Flexible Supply Chain

source: tomfishburne.com(Marketoonist)

By Vivian Cheung

Feb 13, 2012

In order to survive in the competitive market, the flexibility of a company’s supply chain has become an important differentiator. In McKinsey’s business journal article “Building a Flexible Supply Chain for Uncertain Times” [1], discussed about the importance of agility in a supply chain. They used the classic bullwhip metaphor to capture the trend that can be seen commonly in today’s manufacturing industries, which describes how rapid demand fluctuations can exhibit a magnifying influence in other parts of the supply chain. In mature markets, the ability dodging the bullwhip effect increases a company’s chance of the survival.

The bullwhip effect has been widely studied and research in order to discover countermeasures to incorporate into good supply chain designs. Other than demand forecasting errors, Bullwhip effect also can be triggered in a lot of different ways. Overreaction to unmet demand, miscommunication upstream and downstream of supply chain, lead time variability, trade promotion and forward buying, shortage anticipations… etc, all can contribute to generating negative impacts on operating performances. As a result, schedule variability increases, lead time lengthens and customer satisfaction decreases. These are all signs of a unhealthy supply chain.[2]

Flexibility seems to be the key to dodging the bullet. For the short term, flexibility means responding to changes in demand or supply quickly and handle external disruptions effectively. For the longer term, it means meeting structural shifts in markets, modify supply network strategies, products and technologies.[3] To achieve flexibility, a company should reduce the size of their order and increase their replenishment frequencies. When entities orders more frequently, its required safety stock will decrease, and the uncertainty and variance due to demand fluctuations will also be reduced. Collaboration with key suppliers is very important as well. A true flexibly buyer-supplier relationship can allow a company to accommodate a large product variety and change in volumes in production. This partnership can be achieved by continuous information sharing, creating the sense of trust between the supplier and the buyer, and allow both parties to make informed decisions. This also enables the possibility to respond quickly on demand volatility since suppliers are willing to corporate. Other recommendations include maintaining a stable prices for products since price fluctuations encourage customers to over-purchase when prices are low and cut back on orders when prices are high, leading to large demand fluctuations. Moreover, a company should allocate demand among customers based on past orders, not present orders to reduce hoarding behavior when shortages occur.[4]

McKinsey’s article had emphasized on the importance for companies to make supply chain decisions more quickly in respond to the unprecedented volatile demand. The way I see it, companies do need to make decision more quickly, but on committing to improving their supply chain flexibility to survive in this competitive market.

References

[1] Glatzel, Christoph, Stefan Helmcke, and Joshua Wine. "Building a Flexible Supply Chain for Uncertain times - McKinsey Quarterly - Operations - Supply Chain & Logistics."Articles by McKinsey Quarterly: Online Business Journal of McKinsey & Company. Business Management Strategy - Corporate Strategy - Global Business Strategy. Mar. 2009. Web. 12 Feb. 2012. .

[2] "The Bullwhip Effect." QuickMBA: Accounting, Business Law, Economics, Entrepreneurship, Finance, Management, Marketing, Operations, Statistics, Strategy. Web. 12 Feb. 2012. .

[3] Donovan, Michael. "Supply Chain Management - Cracking the Bullwhip Effect." SCM Community - Toolbox for IT. Performance Improvement. Web. 12 Feb. 2012. .

[4] Bean, Michael. "Bullwhips and Beer: Why Supply Chain Management Is so Difficult « Forio Business Simulations." Forio Online Simulations. 2006. Web. 12 Feb. 2012. .

If You Don't Want to Get Hit by the Bullwhip, Examine Your Forecasting Technique

In supply chain management circles, "Inventory" continues to be the single issue driving discussions among managers around the water cooler. In fact, "Inventory Management and Planning" was listed as the #1 concern for senior decision makers, as reported by Crimson & Co.'s list of top supply chain concerns for 2011.

On this topic, one of the ideas discussed in class this week was the bullwhip effect, and Supply Chain Managers have been looking for ways to manage their inventory in a way that can minimize its impact on inventory levels throughout the supply chain. The consequences of the effect can be severe. It results in each level of the supply chain retaining additional safety stocks in order to be prepared for anticipated demand. This can also lead to inefficient production and/or excessive inventory. And if a supplier fails to meet production quotas, this can also result in contractual penalties.

The effect can be minimized in a supply chain if there is a good system of information sharing among the members, which translates to coordinated action. To further minimize the bullwhip effect, supply chain managers have sought to reduce uncertainty, variability, and lead time in placing orders. (While these sort of strategies can all have broad effects on reducing inventory cost, a paper published in the International Journal of Information Technology & Decision Making argues that it is more variability in lead time, rather than mean lead time, that affects inventory policy and total supply chain cost.)

One way to demonstrate the bullwhip effect is a simulation generally called the "beer game". (For fun, play the beer game here!) This simulation, which takes the form of a simplified beer supply chain, consists of a single retailer, a single wholesaler who supplies the retailer, a single distributor who supplies the wholesaler, and a single factory with unlimited raw materials that brews beer and supplies the distributor. To further simplify things, each component in the supply chain has unlimited storage capacity, and there is a fixed supply lead time and order delay time between each component.

Some new research has taken inspiration from this simple game and created a series of much more complicated simulations in order to try and explain which factors affect the magnitude of the bullwhip effect the most. "Supply Chain Networks With Multiple Retailers: A Test of the Emerging Theory on Inventories, Stockouts, and Bullwhips" (.pdf) published in the Journal of Business Logistics, shows:

"that particular supply chain networks have an impact on the bullwhip effect. Furthermore, the impact of supply chain networks on the bullwhip effect is moderated by the demand forecasting technique used. Finally, supply chain networks, forecasting techniques, and their interactions are found to influence on-hand inventory levels and stockout rates for firms within the supply chain. Results also suggest that no one particular type of supply chain network dominates in terms of dampening the bullwhip effect, lowering on-hand inventory levels, or reducing stockout rates. The optimal network depends on the forecasting technique used and other supply chain factors."

What I found most interesting in the article's conclusion was that eliminating forecasting eliminated a bullwhip effect in the supply chain. I also noted that the article concludes that, "when a proper forecasting technique is used, adding retailers to a supply chain does not mitigate the bullwhip effect; however, when using last-period forecasting, adding retailers helps to alleviate the bullwhip effect."

Questions for Discussion:
Based on our class discussions of the Bullwhip Effect, were any of the conclusions of this last article surprising to you?

Further, if you did play the Beer Game, did you see evidence of the bullwhip effect in your simulation? (I will admit: I did, and I was not only aware of the bullwhip effect but consciously trying to avoid it)

Finally, based on what we know about this subject, what is your intuition as to the most effective way to mitigate a bullwhip effect as a supply chain becomes increasingly complex?