomerdemandsareregularlymodified.Sincesafetystock,aswellasthebase-stocklevel,stronglydependsonthese estimates, the user is forced to change order quantities, thus increasing variability2) Lead time. With longer lead times, a small change in the estimate of demandvariability implies a significant change in safety stock and base-stock level leading to asignificant change in order quantities.This,of course, leads to an increase in variability.3)Batch ordering.From Chapter 2,a firmthat isfaced with fixed ordering costsneeds to apply the (Q, R) or (s, S) inventory policies, which lead to batch ordering.Sometimeretailers may order quantities that allow them to take advantage of transportation discountsastransportationcostsbecomemoresignificant.Thismayleadtosomeweekswithlargeorders, and some with no orders.Finally,the quarterly or yearly sales quotas or incentivesobserved in many businesses also can result in unusually large orders observed on a periodicbasis.4) Price fluctuation. If prices fluctuate, retailers often attempt to stock up when pricesare lower. This is accentuated by the prevailing practice in many industries of offeringpromotions and discounts at certain times or for certain quantities.This practice implies thatretailers purchase large quantities during distributors' and manufacturers' discount andpromotion time and order relatively small quantities at other time periods
全英文课《Designing and Managing Supply Chain System》 授课教案 5.2.2 The the Causes of the Variability 1) Demand forecasting. To explain the connection between forecasting and the bullwhip effect, we need to revisit inventory control strategies in supply chains. The warehouse determines a target inventory level, the base-stock level, and each review period, the inventory position is reviewed, and the warehouse orders enough to raise the inventory position to the base-stock level.The base-stock level is typically set equal to the average demand during lead time and review period plus safety stock. Typically, managers use standard forecast smoothing techniques to estimate average demand and demand variability. An important characteristic of all forecasting techniques is that as more data are observed, the estimates of the mean and the standard deviation (or variability) of customer demands are regularly modified. Since safety stock, as well as the base-stock level, strongly depends on these estimates, the user is forced to change order quantities, thus increasing variability. 2) Lead time. With longer lead times, a small change in the estimate of demand variability implies a significant change in safety stock and base-stock level, leading to a significant change in order quantities. This, of course, leads to an increase in variability. 3) Batch ordering. From Chapter 2, a firm that is faced with fixed ordering costs needs to apply the (Q, R) or (s, S) inventory policies, which lead to batch ordering.Sometime retailers may order quantities that allow them to take advantage of transportation discounts as transportation costs become more significant. This may lead to some weeks with large orders, and some with no orders. Finally, the quarterly or yearly sales quotas or incentives observed in many businesses also can result in unusually large orders observed on a periodic basis.4) Price fluctuation. If prices fluctuate, retailers often attempt to stock up when prices are lower. This is accentuated by the prevailing practice in many industries of offering promotions and discounts at certain times or for certain quantities. This practice implies that retailers purchase large quantities during distributors' and manufacturers' discount and promotion time and order relatively small quantities at other time periods
全英文课《DesigningandManagingSupplyChainSystem》授课教案5)Inflated orders. Inflated orders placed by retailers during shortage periods tend tomagnify the bullwhip effect. Such orders are common when retailers and distributors suspectthat a product will be in short supply, and therefore anticipate receiving supply proportionalto the amount ordered. When the period of shortage is over, the retailer goes back to itsstandard orders, leading to all kinds of distortions and variations in demand estimates.5.2.3Methods for Copingwith theBullwhipEffect1) Reducing uncertainty. One of the most frequent suggestions for decreasing oreliminating the bullwhip effect is to reduce uncertainty throughout the supply chain bycentralizing demand information, that is,by providing each stage of the supply chain withcompleteinformationonactualcustomerdemand2) Reducing variability. The bullwhip effect can be diminished by reducing thevariability inherent inthe customer demand process.For example, if we can reducethevariability of the customer demand seen by the retailer, then even if the bullwhip effectoccurs, the variability of the demand seen by the wholesaler also will be reduced. We canreduce the variability of customer demand through, for example, the use of an“everydaylow pricing”(EDLP)strategy.3)Lead-timereduction.lead times servetomagnifytheincreaseinvariability due todemandforecasting.Therefore,lead timereductioncan significantlyreducethebullwhipeffect throughout a supply chain.Observe that lead times typically include two components:order lead times and information lead times. This distinction is important since order leadtimes can be reduced through the use of cross-docking, while information lead time can bereduced through the use of electronic data interchange (EDI).4) Strategic partnerships. The bullwhip effect can be eliminated by engaging in anyof a number of strategic partnerships. These strategic partnerships change the wayinformation is shared and inventory is managed within a supply chain, possibly eliminatingthe impact of the bullwhip effect such as vendor managed inventory (VMI).QUESTIONSDiscuss how each of the following helps to alleviate the bullwhip effect:a. E-commerce and the Internet.b. Express delivery.c. Collaborative forecasts.d. Everyday low pricinge. Vendor-managed inventory (VMI)f.Supply contracts
全英文课《Designing and Managing Supply Chain System》 授课教案 5) Inflated orders. Inflated orders placed by retailers during shortage periods tend to magnify the bullwhip effect. Such orders 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. When the period of shortage is over, the retailer goes back to its standard orders, leading to all kinds of distortions and variations in demand estimates. 5.2.3 Methods for Coping with the Bullwhip Effect 1) Reducing uncertainty. One of the most frequent suggestions for decreasing or eliminating the bullwhip effect is to reduce uncertainty throughout the supply chain by centralizing demand information, that is,by providing each stage of the supply chain with complete information on actual customer demand. 2) Reducing variability. The bullwhip effect can be diminished by reducing the variability inherent in the customer demand process. For example, if we can reduce the variability of the customer demand seen by the retailer, then even if the bullwhip effect occurs, the variability of the demand seen by the wholesaler also will be reduced. We can reduce the variability of customer demand through, for example, the use of an “everyday low pricing” (EDLP) strategy. 3) Lead-time reduction. lead times serve to magnify the increase in variability due to demand forecasting. Therefore, lead time reduction can significantly reduce the bullwhip effect throughout a supply chain.Observe that lead times typically include two components: order lead times and information lead times. This distinction is important since order lead times can be reduced through the use of cross-docking, while information lead time can be reduced through the use of electronic data interchange (EDI). 4) Strategic partnerships. The bullwhip effect can be eliminated by engaging in any of a number of strategic partnerships. These strategic partnerships change the way information is shared and inventory is managed within a supply chain, possibly eliminating the impact of the bullwhip effect such as vendor managed inventory (VMI). QUESTIONS Discuss how each of the following helps to alleviate the bullwhip effect: a. E-commerce and the Internet. b. Express delivery. c. Collaborative forecasts. d. Everyday low pricing. e. Vendor-managed inventory (VMI). f. Supply contracts