the value of information lecture4

8/9/2019 The Value of Information Lecture4

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The Value of Information

In modern supply chains,

information replaces inventory.


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Value of Information Helps reduce variability in the supply chain. Helps suppliers make better forecasts,

accounting for promotions and market changes. Enables the coordination of manufacturing and

distribution systems & strategies. Enables retailers to better serve their

customers by offering tools for locatingdesired items.

Enables retailers to react and adapt to supplyproblems more rapidly.

Enables lead time reductions.


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Factors Contributing to Supply

Chain Variability

Demand forecasting

Lead timeBatch ordering

Price fluctuation

Inflated orders


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The Bullwhip effectIn recent years many suppliers and

retailers have observed that whilecustomer demand for specificproducts does not vary very much,inventory and back-order levels

fluctuate considerably across theirsupply chain.


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Bullwhip EffectFluctuations in orders increase as they move up

the supply chain from retailers to wholesalers

to manufacturers to suppliersDistorts demand information within the supply

chain, where different stages have verydifferent estimates of what demand looks like

Results in a loss of supply chain coordination


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Retailer

Wholesaler

Distributor

Manufacturer

External Demand

Delivery lead time

Delivery lead time

Delivery lead time

Order lead time

Order lead time

Order lead time

Production lead time


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The Effect of Lack of

Coordination on Performance Manufacturing cost (increases) Inventory cost (increases) Replenishment lead time (increases) Transportation cost (increases) Labor cost for shipping and receiving (increases) Level of product availability (decreases) Relationships across the supply chain (worsens)

Profitability (decreases) The bullwhip effect reduces supply chain

profitability by making it more expensive to providea given level of product availability


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Methods of Coping with

Bullwhip EffectReducing uncertainty

Reducing variability

Lead time reduction

Strategic partnerships


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Obstacles to Coordination

in a Supply ChainIncentive Obstacles

Information Processing Obstacles

Operational Obstacles

Pricing Obstacles

Behavioral Obstacles


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Managerial Levers to

Achieve CoordinationAligning Goals and Incentives

Improving Information Accuracy

Improving Operational Performance

Designing Pricing Strategies toStabilize Orders

Building Strategic Partnerships andTrust


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Aligning Goals and Incentives Align incentives so that each participant has

an incentive to do the things that will

maximize total supply chain profits Align incentives across functions

Pricing for coordination

Alter sales force incentives from sell-in (tothe retailer) to sell-through (by theretailer)


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Improving Information

AccuracySharing point of sale data

Collaborative forecasting and planning

Single stage control of replenishment Continuous replenishment programs (CRP)

Vendor managed inventory (VMI)


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Improving Operational

Performance Reducing replenishment lead time Reducing lot sizes

1. Computer-assisted ordering, B2B exchanges2. Shipping in LTL sizes by combining shipments3. Technology4. Changing customer ordering behavior

Rationing based on past sales and sharing

information to limit gaming Turn-and-earn Information sharing


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Designing Pricing Strategies

to Stabilize Orders Encouraging retailers to order in smaller lots and

reduce forward buying Moving from lot size-based to volume-based

quantity discounts (consider total purchases over aspecified time period) Stabilizing pricing

Eliminate promotions (everyday low pricing,EDLP)

Limit quantity purchased during a promotion Tie promotion payments to sell-through rather

than amount purchased Building strategic partnerships and trust


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Building Trust across Supply Chains1. Deterrence-based view

2. Process-based view


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Designing a Relationship

with Cooperation and TrustAssessing the value of the

relationship and its contributions

Identifying operational roles anddecision rights for each party

Creating effective contracts

Designing effective conflictresolution mechanisms


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Effect of Interdependence on

Supply Chain Relationships

P

artner RelativelyPowerful High level ofInterdependence

Low level ofInterdependence

OrganizationRelativelyPowerful

Org.Dependence

Partners dependence

High

HighLow


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Information & Supply Chain

trade-offs The lot size-inventory trade-off

The inventory-transportation cost trade-off

The lead time-transportation cost trade-off

The product variety-inventory trade-off

The cost-customer service trade-off

the value of information lecture4

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