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Unit 2 BUSCM Bullwhip

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    Dr.S.Yogananthan

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    Systems 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 ateach step in the chain, with variations typicallymore pronounced the further upstream theenterprise is from the ultimate user.

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    Results in: Larger inventory carrying costs

    Lost sales from stock outs

    Lack of responsiveness to customer demand

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    Bullwhip effect - is the uncertainty caused fromthe distorted information flowing up and downthe supply chain stream and which may cause excessive swelling up of stocks and inventories,

    order size, stagnation in supply chain stream,stock outs, etc.

    Results in: excessive inventory investment poor customer service lost revenues misguided capacity planning

    ineffective transportation

    Ineffective production schedules.

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    Underscores the importance of understandingsupply chain dynamics and applying systemsthinking to coordinate activities within andbetween enterprises.

    Explains the crucial role lead times play inenhancing or inhibiting competitiveness

    Elaborates on the role ofinformation systems inthe lean supply chain.

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    Assumes a linear SC, 4 enterprises, one type of beer

    Goal is to manage demand as imposed by itscustomer

    Each enterprise has only one manager

    Runs for 50 wks.

    RetailerFactory DistributorWholesaler

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    Each week, an enterprise receives an orderfrom downstream customers and places anorder upstream.

    Two week lead time between when an order isplaced and when it is received.

    Another two week lead time before the orderis delivered.

    Each enterprise starts with 12 cases of beer.

    At the beginning of each week we know whatdemand will be.

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    Everyone acts in their own selfinterest on the basis of their ownforecasts

    The system is in a steady statewith demand at four cases eachweek.

    In week 5, demand is disrupted to

    8 cases a week and remainsconstant.

    Each players ordering policy isbased on two rules

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    The forecast rule: The weekly demand for eachof the next four weeks is the average of theweekly demand over the four most recentweeks. Four period moving average:

    (4+4+4+4)/4=4

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    Given the forecasts, the amountordered is just enough to replenishthe ending inventory (Four weeksfrom now-when the order arrives) toa target of 12 cases.

    12+(Forecast demand for next 4

    weeks)-(current inventory)-(Ordersalready placed for the next threeweeks.

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    Customer and Retailer: Week 4

    Forecast Demand: (4+4+4+4)/4 4

    Demand (this period) 4 4 Order just received

    Demand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4

    Target Safety Stock 12 12 Inventory on hand

    Order 4

    Retailer and Wholeseller: 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+4

    Target Safety Stock 12 12 Inventory on hand

    Order 4

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    Consumer demand increased by 100%

    4 8 cases

    The retailers order to the wholesaler increased by200%

    4 12 cases

    The retailer doubled the variation in demand

    Customer and Retailer: Week 5

    Forecast Demand(4+4+4+8)/4 5

    Demand (this period) 8 4 Order just received

    Demand(next 3 periods): 5+5+5 15 12 Orders on the way: 4+4+4

    Target Safety Stock 12 8 Inventory on hand

    Order 12

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    Retailer and Wholeseller: Week 5Forecast Demand (4+4+4+12)/4 6

    Demand (this period) 12 4 Order just received

    Demand(next 3 periods): 6+6+6 18 12 Orders on the way: 4+4+4

    Target Safety Stock 12 4 Inventory on hand

    Order 20

    The wholesalers order to the distributor

    increased by 400%. 4 20

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    Distributor and Factory: Week 5

    Forecast Demand (4+4+4+36)/4 12

    Demand (this period) 36 4 Order just received

    Demand(next 3 periods): 12+12+12 36 12 Orders on the way: 4+4+4

    Target Safety Stock 12 -20 Inventory on hand

    Order 68

    Wholeseller and Distributor: Week 5

    Forecast Demand (4+4+4+20)/4 8

    Demand (this period) 20 4 Order just received

    Demand(next 3 periods): 8+8+8 24 12 Orders on the way: 4+4+4

    Target Safety Stock 12 -4 Inventory on hand

    Order 36

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    200% 400% 800% 1,600%

    FactoryRetailer Wholesaler Distributor

    The variation doubles at each stage.

    However, of the 64-case increase in the factory'sorders, only four cases were directly attributableto a change in consumer demand.

    The lead times present in this value streamcreated 94 percent of the variation observed inthe factorys orders.

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    Warehouses/Distributors

    Manufacturers

    Retailers

    Lead times significantly exacerbate the bullwhipeffect

    Reducing lead time, in combination withimproved visibility along the supply chain, can

    significantly and positively relieve the bullwhip

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    Assume all of the same factors except thateach stage is aware of the customersorders.

    Assume we know that demand for week sixand onward is five cases.

    Following exactly the same steps.

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    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+4

    Target Safety Stock 12 8 Inventory on hand

    Order 12

    Forecast Demand 5

    Demand (this period)12

    4 Order just receivedDemand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4

    Target Safety Stock 12 4 Inventory on hand

    Order 16

    Forecast Demand 5

    Demand (this period) 16 4 Order just received

    Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4

    Target Safety Stock 12 0 Inventory on hand

    Order 20

    Forecast Demand 5

    Demand (this period) 20 4 Order just received

    Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4

    Target Safety Stock 12 -4 Inventory on hand

    Order 24

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    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

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    Perfect forecasting does not eliminate thebullwhip effect

    Lesson: The bullwhip effect is presenteven if there is perfect information aboutthe future that is shared among allchannel partners.

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    Lead times can multiply the variation in demandand so everyone in the supply chain should beworking to reduce lead times.

    The implications of Little's Law are that wheninventory in the supply chain is high, lead timesincrease, and, conversely, longer lead timesresult in more inventories in the pipeline.

    This problematic and cyclical relationshipbetween lead times and inventory is a powerfulreason for reducing lead times.

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    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

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    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

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    At Distributionlevel

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    At Process(throughput) level

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    Product postponement occurs in two ways:Manufacturing PP: Changes in form and identity occur @the latest possible point in the SCN

    Logistics PP: Changes in inventory location occur @ thelatest possible point in time

    HP Deskjet Printers:Power cords, Voltage requirements, fonts, etc.

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    Advantages of PP:Hedge against uncertain customer demand

    Reduce inventory holding cost

    Reduce Logistics/Warehousing costsMinimize imbalance in stock distribution

    Eliminate stages in Manufacturing

    Eg: packaging, customer does assembly etc.

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    Loss of Economies of Scale!

    Requires quick set ups and agile procurement

    Reduced risk of product obsolescence

    Requires increased capability to process,transmit, and deliver orders

    Product should be "DFPP"(Should be technically and economically feasible)

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    Information Sharing (Transparency) using ICTSCM/ERP Solutions

    B2B Markeplaces

    B2C and CRM

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    Supply Rationing Problem: Given shortage insupplies, how to allocate stock across echelons

    Threshold policies for high priority customers (Ha 1997)

    Minimize total imbalance in stock distribution s.t. servicelevel constraints (Van der Heijden 1997)

    Hundreds of articles in various journalsincluding OR, MS, EJOR, JORS, IJPR, IJPDLM, JOM,

    etc.

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    Hierarchical integration of production planningand scheduling

    Provide effective decision support for different DM levels

    within a hierarchical organizationBased on the following scheme:

    Decompose to get hierarchical structure (Stgc-Tac-Opn)

    Do Aggregation where possible (eg. Forecasts: agg. ontime,products,markets; Capacity: agg. On resources)

    Hierarchical coordination (by setting targets+getting f/b)

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    Forrestor: Industrial Dynamics, HBR, 36:4, 1958First research paper to illustrate systems dynamics inSCN's

    Base for developing Distribution Games

    "BWE" coined by P&GBWE describes the increasing amplification oforders occuring within a SC

    Resembles a whip lash

    Occurs even if end-item demand is fairly stable!Forrestor studied a simulation model of the simplesttandem supply chain with four entities: Retailer, DC, W/H,Plant

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    A fast forwardoutlook onBullwhip

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    Sunil Chopra and Peter Meindl, SCM, Pearsonedition.

    NRS.Raghavan, Supply chain dynamics, IISClecture material.


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