Value of Information

(Designing & Managing the Supply

Chain: David Simchi-Levi & others)
Information Technology has improved
availability of information and speed of
access to information
Accurate and real time information is
key to sound decision making
Adequate utilization of information
Leads to Lower Inventories in the
Supply Chain
1

Uninterrupted information flow in a

supply chain
Helps reduce variability in the supply
chain
Suppliers make better forecasts
Enables coordination of manufacturing
and distribution systems and strategies
Enables retailers to serve customers
better by locating items
Enables retailers to react and adapt to
supply problems rapidly
2

Bull-whip Effect
(Forester effect)
The amplitude is smallest near the handle but
largest near the tip

Bull-whip Effect
In 1958, Forrester found that,
interaction between flows of supply chain
leads to delays and interruptions in
delivery of goods
In 1989, Sterman said that decision
makers perceive dynamic environment
erroneously which leads to disturbance in
the flow of materials
The resultant disturbance in the supply
chain is called Bull-Whip Effect
5

Bull-whip Effect is the uncertainty in the

supply chain caused by distorted information
flow
Large variations in demand upstream due to
small variations downstream
Babies diapers
Suppliers acting on demand signal downstream
Caused by undisclosed discounts and sales
promotions by retailers down stream
Customers rejecting backorders
6

Buildup of safety stock

Lack of confidence in customers
forecast
Frequent changes in demand forecasts
Lead time variability
Lack of coordination amongst supply
chain partners
Errors in demand forecasting
Order batching

The consequences
Excess inventory high cost
Problems with quality due to high
inventory
Increased raw materials cost
Overtime expenses
Increased shipping costs
Lost customer service
Lengthened lead-times
Lost sales
Unnecessary capacity created

How to avoid Bullwhip effect?

Use of IT for managing information
analysis and flow
Sharing Real time information
EDI timely information availability and
Inventory visibility across supply chain
Kanban real time information driven
inventory control

Supply chain in equilibrium

Supplier
supplies 10 u
and orders 10u
s/s10 units

Producer
supplies 10 u
and orders 10u
s/s 10 units

Distributor
supplies 10 u
and orders
10u
s/s 10
units

Retaile
r
suppli
es 10
u
Orders
10 u

consum
er
Orders
10 u

10

Supply chain disrupted

Supplier
supplies 20 u
and prepares
(s/s120
240u
units)

Producer
supplies 20 u
and orders
(s/s120u
60 units)

Distributor
supplies 20
u and
orders
(s/s 30
60u
units)

Retaile
r
supplie
s 10 u
Orders
30 u

consum
er
Orders
20 u

11