Dr.S.

Yogananthan

Systems Perspective

Supply Chain Dynamics

Understand supply chain dynamics and adopt a holistic view. Consider the business ecosystem in which you are operating. 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.

Results in:
Larger inventory carrying costs Lost sales from stock outs Lack of responsiveness to customer demand

Bullwhip effect - is the uncertainty caused from the distorted information flowing up and down the 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.

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.

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

Factory

Distributor

Wholesaler

Retailer

Goal is to manage demand as imposed by its customer Each enterprise has only one manager Runs for 50 wks.

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.

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 players ordering policy is based on two rules

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

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.

Customer and Retailer: Week 4 Forecast Demand: (4+4+4+4)/4 Demand (this period) Demand(next 3 periods): 4+4+4 Target Safety Stock Order Retailer and Wholeseller: Week 4 Forecast Demand: (4+4+4+4)/4 Demand (this period) Demand(next 3 periods): 4+4+4 Target Safety Stock Order

4 4 12 12 4

4 Order just received 12 Orders on the way: 4+4+4 12 Inventory on hand

4 4 12 12 4

4 Order just received 12 Orders on the way: 4+4+4 12 Inventory on hand

Customer and Retailer: Week 5 Forecast Demand(4+4+4+8)/4 Demand (this period) Demand(next 3 periods): 5+5+5 Target Safety Stock Order

5 8 15 12 12

4 Order just received 12 Orders on the way: 4+4+4 8 Inventory on hand

Consumer demand increased by 100%

4 8 cases

The retailers order to the wholesaler increased by 200%

The retailer doubled the variation in demand

4 12 cases

Retailer and Wholeseller: Week 5 Forecast Demand (4+4+4+12)/4 Demand (this period) Demand(next 3 periods): 6+6+6 Target Safety Stock Order

6 12 18 12 20

4 Order just received 12 Orders on the way: 4+4+4 4 Inventory on hand

The wholesalers order to the distributor increased by 400%. 4 20

Wholeseller and Distributor: Week 5 Forecast Demand (4+4+4+20)/4 8 Demand (this period) 20 Demand(next 3 periods): 8+8+8 24 Target Safety Stock 12 Order 36
Distributor and Factory: Week 5 Forecast Demand (4+4+4+36)/4 Demand (this period) Demand(next 3 periods): 12+12+12 Target Safety Stock Order

4 Order just received 12 Orders on the way: 4+4+4 -4 Inventory on hand

12 36 36 12 68

4 Order just received 12 Orders on the way: 4+4+4 -20 Inventory on hand

Retailer

Wholesaler

Distributor

Factory

200%

400%

800%

1,600%

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 factorys orders.

Manufacturers

Warehouses/ Distributors

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

Assume all of the same factors except that each stage is aware of the customers orders. Assume we know that demand for week six and onward is five cases. Following exactly the same steps.

Forecast Demand: (4+4+4+8)/4 Demand (this period) Demand(next 3 periods):5+5+5 Target Safety Stock Order Forecast Demand Demand (this period) Demand(next 3 periods):5+5+5 Target Safety Stock Order Forecast Demand Demand (this period) Demand(next 3 periods):5+5+5 Target Safety Stock Order Forecast Demand Demand (this period) Demand(next 3 periods):5+5+5 Target Safety Stock Order

5 8 15 12 12 5 12 15 12 16 5 16 15 12 20 5 20 15 12 24

4 Order just received 12 Orders on the way:4+4+4 8 Inventory on hand

4 Order just received 12 Orders on the way:4+4+4 4 Inventory on hand

4 Order just received 12 Orders on the way:4+4+4 0 Inventory on hand

4 Order just received 12 Orders on the way:4+4+4 -4 Inventory on hand

Retailer

Retailer orders 12 cases- a 200% increase

Wholesaler

Wholesaler orders 16 cases- a 300% increase

Distributor

Distributor orders 20 cases- a 400% increase

Manufacturer

Manufacturer order Raw Materials to make 24 cases- a 500% increase

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.

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.

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

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

At Distribution level

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

At Process (throughput) level

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 @ the latest possible point in time

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

Advantages of PP:
Hedge against uncertain customer demand Reduce inventory holding cost Reduce Logistics/Warehousing costs Minimize imbalance in stock distribution Eliminate stages in Manufacturing
Eg: packaging, customer does assembly etc.

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)

Individual objectives of different functional units within a firm may jeopardize overall efficiency
Manufacturing: Long production runs Procurement: Lowest procurement costs Marketing: Infinite assortments Finance: Low inventories Logistics: Full Truck Loads

Information Sharing (Transparency) using ICT

SCM/ERP Solutions B2B Markeplaces B2C and CRM

Supply Rationing Problem: Given shortage in supplies, how to allocate stock across echelons
Threshold policies for high priority customers (Ha 1997) Minimize total imbalance in stock distribution s.t. service level constraints (Van der Heijden 1997)

Hundreds of articles in various journals including OR, MS, EJOR, JORS, IJPR, IJPDLM, JOM, etc.

Hierarchical integration of production planning and scheduling

Provide effective decision support for different DM levels within a hierarchical organization

Based on the following scheme:

Decompose to get hierarchical structure (Stgc-Tac-Opn) Do Aggregation where possible (eg. Forecasts: agg. on time,products,markets; Capacity: agg. On resources) Hierarchical coordination (by setting targets+getting f/b)

Forrestor: Industrial Dynamics, HBR, 36:4, 1958

First research paper to illustrate systems dynamics in SCN's Base for developing Distribution Games "BWE" coined by P&G

BWE describes the increasing amplification of orders occuring within a SC Occurs even if end-item demand is fairly stable!
Forrestor studied a simulation model of the simplest tandem supply chain with four entities: Retailer, DC, W/H, Plant Resembles a whip lash

A fast forward outlook on Bullwhip

Sunil Chopra and Peter Meindl, SCM, Pearson edition. NRS.Raghavan, Supply chain dynamics, IISC lecture material.