Marketing Channels

1. Marketing Channels Value of Information Distribution Strategies 8 January

2. Agenda The Bullwhip Effect Distribution Strategies and Information Systems Supply Chain Management: Pitfalls and Opportunities �New technologies for supply chain management and flexible manufacturing imply that businesses can perceive imbalances in inventories at a very early stage.� - Alan Greenspan (Feb 2001)

3. The Bullwhip Effect and its Impact on the Supply Chain Consider the order pattern of a single color television model sold by a large electronics manufacturer to one of its accounts, a national retailer.

4. The Bullwhip Effect and its Impact on the Supply Chain

5. The Bullwhip Effectand its Impact on the Supply Chain

6. Higher Variability in Orders Placed by Computer Retailer to Manufacturer Than Actual Sales

7. Increasing Variability of Orders Up the Supply Chain

8. Any conclusions �? Information about the demand for a product becomes distorted as it moves along the supply chain. Order Variability is amplified up the supply chain; upstream echelons face higher variability. What you see as an upstream member of the supply chain is not what the retailer actually faces.

9. What are the Causes�? Promotional sales Inflated orders � �gaming� - IBM Aptiva orders increased by 2-3 times when retailers thought that IBM would be out of stock over Christmas - Same with Motorola�s Cellular phones Demand Forecast Long cycle times Order Batching

10. Demand Orders as signal of product demand Forecasting that may rely too much on recent demand Safety stock that depends on erratic demand Long lead times

11. Order batching � �Gaming� Economies of scale in ordering costs and manufacturing setups MRP periodic ordering Economies of scale in transportation Push strategies in order to reduce inventory and/or enhance short-term financial measures

12.  Single retailer, single manufacturer. Retailer observes customer demand, Dt. Retailer orders qt from manufacturer. Lead time + 1 = L.

13. The Bullwhip Effect

14. Var(q)/Var(D):For Various Lead Times

15. Consequences�. Increased safety stock Reduced service level Inefficient allocation of resources Increased transportation costs

16. Multi-Stage Supply Chains Consider a multi-stage supply chain: Stage i places order qi to stage i+1. Li is lead time between stage i and i+1.

17. Formula (to memorize�)

18. Multi-Stage Systems: Var(qk)/Var(D)

19. The Bullwhip Effect:Managerial Insights Exists, in part, due to the retailer�s need to estimate the mean and variance of customer demand. The increase in variability is an increasing function of the lead time. The more complicated the demand models and the forecasting techniques, the greater the increase. Centralized demand information can reduce the bullwhip effect, but will not eliminate it.

20. Coping with the Bullwhip Effect Reduce Variability and Uncertainty POS Sharing Information Year-round low pricing Reduce Lead Times EDI Cross Docking Alliance Arrangements Vendor managed inventory (VMI) On-site vendor representatives Continuous Replenishment Programs

21. Coping with the Bullwhip Effect Use of 3PL/4PL Customer management Activity Based Costing Strategy: Everyday low cost Everyday low price Order return and cancellation policy (reduce gaming) Placing orders before peak periods

22. In summary� Avoid multiple demand forecast updates Stabilize prices Eliminate gaming

23. Example: Quick Response at Benetton Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy. Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion. Many attribute Benetton�s success to successful use of communication and information technologies.

24. Example:Quick Response at Benetton Benetton uses an effective strategy, referred to as Quick Response, in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton�s mainframe computer in Italy. Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors.

25. How Does BenettonCope with the Bullwhip Effect? 1. Integrated Information Systems � Global EDI network that links agents with production and inventory information � EDI order transmission to HQ � EDI linkage with air carriers � Data linked to manufacturing 2. Coordinated Planning � Frequent review allows fast reaction � Integrated distribution strategy

26. Distribution Strategiesand Information Systems Pull Vs. Push Strategies Push Strategies: Production decisions based on forecasts Manual purchase orders and invoices are employed Ordering decisions based on inventory & forecasts.

27. Push Strategies Single retailer, single manufacturer. Retailer observes customer demand, Dt. Retailer orders qt from manufacturer.

28. Distribution Strategies Direct Shipping No DC needed Lead times reduced �smaller and more frequent trucks� leading to transportation cost increases no risk pooling effects Warehousing Cross-docking High inventory throughput Decreased lead times

29. Characteristics of Cross-Docking: Goods spend at most 12-15 hours in the warehouse, Avoids high inventory handling costs, Example: Wal-Mart delivers about 85% of its goods through its warehouse system, compared to about 50% for Kmart, Stores trigger orders for products.

30. System Characteristics: Very difficult to manage, Requires linking distribution centers, suppliers and stores to guarantee that any order is processed and executed in a matter of hours, Wal-Mart, Home Depot, etc., operate a satellite-communications system that sends point-of-sale data to all its vendors allowing them to have a clear vision of sales at the stores.

31. Transshipment What is the value of transshipment? What tools are needed? What if the network system is decentralized?

32. Push Strategies: Excess finished goods inventory Inefficient production Inefficient operations, high costs, low service levels - Excess capacity - Low utilization of resources - High transportation cost  Distribution Strategies

33. Pull Strategies Single retailer, single manufacturer. Retailer observes customer demand, Dt. Retailer orders qt from manufacturer. POS Data

34. Pull Strategies Production is demand driven Faster information flow mechanisms are used Inventory levels are reduced Distribution facilities are transformed from storage points to coordinators of flow. But: Harder to leverage economies of scale Doesn�t work in all cases Distribution Strategies

35. Push and Pull Systems How can a supply chain take advantage of both the push and pull systems?

36. Supply Chain Integration � Dealing with Conflicting Goals Lot Size vs. Inventory Inventory vs. Transportation Lead Time vs. Transportation Product Variety vs. Inventory Cost vs. Customer Service

37. Supply Chain Management:Pitfalls and Opportunities Conflicting Objectives in the Supply Chain 1. Purchasing � Stable volume requirements � Flexible delivery time � Little variation in mix � Large quantities 2. Manufacturing � Long run production � High quality � High productivity � Low production cost

38. Supply Chain Management:Pitfalls and Opportunities 3. Warehousing � Low inventory � Reduced transportation costs � Quick replenishment capability 4. Customers � Short order lead time � High in stock � Enormous variety of products � Low prices

39. Symptoms of Supply Chain Problems Stock-outs and High Inventory Long Cycle Times High Returns High Costs Poor Service Level

40. Common Pitfalls 1. Information and Management � No Supply Chain Metrics � Inadequate Definition of Customer Service � Inaccurate Delivery Status Data � Inefficient Information Systems 2. Operational Control � Ignoring the Impact of Uncertainties � Simplistic Inventory Stocking Policies � Discrimination against Internal Customers � Poor Coordination

41. Common Pitfalls 3. Design and Strategy � Incomplete Shipment Methods Analysis � Incorrect Assessment of Inventory Costs � Product and Process Design without SC Consideration � Focus on Incomplete Supply Chain