ThemeGallery PowerTemplate

THE VALUE OF INFORMATIONProf. Shuo Yan ChouGroup 10:Nguyen Thi Anh Tuyet( D10301811)Franky Saputra(M10201809)(M10301206)(M10301004)Novieka Distiasari(M10301820)

Supply Chain Management Fall 2014

www.themegallery.comLOGOOutlineInformation Sharing and IncentivesEffective ForecastsInformation for the Coordination SystemLocating Desired ProductsLead-Time ReductionOutlineIntroductionThe Bullwhip EffectInformation and Supply Chain Trade-offsDecreasing Marginal Value of InformationIntroductionInformationInformation ageSupply chain

Inventory levelOrders /ProductionDelivery status

Effective

Lower inventory

Reduce lead timeValue of informationCharacterize how information affects the design and operation of supply chainReduce variability in the supply chainLead time reductionsRetailers has better serve their customersEnables the coordination of manufacturing and distribution systems and strategies Retailers to react and adapt to supply problems more rapidlySuppliers make better forecasts, accountingBenefit of informationIntroduction4Bullwhip EffectRetailerWholesalerDistributorFactoryExternal DemandDelivery lead timeOrder lead timeProduction lead timeOrder lead timeOrder lead timeDelivery lead timeDelivery lead timeFig 1: The stage of supply chainBullwhip EffectThe bullwhip effect is the increase in variability as we travel up in the supply chain

Factors that Contribute to the VariabilityFactors influenceLead timeDemand forecastingBatch orderingInflated ordersPrice fluctuationFactors that Contribute to the Variability- Demand forecastingReorder point = Average demand during lead time + a multiple of standard deviation of demand during lead time and review period (safety stock)Estimated method Use standard forecast smoothing techniques to estimation of average demand and demand variability Estimates get modified as more data becomes availableSafety stock and base-stock level depends on these estimatesOrder quantities are changed accordingly increasing variability

Increase in variability is magnified with increasing lead time. With longer lead times: A small change in the estimate of demand variability => A significant change in safety stock and base-stock level => Significant changes in order quantities => Leads to an increase in variability

Factors that Contribute to the Variability- Lead time Bath ordering Price Fluctuations Inflated ordersCommon when retailers and distributors suspect that a product will be in short supply => anticipate receiving supply proportional to the amount ordered. After period of shortage, retailer goes back to its standard orders => all kinds of distortions and variations in demand estimates Retailers often attempt to stock up when prices are lower Accentuated by promotions and discounts at certain times / quantities. Forward Buying results in: Large order during the discounts; Relatively small orders at other time periods

Retailer use batch ordering => Wholesaler observes a large order, followed by several periods of no orders, followed by another large order, and so on.Wholesaler sees a distorted and highly variable pattern of orders.

Factors that Contribute to the Variability10Content LayoutsQuantifying the Bullwhip Effect(1/3)Quantify the Bullwhip Effect:1. To quantify the increase in variability that occurs at every stage of the supply chain.2. Useful in demonstrating the magnitude of the increase in variability and showing the relationship between the forecasting techniques, lead time, and the increase in variability.

Quantifying the Bullwhip Effect-basic-stock level(2/3)Manufacturer Retailer Customer(Demand)(Place an order)Base-stock level: L*AVG+Z*STD*L L: lead time Z : safety factor AVG : average of daily customer demandSTD : standard deviation of daily customer demand Order-up-to point in period t, yt :

If the retailer uses a moving average technique:

Quantifying the Bullwhip Effect-order-up-to point(3/3)

Quantifying the Increase in Variability

Var(D), variance of the customer demand seen by the retailer Var(Q), variance of the orders placed by the retailer to the manufacturer

When p is large and L is small, the bullwhip effect is negligible.

(A lower bound on the increase in variability given as a function of p)

The impact of Centralized information on Bullwhip EffectAdvantages for centralized demand information:1. Each stage of the supply chain can use the actual customer demand data2. Creates more accurate forecasts rather than orders received from the previous stage

Two type of supply chain :1. Centralized demand information2. Decentralized demand information

Supply chain with centralized demand informationRetailerWholesalerDistributerFactoryLLLVaro(D), variance of the customer demand seen by the retailer Li, lead time between stage i and stage i + 1VA(Qk), variance of the orders placed by the kth stage to its

1.Receive the order along with the retailers forecast2. Use the forecast to determine its target inventory levelAssume using moving average with p observationSupply chain with decentralized demand informationRetailer doesnt make its forecast mean and variance of demand available to the remainder of the supply chain

Variance increases multiplicatively at each stage of the supply chainRetailerWholesalerDistributerFactoryLLLManagerial Insights on the value of centralized information

Centralized systems has a lower increase in variability1.Variance increases up the supply chain in both centralized and decentralized cases

2. Both of the systems cant eliminate the bullwhip effect, but for the centralized system, it can significantly reduce its increase in variability.Methods for Coping with the Bullwhip EffectOur ability to identify and quantify the causes of the bullwhip effect leads to a number of suggestions for reducing the bullwhip effect or for eliminating its impact.

Methods for Coping with the Bullwhip EffectReducing uncertaintyReducing variabilityThe bullwhip effect can be diminished by reducing the variability inherent in the customer demand process.Everyday low pricing (EDLP) strategy. Lead-time reductionLead times serve to magnify the increase in variability due to demand forecasting. Two components of lead times: order lead times : can be reduced through the use of cross-docking.Information lead times : can be reduced through the use of electronic data interchange (EDI).Strategic partnershipThe strategic changing the way information is shared and inventory is managed is managed within a supply chain, possibly eliminating the impact of the bullwhip effect. Vendor managed inventory (VMI) Manufacturer manages the inventory of its product at the retailer outletIn VMI the manufacturer does not rely on the orders placed by a retailer, thus avoiding the bullwhip effect entirely.

Information Sharing and IncentivesCentralizing demand information can dramatically reduce the variability seen by the upstream stages in a supply chain.The upstream stages would benefit from a partnership.One problem in this industry is that OEMs typically use an assemble-to-order.An inflated forecast may cause the supplier to ignore the forecast altogether.

Two contracts have been discussed in the literature and shown to provide incentives for the buyers to reveal their forecasts.Capacity reservation contractsAdvance purchase contracts

21Effective ForecastInformation leads to more effect forecast. The more factors that predictions of future demand can take into account, the more accurate these predictions can be.Effective ForecastRetailer forecast Typically based on an analysis of previous sales at the retailer. Future customer demand influenced by pricing, promotions, and release of new products. Including such information will make forecasts more accurate.Distribution and manufacturer forecast Influenced by factors under retailer control. Promotions or pricing. Retailer may introduce new products into the stores. Closer to actual sales may have more information.Cooperative forecast Sophisticated information systems. Iterative forecasting process. All participants in the supply chain collaborate to arrive at an agreed-upon forecast. All parties share and use the same forecasting tool.

Information for The Coordination of SystemsManaging any supply chain systems involves a series of complex trade-offsGlobal optimization implies that one identifies what is best for the entire systemWho will optimize?How will the savings obtained through coordinated strategy be split between the different supply chain facilities?To coordinate these facets of the supply chain, some information must available:The knowledge of production status and costsTransportation availabilityQuantity discountsInventory costsInventory levelsVarious capacitiesCustomer demand

Locating Desired ProductsThe value of information about location of desired productsBeing able to locate and deliver goods is sometimes as effective as having them in stockThe issues of the goods location is at our competitor will be discussed in Chapter 7, Inventory Pooling and Chapter 8, Distributor Integration

Lead-Time ReductionLead-time reduction typically leads to:The ability to quickly fill customer orders that cant be filled from stockReduction in the bullwhip effectMore accurate forecasts due to a decreased forecast horizonReduction in finished foods inventory levelsLead-time reduction can be achieved through use of EDI, Point-of-Sale (POS) data, etc.

Lead-Time ReductionInformation and Supply Chain Trade-OffsIn Global optimization, the objective is to coordinate supply chain activities so as to maximize supply chain performanceThis is easier to do in a centralized system, in a decentralized system, it may be necessary to find incentives to bring about the integration of supply chain activitiesConflicting Objectives in the Supply ChainRaw Material SupplierManufacturing ManagementMaterials, Warehousing, and Outbound Logistics ManagementRetailerCustomerStable Volume RequirementsLimit the Number of ChangeoversMinimizing Transportation CostsShort Order Lead TimesIn-Stock ItemsFlexible Delivery TimesHigh Productivity and Production EfficiencyQuantity DiscountsEfficient and Accurate Order DeliveryEnormous VarietyLarge Volume DemandsMinimizing Inventory levelsLow PricesQuickly Replenishing StockDesigning the Supply Chain for Conflicting GoalsThe Lot Size Inventory Trade-OffManufacturers would like to have large lot sizes. Per unit setup costs are reducedManufacturing expertise for a particular product increasesProcesses are easier to control. Modern practices [Setup time reduction, Kanban and CONWIP] Reduce inventories and improve system responsiveness. Advanced manufacturing systems make it possible for manufacturers to meet shorter lead times and respond more rapidly to customer needs.Manufacturer should have as much time as possible to react to the needs of downstream supply chain members. Distributors/retailers can have factory status and manufacturer inventory data:they can quote lead times to customers more accurately. develops an understanding of, and confidence in, the manufacturers ability. allows reduction in inventory in anticipation of manufacturing problems

The Inventory Transportation Cost Trade-OffCompany operates its own fleet of trucks. Fixed cost of operation + variable costCarrying full truckloads minimizes transportation costs.Outside firm is used for shippingquantity discountsTL shipping cheaper than LTL shippingIn many casesdemand is much less than TLItems sit for a long time before consumption leading to higher inventory costs.Trade-off cant be eliminated completely. Use advanced information technology to reduce this effect. Distribution control systems allow combining shipments of different products from warehouses to stores Cross-docking, Decision-support systems allow appropriate balance between transportation and inventory costsThe Lead Time Transportation Cost Trade-OffTransportation costs lowest when large quantities of items are transported between stages of the supply chain. Hold items to accumulate enough to combine shipmentsLead times can be reduced if items are transported immediately after they are manufactured or arrive from suppliers. Cannot be completely eliminatedInformation can be used to reduce its effect. Control transportation costs reducing the need to hold items until a sufficient number accumulate. Improved forecasting techniques and information systems reduce the other components of lead timemay not be essential to reduce the transportation component.

The Product Variety Inventory Trade-OffHigher product variety makes supply chain decisions more complexBetter for meeting customer demandTypically leads to higher inventories

The Cost Customer Service Trade-OffReducing inventories, manufacturing costs, and transportation costs typically comes at the expense of customer serviceCustomer service could mean the ability of a retailer to meet a customers demand quickly

Decreasing Marginal Value of InformationObtaining and sharing information is not free. Many firms are struggling with exactly how to use the data they collect through loyalty programs, RFID readers, and so on. Cost of exchanging information versus the benefit of doing so. May not be necessary to exchange all of the available information, or to exchange information continuously. Decreasing marginal value of additional informationIn multi-stage decentralized manufacturing supply chains many of the performance benefits of detailed information sharing can be achieved if only a small amount of information is exchanged between supply chain participants.

Decreasing Marginal Value of InformationSummaryWe have identified specific techniques to counteract the bullwhip effect, one of which is information sharing, that is, centralized demand information.Information is the key enabler of integrating the different supply chain stages and discussed how information can be used to reduce the necessity of many of these trade-offs.