Tuesday, January 28, 2014

This is why we can't have nice things

                At its core, effective inventory management within a supply chain is about minimizing inefficiency.  Having every item available to purchase at the right time and at the right location is the lofty goal of forecasters from those reliant on intuition to the most sophisticated predictive modelers.  With the rise in computing and analytical power, a great deal of attention has been paid to improving and building upon the capacity of supply chain engineers to accurately model the various fluctuations that occur along a supply chain and what managerial responses are required to contend with them.  Despite these advancements, the last step of these systems is often still a human decision maker.  It is the impact of these behavioral implications that can cause serious breakdowns in the effectiveness of even the most precisely engineered supply chain.
                Take for example this week’s article concerning Wal Mart.  Despite significant investment in building one of, if not the, preeminent global supply chain, the last-mile of a product’s trip to the shelves has been halted with noticeable regularity.[1] The human factor of the under staffing of still-necessary stock workers foils the retail giant’s best laid plans.  Academia has also taken notice of this the behavioral factors that need to be taken into account for a supply chain to have effective inventory management.  Externally, this relates to accurate demand forecasting and other consumer-driven metrics and predictions.  Equally important though are the internal behavioral tendencies within the supply chain.
                  With the bullwhip effect, the behaviorally driven propagation of a demand disruption creates a great deal of headache for supply chain engineers.  Much has been theorized about ways to diminish the wave effect.  According to their article investigating the effect of information sharing schemes through electronic linkage, Yao and Zhu find mixed results.  With what they call “supplier industries,” variability is decreased to these upstream providers advantage.  However, “buyer-industries,” usually those further downstream, benefit asymmetrically in a way that actually increases the bullwhip effect.[2]

The question therefore arises, although the article does find net-benefits to developing information sharing systems, how does a firm ensure that it stays on the winning side of such an arrangement?

[1] http://business.time.com/2013/04/09/the-trouble-lurking-on-walmarts-empty-shelves/
[2] Yuliang Yao, Kevin Xiaoguo Zhu, (2012) Research Note--Do Electronic Linkages Reduce the Bullwhip Effect? An Empirical Analysis of the U.S. Manufacturing Supply Chains. Information Systems Research 23(3-part-2):1042-1055.

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