Lean Supply Chains: The Foundation System’s Perspective
Understand supply chain dynamics and adopt a holistic view.
Consider the business ecosystem in which you are operating.
Supply Chain Dynamics Enterprises can experience huge variations at each
step in the chain, with variations typically more pronounced the further upstream the enterprise is from the ultimate user.
Demand Distortion Results in:
Larger inventory carrying costs Lost sales from stock outs Lack of responsiveness to customer demand
Bullwhip Effect A slight motion of the handle of a bullwhip can make
the top thrash wildly at up to 900mph. Increasing demand variability as you move upstream. Most demand distortion is caused by the supply chain
itself, not by the customer. Results in:
excessive inventory investment poor customer service lost revenues misguided capacity planning ineffective transportation Ineffective production schedules.
The Beer Game
Underscores the importance of understanding supply chain dynamics and applying systems thinking to coordinate activities within and between enterprises.
Explains the crucial role lead times play in enhancing or inhibiting competitiveness
Elaborates on the role of information systems in the lean supply chain.
Assumptions Assumes a linear SC, 4 enterprises, one type of beer
Goal is to manage demand as imposed by it’s customer Each enterprise has only one manager Runs for 50 wks.
RetailerFactory Distributor Wholesaler
Each week, an enterprise receives an order from downstream customers and places an order upstream.
Two week lead time between when an order is placed and when it is received.
Another two week lead time before the order is delivered.
Each enterprise starts with 12 cases of beer. At the beginning of each week we know what
demand will be.
Assumptions
Playing the game Everyone acts in their own self
interest on the basis of their own forecasts
The system is in a steady state with demand at four cases each week.
In week 5, demand is disrupted to 8 cases a week and remains constant.
Each player’s ordering policy is based on two rules
Demand Forecast Rule
The forecast rule: The weekly demand for each of the next four weeks is the average of the weekly demand over the four most recent weeks. Four period moving average: (4+4+4+4)/4=4
Order Quantity Rule
Given the forecasts, the amount ordered is just enough to replenish the ending inventory (Four weeks from now-when the order arrives) to a target of 12 cases.
12+(Forecast demand for next 4 weeks)-(current inventory)-(Orders already placed for the next three weeks.
week 4:Customer/Retailer/WholesellerCustomer and Retailer: Week 4
Forecast Demand: (4+4+4+4)/4 4Demand (this period) 4 4 Order just received
Demand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4Target Safety Stock 12 12 Inventory on hand
Order 4
Retailer and Wholeseller: Week 4Forecast Demand: (4+4+4+4)/4 4
Demand (this period) 4 4 Order just receivedDemand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4
Target Safety Stock 12 12 Inventory on handOrder 4
week 5: Customer/Retailer/WholesellerCustomer and Retailer: Week 5
Forecast Demand(4+4+4+8)/4 5Demand (this period) 8 4 Order just received
Demand(next 3 periods): 5+5+5 15 12 Orders on the way: 4+4+4Target Safety Stock 12 8 Inventory on hand
Order 12
Consumer demand increased by 100% 4 8 cases
The retailers order to the wholesaler increased by 200% 4 12 cases
The retailer doubled the variation in demand
Retailer and Wholeseller: Week 5Forecast Demand (4+4+4+12)/4 6
Demand (this period) 12 4 Order just receivedDemand(next 3 periods): 6+6+6 18 12 Orders on the way: 4+4+4
Target Safety Stock 12 4 Inventory on handOrder 20
week 5: Customer/Retailer/Wholeseller
The wholesaler’s order to the distributor increased by 400%. 4 20
Distributor and Factory: Week 5Forecast Demand (4+4+4+36)/4 12
Demand (this period) 36 4 Order just receivedDemand(next 3 periods): 12+12+12 36 12 Orders on the way: 4+4+4
Target Safety Stock 12 -20 Inventory on handOrder 68
Wholeseller and Distributor: Week 5Forecast Demand (4+4+4+20)/4 8
Demand (this period) 20 4 Order just receivedDemand(next 3 periods): 8+8+8 24 12 Orders on the way: 4+4+4
Target Safety Stock 12 -4 Inventory on handOrder 36
week 5: Wholeseller/Didtributor/Factory
200% 400% 800% 1,600%
FactoryRetailer Wholesaler Distributor
The variation doubles at each stage. However, of the 64-case increase in the factory's
orders, only four cases were directly attributable to a change in consumer demand.
The lead times present in this value stream created 94 percent of the variation observed in the factory’s orders.
The Implications of Lead Time on the Bullwhip Effect
Warehouses/Distributors
Manufacturers
Retailers
Lead times significantly exacerbate the bullwhip effect Reducing lead time, in combination with improved
visibility along the supply chain, can significantly and positively relieve the bullwhip effect
The impact of information
Assume all of the same factors except that each stage is aware of the customer’s orders.
Assume we know that demand for week six and onward is five cases.
Following exactly the same steps.
The impact of informationForecast Demand: (4+4+4+8)/4 5
Demand (this period) 8 4 Order just receivedDemand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 8 Inventory on handOrder 12
Forecast Demand 5Demand (this period) 12 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4Target Safety Stock 12 4 Inventory on hand
Order 16
Forecast Demand 5Demand (this period) 16 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4Target Safety Stock 12 0 Inventory on hand
Order 20
Forecast Demand 5Demand (this period) 20 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4Target Safety Stock 12 -4 Inventory on hand
Order 24
Retailer
Wholesaler
Distributor
Manufacturer
Retailer orders 12 cases- a 200% increase
Wholesaler orders 16 cases- a 300% increase
Distributor orders 20 cases- a 400% increase
Manufacturer order Raw Materials to make 24 cases- a 500% increase
The Impact of Information on the Bullwhip Effect Perfect forecasting does not eliminate the
bullwhip effect Lesson: The bullwhip effect is present even if
there is perfect information about the future that is shared among all channel partners.
The Impact of Lead Time on the Bullwhip Effect Lead times can multiply the variation in demand and
so everyone in the supply chain should be working to reduce lead times.
The implications of Little's Law are that when inventory in the supply chain is high, lead times increase, and, conversely, longer lead times result in more inventories in the pipeline.
This problematic and cyclical relationship between lead times and inventory is a powerful reason for reducing lead times.
Structure Drives Behavior:Causes of the Bullwhip Effect Lack of visibility Long lead time Many stages in the supply chain Lack of pull signals Order batching Price discount and promotions Forward buying Rationing
Other Behaviors that Cause the Bullwhip Effect Over-reaction to backlogs Neglecting to order to reduce inventory Hoarding customers Shortage gaming for customers Demand forecast inaccuracies Attempts to meet end-of-month metrics
Ways to Mitigate the Bullwhip Effect
Reduce lead times Use/sharing of POS data Smaller orders
Work with suppliers on more frequent deliveries of smaller order increments
Use stable pricing, “everyday low prices” Levels out customer demand
Allocation based on past sales