Chapter 6

Supply Chain Integration

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

6.1 Introduction 6.1 Introduction

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6.2 Push, Pull, Push-Pull Systems 6.2 Push, Pull, Push-Pull Systems

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Bull whip Effect



The bullwhip effect (or whiplash effect) is an observed phenomenon in forecast-driven distribution channels. It refers to a trend of larger and larger swings in inventory in response to changes in demand, as one looks at firms further back in the supply chain for a product. Since the oscillating demand magnification upstream a supply chain is reminiscent of a cracking whip, it became known as the bullwhip effect.

WHY BULL WHIP HAPPENS?



Because customer demand is rarely perfectly stable, businesses must forecast demand to properly position inventory and other resources. Forecasts are based on statistics, and they are rarely perfectly accurate. Because forecast errors are a given, companies often carry an inventory buffer called "safety stock".

Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. In periods of rising demand, down-stream participants increase orders. In periods of falling demand, orders fall or stop, thereby not reducing inventory. The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer) Behavioral causes
   

* misuse of base-stock policies * misapplication of trinomial theorem * misperceptions of feedback and time delays * panic ordering reactions after unmet demand * perceived risk of other players' bounded rationality
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Bull whip Cont'd


            

Operational causes
* dependent demand processing o Forecast Errors o adjustment of inventory control parameters with each demand observation * Lead time Variability (forecast error during replenishment lead time) * lot-sizing/order synchronization o consolidation of demands o transaction motive o quantity discount * trade promotion and forward buying * anticipation of shortages o allocation rule of suppliers o shortage gaming (including dereliction under Benford's Law) o Lean and JIT style management of inventories and a chase production strategy

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Effect of Bull Whip



In addition to greater safety stocks, the described effect can lead to either inefficient production or excessive inventory as the producer needs to fulfill the demand of its predecessor in the supply chain. This also leads to a low utilization of the distribution channel. In spite of having safety stocks there is still the hazard of stock-outs which result in poor customer service. Furthermore, the Bullwhip effect leads to a row of financial

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Push-Based Supply Chains Push-Based Supply Chains

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Bullwhip Effect in Push-Based Supply Chains Bullwhip Effect in Push-Based Supply Chains

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Pull-Based Supply Chains Pull-Based Supply Chains

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Implementation of Pull-Based Systems Implementation of Pull-Based Systems

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Push-Pull Strategy Push-Pull Strategy

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Supply Chain Timeline

FIGURE 6-8: Push-pull supply chains

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General Strategy General Strategy

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Identifying the Appropriate Supply Chain Strategy

FIGURE 6-9: Push-pull supply chains

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Impact of Demand Uncertainty and Economies of Scale Impact of Demand Uncertainty and Economies of Scale

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Implementing a PushPull Strategy Implementing a PushPull Strategy

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Impact of the Push-Pull Strategy Impact of the Push-Pull Strategy

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Impact of the Push-Pull Strategy



Pull portion
High uncertainty  Simple supply chain structure  Short cycle time  Focus on service level.  Achieved by deploying a flexible and responsive supply chain  Order-fulfillment processes are applied


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Characteristics of the Push and Pull Portions of the Supply Chain

Portion Push Pull

Objective

Minimize cost

Maximize service level

Complexity

High

Low

Focus Lead time

Resource allocation Long

Responsiveness Short

Processes

Supply chain planning

Order fulfillment

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Interactions of the Two Portions Interactions of the Two Portions

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6.3 The Impact of Lead Time 6.3 The Impact of Lead Time

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Impact of Lead Time

FIGURE 6-10: Matching supply chain strategies with products: the impact of lead time and demand uncertainty
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Impact of Lead Time Impact of Lead Time

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6.4 Demand-Driven Strategies 6.4 Demand-Driven Strategies

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Forecast Errors Are Always Present! Forecast Errors Are Always Present!

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6.5 The Impact of the Internet on Supply Chain Strategies 6.5 The Impact of the Internet on Supply Chain Strategies

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Successes and Failures Successes and Failures

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E-Business E-Business

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Key Observations Key Observations

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Grocery Industry Grocery Industry

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Book Industry Book Industry

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General Retail Industry General Retail Industry

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Traditional Fulfillment Versus eFulfillment

Traditional fulfillment E-fulfillment Supply chain strategy Shipment Reverse logistics Delivery destination Lead times Push Bulk Small part of the business Small number of stores Relatively long Pushpull Parcel Important and highly complex Large number of geographically dispersed customers Relatively short

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Summary Summary

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