Supply Chain Management Fall 2014

THE VALUE OF
INFORMATION
Prof. Shuo Yan Chou

Group 10:
Nguyen Thi Anh Tuyet ( D10301811)
Franky Saputra
(M10201809)
(M10301206)
(M10301004)
Novieka Distiasari (M10301820)

LOGO
www.themegallery.com

Outline
Introduction
Introduction
The
The Bullwhip
Bullwhip Effect
Effect
Information
Information Sharing
Sharing and
and Incentives
Incentives
Effective
Effective Forecasts
Forecasts

Outline

Information
Information for
for the
the Coordination
Coordination System
System

Locating
Locating Desired
Desired Products
Products
Lead-Time
Lead-Time Reduction
Reduction
Information
Information and
and Supply
Supply Chain
Chain Trade-offs
Trade-offs
Decreasing
Decreasing Marginal
Marginal Value
Value of
of Information
Information

Introduction
Characterize how information affects
the design and operation of supply
chain
Inventor
y level

Orders / Informatio
Informati
Productio n age
on
n
Delivery
status

Effectiv
e

Supply
chain

Lower
Value of
informatio inventor
y
n
Reduce
lead
time

Introduction
Reduce
variability in
Retailers
the supply
Suppliers
to react and
chain
make
adapt to
supply
problems
more rapidly
Lead time
reductions

Benefit
of
informati
on

better
forecasts,
accounting

Enables the
coordination of
manufacturing and
distribution
systems and
strategies

Retailers
has better
serve their
customers

Bullwhip Effect
External Demand

Retailer
Order lead time

Delivery lead time

Wholesaler
Order lead time

Delivery lead time

Distributor
Order lead time

Delivery lead time

Factory
Production lead time

Fig 1: The stage of supply chain

Bullwhip Effect

The bullwhip effect is the increase in

variability as we travel up in the supply
chain

Factors that Contribute to the

Variability
Demand
Demand forecasting
forecasting

Lead
Lead time
time

Factors
influenc
e

Batch
Batch ordering
ordering

Price
Price fluctuation
fluctuation

Inflated
Inflated orders
orders

Factors that Contribute to the

Variability- Demand forecasting
Reorder point = Average demand during lead time +
a multiple of standard deviation of demand during
lead time and review period (safety stock)

Estimated method

Use standard forecast smoothing techniques

to estimation of average demand and demand
variability
Estimates get modified as more data becomes
available
Safety stock and base-stock level depends on
these estimates
Order quantities are changed accordingly
increasing variability

Factors that Contribute to the

Variability- Lead time
Increase in variability is magnified with

increasing lead time.

With longer lead times:

A small change in the estimate of demand

variability
=> A significant change in safety stock and
base-stock level
=> Significant changes in order quantities
=> Leads to an increase in variability

Factors that Contribute to the

Variability
Bath ordering
Retailer use batch ordering => Wholesaler observes a large order,
followed by several periods of no orders, followed by another large
order, and so on.
Wholesaler sees a distorted and highly variable pattern of orders.

Price Fluctuations
Retailers often attempt to stock up when prices are lower
Accentuated by promotions and discounts at certain times /
quantities. Forward Buying results in: Large order during the discounts;
Relatively small orders at other time periods

Inflated orders
Common when retailers and distributors suspect that a product will be
in short supply => anticipate receiving supply proportional to the
amount ordered. After period of shortage, retailer goes back to its
standard orders => all kinds of distortions and variations in demand
estimates

Quantifying the Bullwhip

Effect(1/3)
Quantify the Bullwhip Effect:

1. To quantify the increase in variability that

occurs at every stage of the supply chain.
2. Useful in demonstrating the magnitude of
the increase in variability and showing
the
relationship between the
forecasting techniques, lead time, and the
increase in variability.

Quantifying the Bullwhip Effectbasic-stock level(2/3)

Manufactur
er

(Place
an
order)

Retailer

(Deman
d)

Customer

Base-stock level:
L*AVG+Z*STD*L
L: lead time
Z : safety factor
AVG : average of daily customer demand
STD : standard deviation of daily customer
demand

Quantifying the Bullwhip Effectorder-up-to point(3/3)

Order-up-to point in period t, yt :

t L z LS t
If the retailer uses a moving average

technique:

i t p

2
(
D

i t p i t )
t 1

t 1

S t2

p 1

Quantifying the Increase in

Variability
Var(D), variance of the customer demand seen
by the retailer
Var(Q), variance of the orders placed by the
retailer to the manufacturer

Var (Q)
2 L 2 L2
1 2
Var ( D)
p p

When p is
large and L is
small, the
bullwhip
effect is
negligible.

(A lower bound on the increase

in variability given as a function
of p)

The impact of Centralized

information on Bullwhip Effect
Advantages for centralized demand

information:
1. Each stage of the supply chain can use the
actual customer demand data
2. Creates more accurate forecasts rather than
orders received from the previous stage
Two type of supply chain :

1. Centralized demand information

2. Decentralized demand information

Supply chain with centralized

demand information
Retail
er

Wholesal
er

Distribu
ter

Factory

1.Receive the order

along with the
retailers forecast
2. Use the forecast to
determine its target
inventory level

VA(Qk), variance of the orders placed by the kth stage to its

Varo(D), variance of the customer demand seen by the
retailer
Li, lead time between stage i and stage i + 1

2i 1 Li 2(i 1 Li )
Var (Q )
1

Var ( D)
p
p2
k

Assume
using
moving
average with
p
observation

Supply chain with decentralized

demand information
Retail
er

Wholesal
er

Distribu
ter

Factory

Retailer doesnt make its forecast mean and variance of

demand available to the remainder of the supply chain

2 Li 2 L2i
Var (Q k ) k
(1 2 )
Var ( D) i 1
p p

Variance
increases
multiplicativel
y at each
stage of the
supply chain

Managerial Insights on the value

of centralized information
1.Variance increases up the supply chain in both
centralized and decentralized cases
2. Both of the systems cant eliminate the bullwhip
effect, but for the centralized system, it can
significantly reduce its increase in variability.

Centralized
systems has
a lower
increase in
variability

Methods for Coping with the

Bullwhip Effect
Our ability to identify and quantify the causes of

the bullwhip effect leads to a number of

suggestions for reducing the bullwhip effect or
for eliminating its impact.

Methods for Coping with the

Bullwhip Effect
Reducing uncertainty
2)
Reducing variability
The bullwhip effect can be diminished by reducing the variability
inherent in the customer demand process.
3)
Everyday low pricing (EDLP) strategy. Lead-time
reduction
Lead times serve to magnify the increase in variability due to
demand forecasting.
Two components of lead times:
order lead times : can be reduced through the use of crossdocking.
Information lead times : can be reduced through the use of
electronic data interchange (EDI).
4)
Strategic partnership
The strategic changing the way information is shared and
inventory is managed is managed within a supply chain,
possibly eliminating the impact of the bullwhip effect.
Vendor managed inventory (VMI)
Manufacturer manages the inventory of its product at the
retailer outlet
In VMI the manufacturer does not rely on the orders placed by
1)

Information Sharing and

Incentives
Centralizing demand information can
dramatically reduce the variability seen by the
upstream stages in a supply chain.
The upstream stages would benefit from a
partnership.
One problem in this industry is that OEMs
typically use an assemble-to-order.
An inflated forecast may cause the supplier to
ignore the forecast altogether.

Two contracts have been discussed in the

literature and shown to provide incentives for

the buyers to reveal their forecasts.
1) Capacity reservation contracts
2) Advance purchase contracts

Effective Forecast
Information leads to more effect forecast. The

more factors that predictions of future demand

can take into account, the more accurate these
predictions can be.

Effective Forecast
Retailer forecast
Typically based on an analysis of previous sales at the
retailer.
Future customer demand influenced by pricing,
promotions, and release of new products.
Including such information will make forecasts more
accurate.
2) Distribution and manufacturer forecast
Influenced by factors under retailer control.
Promotions or pricing.
Retailer may introduce new products into the stores.
Closer to actual sales may have more information.
3) Cooperative forecast
Sophisticated information systems.
Iterative forecasting process.
All participants in the supply chain collaborate to
arrive at an agreed-upon forecast.
All parties share and use the same forecasting tool.
1)

Information for The Coordination

of Systems

Managing any supply chain systems involves a

series of complex trade-offs

Global optimization implies that one identifies
what is best for the entire system
Who will optimize?
How will the savings obtained through coordinated
strategy be split between the different supply chain
facilities?
To coordinate these facets of the supply chain,
some information must available:
The knowledge of production status and costs
Transportation availability
Quantity discounts
Inventory costs
Inventory levels
Various capacities
Customer demand

Locating Desired Products

The value of information about location of

desired products
Being able to locate and deliver goods is
sometimes as effective as having them in
stock
The issues of the goods location is at our
competitor will be discussed in Chapter 7,
Inventory Pooling and Chapter 8, Distributor
Integration

Lead-Time Reduction
Lead-time reduction typically leads to:

The ability to quickly fill customer orders

that cant be filled from stock
Reduction in the bullwhip effect
More accurate forecasts due to a decreased
forecast horizon
Reduction in finished foods inventory levels
Lead-time reduction can be achieved
through use of EDI, Point-of-Sale (POS)
data, etc.

Lead-Time Reduction

Information and Supply Chain Trade

Offs
In

Global optimization, the objective is to

coordinate supply chain activities so as to
maximize supply chain performance
This is easier to do in a centralized system, in a
decentralized system, it may be necessary to
find incentives to bring about the integration of
supply chain activities

Conflicting Objectives in the

Supply Chain

Raw Material
Supplier

Manufacturing
Management

Materials,
Warehousing, and
Outbound Logistics
Management

Retailer

Customer

Stable Volume
Requirements

Limit the
Number of
Changeovers

Minimizing
Transportation Costs

Short Order
Lead Times

In-Stock
Items

Flexible
Delivery Times

High Productivity
and Production
Efficiency

Quantity Discounts

Efficient and
Accurate
Order Delivery

Enormou
s Variety

Large Volume
Demands

Minimizing Inventory
levels
Quickly Replenishing
Stock

Low
Prices

Designing the Supply Chain for

Conflicting Goals

The Lot Size Inventory TradeOff

Manufacturers would like to have large lot sizes.

Per unit setup costs are reduced

Manufacturing expertise for a particular product
increases
Processes are easier to control.
Modern practices [Setup time reduction, Kanban and
CONWIP]
Reduce inventories and improve system responsiveness.
Advanced manufacturing systems make it possible for
manufacturers to meet shorter lead times and respond
more rapidly to customer needs.
Manufacturer should have as much time as possible
to react to the needs of downstream supply chain
members.
Distributors/retailers can have factory status and
manufacturer inventory data:
they can quote lead times to customers more accurately.
develops an understanding of, and confidence in, the
manufacturers ability.
allows reduction in inventory in anticipation of
manufacturing problems

The Inventory Transportation

Cost Trade-Off
Company operates its own fleet of trucks.

Fixed cost of operation + variable cost

Carrying full truckloads minimizes transportation costs.
Outside firm is used for shipping
quantity discounts
TL shipping cheaper than LTL shipping
In many cases
demand is much less than TL
Items sit for a long time before consumption leading to
higher inventory costs.
Trade-off cant be eliminated completely.
Use advanced information technology to reduce this
effect.
Distribution control systems allow combining shipments
of different products from warehouses to stores
Cross-docking,
Decision-support systems allow appropriate balance
between transportation and inventory costs

The Lead Time Transportation

Cost Trade-Off
Transportation costs lowest when large quantities

of items are transported between stages of the

supply chain.
Hold items to accumulate enough to combine
shipments
Lead times can be reduced if items are transported
immediately after they are manufactured or arrive
from suppliers.
Cannot be completely eliminated
Information can be used to reduce its effect.
Control transportation costs reducing the need to hold
items until a sufficient number accumulate.
Improved forecasting techniques and information
systems reduce the other components of lead time
may not be essential to reduce the transportation
component.

The Product Variety Inventory

Trade-Off
Higher product variety makes supply

chain decisions more complex

Better for meeting customer demand
Typically leads to higher inventories

The Cost Customer Service TradeOff

Reducing inventories, manufacturing costs, and

transportation costs typically comes at the

expense of customer service
Customer service could mean the ability of a
retailer to meet a customers demand quickly

Decreasing Marginal Value of

Information
Obtaining and sharing information is not free.
Many firms are struggling with exactly how to

use the data they collect through loyalty

programs, RFID readers, and so on.
Cost of exchanging information versus the
benefit of doing so.
May not be necessary to exchange all of the
available information, or to exchange information
continuously.
Decreasing marginal value of additional
information
In multi-stage decentralized manufacturing
supply chains many of the performance
benefits of detailed information sharing can
be achieved if only a small amount of
information is exchanged between supply
chain participants.

Decreasing Marginal Value of

Information

Summary
We

have identified specific techniques to

counteract the bullwhip effect, one of which
is information sharing, that is, centralized
demand information.
Information is the key enabler of integrating
the different supply chain stages and
discussed how information can be used to
reduce the necessity of many of these tradeoffs.