The Impact of Bullwhip Effect in SCM and How to Manage It

From the case study, in the early 1990s, P&G faced a problem of extreme demands variation for its Pamper diapers. Although the purchase rate somehow remain steady at the customer end, it has been found that the variation of order rates amplify up the supply chain, from the retailer level to the distributor level. This phenomenon is called bullwhip effect, and the distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies, such as excessive inventory investment, poor customer service, lost revenues, misguided capacity plans, inactive transportation, and missed production schedules.[i]

In learning supply chain management, the most classical beer game[ii] has been used to demonstrate the same phenomenon. Here is a video that introduce the general concept, and just take 1 minute you will easily understand what is bullwhip effect.  

Then, P&G attributed the huge variation in orders to reasons like infrequent placing of orders, distributors placing multiple orders, and the most important is because of lacking information of the actual customer demand on the upstream end. According to the relevant materials I have read for this week, I would like to provide some technological advances to help P&G manage the bullwhip effect more efficiently.

P&G took next steps to update its supply chain model and inventory system. Managing the bullwhip effect is minimizing the fluctuation and variation of the demand through the supply chain, and one of the keys is to share information with other members of the supply chain. The Internet, for its information sharing capabilities and Radio frequency identification (RFID) could be used.[iii] However, P&G still need to be careful when use the information sharing, because it is only an initial step to reduce the bullwhip effect within a supply chain, if use it from other stages continuously will lead to other problems.[iv]For instance, the POS data for a cosmetics store of P&G is not useful for suppliers of Pamper diapers. Moreover, if P&G cannot ensure its short order lead time, information sharing could be redundant because its supply chain is not capable of capitalizing on that information.[v] Coordination in the supply chain is the next primary technique. Besides the Vendor-Managed Inventory (VMI) which P&G has already applied, the Collaborative Planning, Forecasting, and Replenishment (CPFR) could also be used to moderate the bullwhip effect, as well as to reduce cost (i.e., inventory, transportation).[vi]

Finally, I’d like to talk about the impact of demand forecasting in the bullwhip effect. Since P&G encouraged the whole supply chain work together to get an aligned picture of demand, it made decision to ensure the entire supply chain driven by demand which requires demand forecasting. An intelligent demand forecasting would lead to less inventory, better order fulfillment, higher profit margins, even better decision making. However, the forecasting demand will inevitably lead to bullwhip effect has already been proven, and the size of the impact does depend on the demand forecasting methods. [vii] For example, the bullwhip effect can be reduced, but not completely eliminated, by centralizing customer demand information. [viii]

In order to get more accurate demand forecasting for better decision making in its supply chain management, I also recommend P&G to take more action to refine its demand forecasting methods, and pay more attention on the inputs rather than only focusing on the outcomes in the metric model.  Examing different key variables to get a range of possible outcomes will provide better reference for the decision making of supply chain upstream under the uncertainty of future.

Question:

It seems that by using sophisticated computing method could generate high quality demand forecasting, thus moderate the bullwhip effect. However, does every participant in supply chain really act rationally, as our logical model designed, in the real world? How can we minimizing the risk due to the inherent irrational behavior of people? Like, a manager in P&G, who has a tendency to be over-optimistic, may exert imperceptible influence on shifting the model to get a biased optimistic outcome. And also, consumers rarely make rational consumption may cause the demand variation.

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[i] Lee, Hau L., V. Padmanabhan, and Seungjin Whang. "The Bullwhip Effect In Supply Chains1." Sloan management review 38.3 (1997): 93-102.

[ii] J. D. Sterman, “Modeling managerial behavior: misperceptions of feedback in a dynamic decision making experiment,” Management Science, vol. 35, pp. 321–339, 1989.

[iii] Lee, H.L., V. Padmanabhan, and S. Whang. “Comments on ‘Information Distortion in a Supply Chain: The Bullwhip Effect,’” Management Science, 50(12), 1887-1893, 2004.

[iv] Wilck, Joseph H. "Managing the Bullwhip Effect." Unpublished Ph. D. Dual Degree, Industrial Engineering and Operations Research, College of Engineering (available at< http://www. engr. psu. edu/symposium2006/papers/Session% 203D% 20-% 20Modeling% 20and% 20Engineering% 20Applications/Wilck. pdf>, accessed July 2009) (2006).

[v] Gilbert, K. “An ARIMA Supply Chain Model,” Management Science, 51(2), 305-310, 2005.

[vi] Chopra, S. and P. Meindl. Supply Chain Management. Second Edition, Prentice Hall, 478-504, 2004.

[vii] [4] Dejonckheere, J., S.M. Disney, M.R. Lambrecht, and D.R. Towill. “Measuring and Avoiding the Bullwhip Effect: A Control Theoretic Approach,” European Journal of Operational Research, 147, 567-590, 2003.

[viii] Chen, Frank, et al. "Quantifying the bullwhip effect in a simple supply chain: The impact of forecasting, lead times, and information." Management science 46.3 (2000): 436-443.

Healthcare goes Lean

            With healthcare costs on the rise and currently accounting for 18% of our GDP, any processes that increase efficiency, improve processes and effectively reduce costs should be explored.  Processes in the healthcare sector should thus be geared towards becoming more lean and increase value by decreasing waste.  This concept became very apparent when I completed a project in my Health Care Quality and Process Improvement course.  My group members and I shadowed patients upon their entry to three different clinical sites.  Among our deliverables was a time study, which assessed the value added and non-value added time.  From this analysis we were able to see that there was almost an equal amount of value added and non-value added time.  This demonstrated that there was waste within these three clinical sites and improvements could be made to make the processes more efficient and more lean. 

            Lean processes also focus on continuous improvement, which enables focus to be continually on patient safety and quality medical treatment.  These processes also improve efficiency, which will ultimately reduce costs.  For example, initiatives such as creating effective material restocking processes, increasing capacity by using current equipment and available space and focusing on preventing errors that would increase a patient’s length of stay would directly decrease costs for an organization[1]. 

An example of a medical center that has worked hard to implement lean processes includes Virginia Mason Medical Center in Seattle who implemented their own version of the Toyota Production System, or the Virginia Mason Production System (VMPS).  This system has focused on areas including, but not limited to a no layoff policy and a defect alert system.  The no layoff policy enables lean management to take place as workers were more willing to engage in improvements once they did not felt as if their job was threatened.  The defect alert system is similar to Toyota’s assembly line where anyone is able to “stop the line” when they see a mistake.  Virginia Mason has implemented a similar concept where they can stop care if someone sees a mistake and will call the patient safety department and someone will come to assess the situation and conduct a root cause analysis.  These processes, and the others implemented created efficiency and financial gains as well as helped to advance clinical improvements at Virginia Mason[2].

            What are other ways in which healthcare organizations have already implemented lean processes to reduce their costs and decrease waste?  What are new ways in which this can be achieved in healthcare?

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[1] http://www.healthcarefinancenews.com/news/7-ways-lean-healthcare-management-reduces-cost

[2] http://www.entnet.org/Practice/upload/GoingLeaninHealthCareWhitePaper.pdf

Ikea's Low Price Strategy

                                Ikea’s Low Price Strategy

"To design a desk which may cost $1,000 is easy for a furniture designer, but to design a functional and good desk which shall cost $50 can only be done by the very best. Expensive solutions to all kinds of problems are often signs of mediocrity." - (Ingvar Kamprad)

  

Ikea, the world’s largest furniture retailer⁸, is known for providing high value in terms of creative designs, multiple functionalities and quality at a low price. It has been able to stake out a unique and a valuable strategic position for itself by carrying out some of the following activities differently from its rivals.

Innovative Designs

Ikea focuses on generating design creativity by internal competition among a huge network of freelancer and 9 staff designers. Freelance designing provides a great degree of flexibility and a valuable source of creativity. The network of free lance designers and the team work of people from a wide range of professional and personal backgrounds provides some of the most significant design creativity which Ikea demonstrates in it’s furniture¹. Ikea’s designers provide innovative designs and multiple functionalities to the user. They also focus on using material as efficiently as possible without comprising on sturdiness and quality of the product⁷.

                              

Cost Reduction

Ikea mainly targets people who want value at a low price but are willing to do a bit of work. It can provide quality furniture at low price to its customers by making some trade offs.  

•  Instead of having sales people attending customers, Ikea uses a self-service model based on clear in store displays.
• Rather than relying on third party manufacturers, Ikea designs its own low-cost, modular, ready-to-assemble furniture. ²
• Items are provided to customers in flat-packed form, which results in a wide range of supply chain contributions. The Flat package reduces the cost of shipping, storing, construction and assembling. It also provides greater transportation capacity and warehouse space.¹

Global Strategy

Ikea has developed its distribution network worldwide. It is able to ensure timely delivery of products to retail stores all over the world by utilizing control points in the distribution cycle³. It has over 1800 suppliers located in over 50 different nations⁷. Ikea’s suppliers are mostly located in low cost nations with close proximity to raw materials and distribution channels. The company possesses a big network of suppliers closely attracted to supply chain processes that helps in gaining industrial knowledge continuously and enhances information flow facilitation and operational efficiency.

These suppliers provide highly standardized products intended for the global market. However a standardized product strategy does not mean complete cultural insensitivity. The company responds to globally emerging consumer tastes and preferences by placing great emphasis on the product lines that appeal to local customer preferences apart from basic product range that is universally acceptable³.

Close relationship with consumers

Ikea focuses on extracting customer insight by market research, observations and ongoing communication¹. This strategy is not only beneficial to Ikea’s production design but also servers as a source of valuable knowledge of types and amount of production material that would be needed. This enables Ikea to coordinate better with its suppliers by providing them information and ultimately decreases procurement cost associated with purchasing and transportation of raw materials.

Close relationship with suppliers

The company operates 43 local trading offices in 33 countries to manage relationship with suppliers⁷. Although Ikea fosters competition among suppliers to ensure best price and material, it believes in making long-term business relationships with its suppliers and ensures Volume Business.

Unique Services

Ikea offers a number of extra services that its competitors do not. Ikea in-store environment and purchasing processes promote greater consumer interest and facilitate the buying behavior of customers. Ikea displays every product and sells in room-like settings that help customers to imagine how to put the pieces together. They also provide in-store childcare and extended hours facilities. These services are mainly designed for the customers who are young, not rich, likely to have children, or work for a living and need to shop at odd hours. ⁴

                                              Challenges for Ikea

For the past years, Ikea's has stood out from other competitors because it blended value into its fashionably designed furniture at an affordable price. However, increasing cost of raw material and land transportation has forced Ikea’s first price hike in five years. ⁶ Would Ikea be able to maintain its differentiation from competitors such as Wal-Mart, Carrefour and Tesco, which are expanding into furniture and furnishings, and following Ikea’s similar approach of low-priced strategy?

Furthermore, Ikea is heavily dependent on raw material such as wood and plastic. “This year it used 13.56 million cubic meters of solid wood and wood-based board materials, not including paper and packaging, meaning Ikea alone uses almost 1% of all wood used commercially around the world.” ⁵ It is a challenge for Ikea to maintain or improve its corporate image through social and environmental responsibility. Although the company says it will become ‘forest positive’ by 2020, will it be able to make this vision a reality?

References

1. ^{http://www.ukessays.com/essays/business-strategy/strategic-operations-management-in-ikea.php}
2. ^{http://www.cbpp.uaa.alaska.edu/afef/what_is_strategy.htm}
3. ^{http://reocities.com/TimesSquare/1848/ikea.html}
4. ^{http://www.cbpp.uaa.alaska.edu/afef/what_is_strategy.htm}
5. ^{http://www.guardian.co.uk/sustainable-business/ikea-sustainability-forest-positive-karelia}
6. ^{http://www.studymode.com/essays/Key-Challenges-Facing-Brand-Ikea-646692.html}
7. ^{Article: How Ikea Designs Its Sexy Price Tags (Business 2.0, October 2002)}
8. http://en.wikipedia.org/wiki/IKEA

IKEA and TATA : Two Companies With Similar Business Strategy

The articles about IKEA and TATA highlight some very interesting facts about these two companies.Both companies are from the different parts of the world.These companies are selling different products. IKEA is selling furniture and TATA is selling cars.These companies are making profits in a similar way.

              These companies are using a very attractive price tag for their products.They are , however, not selling low quality products.They are just using innovative ways to build and supply their products.These innovations have resulted in the decrease of their product price without compromising on the quality of the product. TATA, for example, is using Aluminum in its Nano car engine.IKEA is using expensive wood on the outer side and low price wood on the inner side of the products.This strategy has helped them to come up with an attractive price tag fro their product.

               Another thing that I have noticed about these two companies is how they transport their products to their stores and dealers. They are using innovation in transportation.For example,IKEA employees say that they are not going to pay for the transportation of air.They are using the concept of flat package to transport their goods.Similarly, TATA is transporting it's Nano car in parts. It not only helps TATA to reduce the price but also helps it to transport the car deeper into the rural areas of the country.

      These companies give their customers option to tailor their products according to their requirements.Almost all the big companies in the western world prefer to innovate themselves and let the customer buy the products with some compromises on their needs. TATA and IKEA are exploiting this thing for attracting more customers.In this way, they can also learn more about the requirements of the customer to redesign their future products.So in a way they are receiving the feedback from their customers to remodel their product.

              Both of them first selected a price and then designed the products for that price. TATA's target was to design a one lakh (Rs.100000) car. IKEA follows the same pattern for its products. If look at G.M. or other big car manufacturing companies, they look for a design and then build the products and give them a price tag which can help them draw profits from their products. That's the problem with them that they don't consider the price first and in turn are losing the market share especially in emerging markets.  

             Their supply network is very simple when it comes to the end user. IKEA doesn't provide the user with the option of transportation. So it doesn't need to care for the delivery of the product to the user.It may be little problematic for the end user but it helps IKEA to reduce its burden.Similarly, TATA gives its car in the form of parts to the dealers. So it reduces their burden to transport the car without any problem from one  manufacturing plan to the far and distant places of the country.

              From the above comparison, it is visible that two companies who are into two entirely different business fields are working on a similar strategy to increase their business and profit.But there are some issues that i think that they are overlooking in their business models.For example, TATA may learn from its customers but it can't accommodate all the customers in one car.I mean to say that its hard for them to keep changing the design of the car while maintaining the price of the car to a minimum level. Moreover, IKEA is making it hard for the customers to buy online for their products. From a customers' prospective if you are given your product at you home or office you feel comfortable.These are the things that these companies need to consider in their business models.