ISQA 458/558 Distribution & Replenishment

1. ISQA 458/558 Distribution & Replenishment Professor Mellie Pullman

2. Promotions and their Impact on the Supply Chain Point-of-sales Data: Original POS Data After Removing Promotions

3. Promotion & TrendImpact on the Supply Chain POS Data After Removing Promotion & Trend

4. Increasing Variability of Orders Up the Supply Chain = Bullwhip Effect Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

5. We Conclude …. • Order Variability is amplified up the supply chain; upstream echelons face higher variability. • What one member experiences is not what upstream members face.

6. What are the Causes…. • Promotional sales • Inflated orders to manage risk - IBM Aptiva orders increased by 2-3 times when retailers though that IBM would be out of stock over Christmas • Demand Forecast • Long cycle times • Order Batching

7. Consequences…. • Increased safety stock • Reduced service level • Inefficient allocation of resources • Increased transportation costs

8. The Bullwhip Effect:Managerial Insights • Exists, in part, due to the retailer’s need to estimate the mean and variance of 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.

9. Coping with the Bullwhip Effect • Reduce Variability and Uncertainty - POS - Sharing Information - Year-round low pricing (Every day Low Prices EDLP) • Reduce Lead Times - EDI - Cross Docking • Alliance Arrangements • Vendor managed inventory • On-site vendor representatives

10. Distribution Strategiesand Information Systems Pull Vs. Push Strategies

11. Push Strategies • Single retailer, single manufacturer. • Retailer observes customer demand, Dt. • Retailer orders qt from manufacturer. Dt qt Retailer Manufacturer L

12. Problems with 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 Strategiesand Information Systems

13. Pull Strategies POS Data Dt qt Retailer Manufacturer L

14. 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 and Information Systems

15. Distribution Strategies • Warehousing • Direct Shipping • No DC needed • Lead times reduced • “smaller trucks” • no risk pooling effects

16. Distribution Strategies

17. 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

18. 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