Chapter 5: The Value ofInformation5-1
5-1 Chapter 5: The Value of Information
5.1IntroductionValueof using anytype of informationtechnologyPotentialavailabilityofmoreandmoreinformation throughout the supply chainImplicationsthisavailabilityoneffectivedesign and managementof theintegratedsupplychain5-2
5-2 5.1 Introduction ⚫ Value of using any type of information technology ⚫ Potential availability of more and more information throughout the supply chain ⚫ Implications this availability on effective design and management of the integrated supply chain
Information TypesInventorylevelsOrdersProductionDeliverystatus5-3
5-3 Information Types ⚫ Inventory levels ⚫ Orders ⚫ Production ⚫ Delivery status
MoreInformationHelps reducevariability in the supply chain.Helpssuppliers make betterforecastsaccountingfor promotions andmarket changesEnables the coordination of manufacturing anddistribution systems and strategiesEnables retailers to better serve their customersbyofferingtools forlocating desireditemsEnablesretailers toreactand adapttosupplyproblemsmorerapidlyEnables lead time reductions5-4
5-4 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
5.2Bullwhip EffectWhilecustomerdemandforspecificproducts does not vary muchInventoryandback-orderlevelsfluctuateconsiderablyacrosstheirsupplychainP&G'sdisposablediaperscaseSales quiteflatDistributor orders fluctuate more thanretailsalesSupplierordersfluctuateevenmore5-5
5-5 5.2 Bullwhip Effect ⚫ While customer demand for specific products does not vary much ⚫ Inventory and back-order levels fluctuate considerably across their supply chain ⚫ P&G’s disposable diapers case ⚫ Sales quite flat ⚫ Distributor orders fluctuate more than retail sales ⚫ Supplier orders fluctuate even more
4-Stage Supply ChainExternalDemandFIGURE5-5RetailerThesupplychainOrderleadtimeDelivery lead timeWholesalerOrderleadtimeDelivery lead timeDistributorOrderleadtimeDelivery lead timeFactoryProduction lead time5-6
5-6 4-Stage Supply Chain FIGURE 5-5: The supply chain
EffectofOrderVariabilityOrdervariabilityinthesupplychain807060Factory50Distributor40WholesalerRetailer30Customer2010拉917192111113154WeekFIGURE5-6:The increase invariability in the supply chain5-7
5-7 Effect of Order Variability FIGURE 5-6: The increase in variability in the supply chain
Factors that Contribute to theVariability-Demand ForecastingPeriodicreviewpolicyCharacterized by a single parameter,thebase-stocklevel.Base-stock level =Average demand during lead time and review period +a multiple of the standard deviation of demand duringleadtimeandreviewperiod(safetystock)Estimation of average demand and demand variabilitydoneusing standardforecast smoothing techniquesEstimates get modifiedasmore data becomesavailableSafety stock and base-stock level depends ontheseestimatesOrder quantities are changed accordingly increasingvariability5-8
5-8 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 smoothing 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
Factors that Contribute to theVariability - Lead TimeIncrease in variability magnified with increasingleadtime.Safetystock andbase-stock levels havealeadtimecomponentintheirestimationsWith longer lead times:a small change in the estimate of demand variabilityimpliesa significant change in safety stock and base-stocklevel,whichimpliessignificant changes in order quantitiesleadstoanincreaseinvariability5-9
5-9 ⚫ 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 ⚫ leads to an increase in variability Factors that Contribute to the Variability – Lead Time
Factors that Contribute to theVariability - Batch OrderingRetailer uses batch ordering,as witha(Q,R)ora min-max policyWholesaler observes a large order,followed byseveral periods of no orders, followed byanotherlarge order,and so onWholesaler sees a distorted and highly variablepatternofordersSuchpattern is also a result of:Transportation discounts with large ordersPeriodic sales quotas/incentives5-10
5-10 Factors that Contribute to the Variability – Batch Ordering ⚫ Retailer uses batch ordering, as with a (Q,R) or a min-max policy ⚫ 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