Presented By:Suman Nath(07) Nirupoma Singh(20) Subhashish Biswas(31) Sumanjit Deb(32) Debottam Dutta(33)

What is Supply chain?

A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm.

Supply Chain Stages

Component/ Raw material suppliers Manufacturers Distributer Wholesaler Retailers End Customers

Objectives of SCM
Supply chain planning Procurement Inventory management Packaging Facility design Warehousing Transportation Reverse logistics Logistics Systems Customer service and marketing

What is the Bullwhip Effect?

The term Bullwhip Effect was coined by Procter & Gamble management who noticed an amplification of information distortion as order information travelled up the supply chain. The Bullwhip Effect/Whiplash Effect is the phenomenon in supply chain whereby ordering patterns experience increasing variance as it proceeds upstream in the chain. The Bullwhip Effect can cause costly disruptions to upstream members of a supply chain as the variance in orders increases.

Causes of bullwhip effect

Demand Forecasting

Suppose the manager of a retailer observed a larger demand (sales) than expected. He increased the inventory level because he expected more demand in the future (forecasting). The manager of his wholesaler observed more demand (some of which are not actual demand) than usual and increased his inventory. This caused more (non-real) demand to his maker; the manager of the maker increased his inventory, and so on. This is the basic reason of the bull whip effect.

Lead time

With longer lead times, a small change in the estimate of demand variability implies a significant change in safety stock, reorder level, and thus in order quantities.

Thus a longer lead time leads to an increase in variability and the bull whip effect.

Batch Ordering

When using a min-max inventory policy, then the wholesaler will observe a large order, followed by several periods of no orders, followed by another large order, and so on.

The wholesaler sees a distorted and highly variable pattern of orders.

Thus, batch ordering increases the bull whip effect.

Variability of Price

Retailers (or wholesalers or makers) offer promotions and discounts at certain times or for certain quantities. Retailers (or customers) often attempt to stock up when prices are lower. It increases the variability of demands and the bull whip effect.

Lack of supply and supply allocation

When retailers suspect that a product will be in short supply, and therefore anticipate receiving supply proportional to the amount ordered (supply allocation). When the period of shortage is over, the retailer goes back to its standard orders, leading to all kinds of distortions and variations.

The Consequences of Bullwhip effect

Manufacturing cost o Inventory cost o Replenishment lead time o Transportation cost o Labor cost for shipping and receiving o Level of product availability q Profitability q

Coping with the Bullwhip Effect

Demand uncertainity
Centralizing demand information; by providing each stage of the supply chain with complete information on actual customer demand (POS: Point-Of-Sales data Continuous replenishment VMI Vendor Managed Inventory: VMI

Lead time reduction

Information lead time can be reduced using EDI Electric Data Interchange or CAO Computer Assisted Ordering QR Quick Response in apparel industry

Batch ordering
Reduction of fixed ordering cost using EDI and CAO 3PL Third Party Logistics VMI

Variability of Price
EDLP: Every Day Low Price P&G Remark that the same strategy does not work well in Japan.

.Lack of supply and supply allocation

Allocate the lacking demand due to sales volume and/or market share instead of order volume. General Motors Saturn, Hewlett-Packard Share the inventory and production information of makers with retailers and wholesalers. Hewlett-Packard Motorola

Supply Chain Without Bullwhip Effect

Customer demand forecast = 10 units Information
Products & Services
10 Units 10 Units 10 Units

Suppliers

Producers

Products & Services

10 Units

Distributors
10 Units

Products & Services

10 Units

Retailers

Cash
Retailers are selling product at a constant rate and price. Firms along the supply chain are able to set their inventory to meet demand.

Key:

= Inventory Levels

Supply Chain Bullwhip Effect

Customer Demand forecast = 20 units

Information Flow
Suppliers Producers Products & Services
80 Units 160 Units 80 Units

Products & Services

40 Units

Distributors

Products & Services

20 Units

Retailers

40 Units

Cash Flow
As demand increases, the distributor decides to accommodate the forecasted demand and increase inventory to buffer against unforeseen problems in demand. Each step along the supply chain increases their inventory (double in this example) to accommodate demand fluctuations. The top of the supply chain receives the harshest impact of the whip effect.

Key:

= Inventory Levels

Conclusion:Demand distortion arise in a SC as a consequence of the optimizing behavior of the various players in the SC. This self optimization behavior can prove to be very disastrous for the SC as a whole. Companies can effectively counteract the bullwhip effect by a thorough understanding of its underlying causes. The company desirous of counteracting the bullwhip effect will have to change the ways they think about and do their business. These would include sharing of information across the members of the SC, consistent optimal method of demand forecasting , deceased dependence on price promotions as marketing strategy, and use of third-party logistics for order satisfaction. The net benefits from efficient SCM should be re distributed among the various members to provide an incentive to effect such a change. The choice for the companies is clear- either let the bullwhip effect paralyze you or find ways to conquer it.