Monday, September 15, 2014

Whipping the Supply Line into Shape

A Company’s inventory management strategy is one of the key factors responsible for its success and failures. Inventory can be physical in case of tangible goods and nonphysical in terms of airline bookings, hotel, hospital beds etc. Fluctuation in demand leads to overstocking and under-stocking of goods. The bullwhip effect is a phenomena observed due to such variability in demand.
In the bullwhip effect, the demand variation amplifies as you move along the supply chain from the consumer end to the raw material provider’s end. It is difficult for suppliers to adjust production in response to varying demand. This phenomena is observed in all industries and it occurs because demand is based on forecasting and not the actual consumer demand.
Bullwhip effect mainly occurs due to:
·         Demand is perceived differently by managers at different check points in the supply chain
·         Many times a slow or inefficient ordering process causes variability in the system
·         Fluctuation in prices due to promotions and seasonal discounts
·         Natural disasters which creates disruption in flow of goods and other services
·         False increase in demand due to shortage of a particular product
·         Lead time is an important factor to calculate safety stocks. It is caused due to physical delays as well as gaps in information [1]
In order to deal with the bullwhip effect, companies need to analyze which factors affect consumer demand and inventory consumption. Corrective measures like Point of Sale (POS) system and just in time delivery management reduce variability in the system. This prevents building up of excess inventory and promotes information flow throughout the supply chain. Stakeholders can keep track of the actual demand using the order information from the POS system and place orders to the suppliers accordingly. Spikes in demand can be avoided by using Computer Aided Ordering (CAD) instead of batch ordering. Eliminating factors which cause clients to delay orders, like seasonal and volume discounts can help create systematic ordering patterns. Also, implementing CPFR (Collaborative, Planning, Forecasting and Replenishment) can result in a well-managed inventory and less “out of stock” situations.
Walmart, a giant retailer brand, started using RFID (Radio Frequency Identification) technology to combat the bullwhip effect. It placed RFID tags on all goods which helped the suppliers keep track of the inventory levels in real time. 7- Eleven is one of world’s largest franchiser and operator of convenience stores. The stores are smaller in size as compared to Walmart and have been designed to meet the needs of individual neighborhood. Owing to smaller space, inventory management is a major issue for them. They have formed strategic alliances with neighboring suppliers and use forecasting methods to better manage their inventory.[3] The Barilla Company, a major pasta producer in Italy provided discounts to its customers if they ordered truckload of goods. The promotional offer increased a lot of variability and created random demand patterns. As a result, the supply chain costs outweighed the benefits from shipping truck load of goods.Hence, the question arises as to how create a right balance between the benefits of wholesale discounts and bullwhip effect.


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