Supply Chain Dynamics

Supply Chain Dynamics • N. R. SRINIVASA RAGHAVAN • Asst. Professor • Department of Management Studies • IISc • raghavan@mgmt.iisc.ernet.in

Introduction • Oliver and Webber coined SCM in 1982 • Their Thesis: • Top Management alone can ensure non-conflicting functional objectives along SCN • An integrated systems strategy be developed and implemented • Coordination of M-I-F flows is challenging yet rewarding

Decisions in SCM • Academic work on Integration and Coordination started much before 1982: • Product Postponement (Alderson 1957) • Collaboration and Cooperation (Bowersox 1969) • Location and Control of Inventories in SCN's (Hanssmann 1959) • Hierarchical Production Planning (Hax and Meal 1975) • Bullwhip effect in SCN's (Forrestor 1958)

1. Product Postponement • 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.

Product Postponement (contd) • 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.

Features of PP • 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)

2. Collaboration and Coordination • 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

Collaboration and Coordination (contd) • Information Sharing (Transparency) using ICT • SCM/ERP Solutions • B2B Markeplaces • B2C and CRM

3. Location and Control of Inventories • 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.

4. Hierarchical Production/Distribution Planning • 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)

5. Bullwhip Effect in Supply Chains • 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 • Resembles a whip lash • 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

Bullwhip Effect (contd) • Assumptions of Forrestor's model: • Each entity can make use of only locally available info • Time delays between ordering and receipt of order • It takes 3 weeks for retailer to process the order, half a week to transmit it to DC • The DC takes 1 week to process the order and one week to ship to the retailer, who takes one week to ship to end customer; assumptions for other entities likewise.. • To study impact of a one time +10% change in retail sales on orders placed and inventory levels

Bullwhip Effect (contd) • Forrestor's results: • "...A sudden 10% increase in retail sales implies a peaking of 34% on orders @ 14th week in factory w/h, resulting in factory output peaking in 21st week (including a 6 week lead time) by a whopping 45%.." • Amplified and out of phase fluctuations in ordering and inventory levels • Avoidable inventory and shortage costs; Unstable system • RELEVANT EVEN TODAY! • Replace week by day in the above analysis

Bullwhip Effect: Some Illustrations

Bullwhip Effect (contd) • Causes of BWE: (Empirical: Lee et al: 1997; Analytical: Chen et al: 2000) • Demand Signal Processing (frequent updates of forecasts; only next echelon orders considered) • Order Batching (to realise logistics EoS+Reducing order processing costs) • Price Fluctuations (resulting in over-reactions) • Supply Rationing (Proportionate rationing; unrestricted order acceptance+free return policy)

Counter-Measures for BWE • Avoid multiple demand forecasts • Order based on ultimate customer demand • Use EDI+POS+VMI • Choose a good forecasting method (PLC has a major say) • Move from decentralized DM to centralized planning (visibility+control is better) • Remove layers in channel if possible Eg: HP, Apple, IBM, P&G/Walmart

Counter-Measures for BWE (contd) • Break order batches • Increase frequency of ordering (OP costs reduced by EDI) • Resort to standardization to minmize OP costs • Use 3PL to make small batch replenishments economical • Aggregate across retail outlets to utilize FTL EoS • Reduce safety stocks by cutting lead times Eg: 3PL using Fedex, P&G

Counter-Measures for BWE (contd) • Stabilize prices • EDLP (P&G) • Special purchase contracts • Eliminate shortage gaming • Allocate based on past sales (Sun) • Share capacity and information (HP, Motorola) • Limit flexibility wrt time (HP, Seagate)

The Distribution Game • "Beer Distribution Game" • Bounded rationality depicts decision makers • Orders based on current inventory status, amount ordered by direct successors, past performance • Over-reaction; increases steadily towards u/s end of SCN • http://sudarshana.mgmt.iisc.ernet.in:8080/enter.html

Supply Chain Dynamics