SUPPLY CHAIN MANAGEMENT EXECUTIVE BACHELOR IN MANAGEMENT (PLANTATION MANAGEMENT) (SUPPLY CHAIN MANAGEMENT) Mustafa Bin Mohamed Kassim

Contents
NO 1 2 3 4 5 6 TITLE EXECUTIVE SUMMARY BULLWHIP EFFECTS DEFINITION CAUSES OF THE BULLWHIP EFFECT DEMAND FORECAST COMPANY BACKGROUND SIME DARBY KEMPAS SDN BHD CONSEQUENCES OF THE BULLWHIP EFFECTS IN SIME DARBY KEMPAS SDN BHD HOW TO MINIMIZE BULLWHIP EFFECTS ADOPTING SCM BEST PRACTISED CONCLUSION REFFERENCES PAGES

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Executive Summary Supply Chain Management Supply Chain Management is involves the flows of material, information and finance in a network consisting of customers, suppliers, manufacturers and distributors.

A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm. Below is an example of a very simple supply chain for a single product, where raw material is procured from vendors, transformed into finished goods in a single step, and then transported to distribution centres, and ultimately, customers. Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large.

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing's objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization--there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such an integration can be achieved.

Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm, and those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Cooper and Ellram [1993] compare supply chain management to a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton, but the entire team needs to make a coordinated effort to win the race.

Bullwhip Effects Definition

1. Definition: "It is a phenomenon observed in forecast driven supply chain and describes that the variation in demand increases up the supply chain from consumer to supplier. -> the more steps that are in between of the consumer and the supplier, the bigger the variation gets

Therefore it can be said that the bullwhip effect is an inefficiency of the supply chain and small changes in customer demand can result in large swings in orders placed upstream.

Causes of the Bullwhip effect:

Primary cause: lead time of information and material

Secondary causes:

Demand forecast updating Forecasting is based on order history from companys immediate customer Often, forecasts are made at whims & fancies of managers Upstream manager updates his/her demand forecasts based on customer demand variations, longer lead times, price fluctuations etc. Techniques like exponential smoothing creates bigger swings at the suppliers end

Order batching Periodic Ordering: Weekly, Fortnightly, Monthly etc. Creates spikes in order sizes, disrupting suppliers demand forecasts Benefits from transportation & distribution side Push Ordering: Orders are pushed by sales personnel Done usually at monthly/quarterly sales review and demand estimates from sales team This results in uneven spread of customer orders resulting in the bullwhip effect

Price fluctuation Forward buys; discount sales; offer merchandise; coupons; rebates; end of season sales Customers buy in bulk But the buying pattern never matches the consumption pattern This results in overstocking at the far ends of the supply chain and also results in idle capacity

Rationing and shortage gaming When demand exceeds supply, manufacture ration supplies to distributors This results in distributors ordering more than they need, to fulfil the demand When the market cools down, orders start getting cancelled; excess inventory piles up, leading to the bullwhip effect Real demand is never known in such market conditions. Most commonly affected is the IT hardware & telecom industry

In conclusion, the bullwhip effect can be described as the phenomenon where a small change in the demand is translated into a large change in the next replenishment order in the supply chain, in the absence of unexplained demand changes

Demand Forecast

In the modern supply chain, forecasting is necessary for companies that manufacture items for inventory and that are not made to order. Manufacturers will use material forecasting to ensure that they produce the level of material that satisfies their customers without producing an overcapacity situation where too much inventory is produced and remains on the shelf. Equally, the forecast must not fall short and the manufacturer finds them without inventory to fulfill customers orders. The cost of failing to maintain an accurate forecast can be financially catastrophic. Forecasts are developed for a companys finished goods, components and service parts. The forecast is used by the production team to develop production or purchase order triggers, quantities and safety stock levels. The forecast is not static and should be reviewed by management on a regular basis. This is to ensure that information on future trends, the internal or external environment is incorporated into the forecast to give a more accurate calculation Role of Forecasting in SCM The basis for all strategic and planning decisions in a supply chain Used for both push and pull processes Examples: o Production: scheduling, inventory, aggregate planning o Marketing: sales force allocation, promotions, new production introduction o Finance: plant/equipment investment, budgetary planning o Personnel: workforce planning, hiring, layoffs All of these decisions are interrelated

COMPANY BACKGROUND

SIME DARBY KEMPAS SDN BHD Incorporated on 19 September 1974, Sime Darby Kempas Sdn. Bhd. is a fully-owned subsidiary of Sime Darby Plantation, a division of Sime Darby Berhad which is one of the leading multinational conglomerates in the Asia Pacific region. Based in Malaysia, the Sime Darby Group spans 5 continents with a workforce of more than 100,000 employees.

With its long history of reliability, quality and excellence, Sime Darby Kempas Sdn. Bhd. is a leading refiner and manufacturer of specialty fats and vegetable oils for the food industries worldwide.

Being a fully integrated organisation, Sime Darby Kempas Sdn. Bhd engages in all aspects of the supply chain, from Marketing, R&D, Manufacturing and delivery. This total commitment enables us to work closely with our valued customers, customising products to meet their stringent requirements.

Situated in Pasir Gudang, Johor, on the southern tip of Peninsular Malaysia, Sime Darby Kempas Sdn. Bhd. is served by the Ports of Pasir Gudang and Tanjung Pelepas.

Process Facilities : Refinery Fractionation Hydrogenation Packing Interesterification

Nature of Business : Manufacturer of edible oils and specialty fats

Location : Pasir Gudang, Johor

Consequences of Bullwhip Effects in Sime Darby Kempas Sdn Bhd

The consequences and implications of the bullwhip effect have already become clear in the abovementioned discussion of the phenomenon and its causes. Indicates that the bullwhip effect has implications for efficiency on various levels. At the macro level, the bullwhip effect induces poor service levels, inefficiencies in production and production costs, scheduling (capacity utilisation), sourcing, distribution, revenue generation and revenue realisation. At the operational level, it generates more (additional) inventory and keeps it in the most inappropriate place to meet a specified service level. At a performance level it can reduce the velocity of cash, destroy potential revenue, and significantly erode revenue realisation through price discounts. It can potentially dilute competitive strategy and position and therefore can be a strategy buster. The distortion of demand information implies that the manufacturer who observes only its own immediate order data will be misled by the amplified demand patterns. This has serious cost implications. For example, the manufacturer could incur excess raw materials cost due to unplanned purchases of supplies, additional manufacturing expenses created by excess capacity, inefficient utilisation and overtime, excess warehouse expenses and additional transportation costs due to inefficient scheduling and premium shipping rates. The bullwhip effect contributes to high cost and poor service in supply chains . In some supply chains, the bullwhip effect can drive 13 25% of operating costs. Thus, the bullwhip effect could have a major impact on organisations costs. Therefore, knowing where to invest effort and resources for this purpose should be a high priority for supply chain managers. It is important to understand the causes of the bullwhip effect to limit the effect. list the possible implications of the bullwhip effect as: excessive inventory quantities; poor responsiveness to market dynamics and poor customer service; cash flow problems; stockouts or material shortages; lost sales; obsolescence; high material costs; overtime expense; high transport costs; poor profitability; and longer cycle times.

How to manage Bullwhip Effect

The goal of any supply chain is to get the right selection of goods and services to customers in the most efficient way possible. To meet this goal, each link along the supply chain must not only function as efficiently as possible; it must also coordinate and integrate with links both upstream and downstream in the chain.

The keystone for a lean supply chain is accuracy in demand planning. Unforeseen spikes in demand or overestimations of demand stimulate the supply end of the chain to respond with changes in production. Production and supply issues then impact the consumer end of the supply chain and the effects ripple up and down the chain. This is often referred to as the bullwhip effect.

What Causes the Bullwhip Effect? Supply chain management is a complex process. There are several issues that can lead to the bullwhip effect and those issues can be exacerbated by delays in transmitting information, and a lack of coordination up and down the supply chain. Some causes of the bullwhip effect include:

Consumer demand swings Natural disasters that disrupt the flow of goods and services Overcompensation when addressing inventory issues

Ordering processes, such as order batching, can also contribute to the bullwhip effect. Organizations may accumulate larger orders before processing them in an effort to reduce costs and create transportation economics. They may also wait to place larger orders to benefit from lower prices offered during a promotion. Demand forecasting manipulation is another cause. By padding the forecast to compensate for possible errors, the organization loses sight of true customer demand. Customers can also contribute to the bullwhip effect by engaging in shortage gaming during periods of short supply by purchasing more than they need. Additionally, customers taking advantage of liberal return policies can create problems with developing accurate demand forecasts.

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How to Minimize the Bullwhip Effect The first step in minimizing the bullwhip effect is to understand what drives customer demand planning and inventory consumption. Lack of demand visibility can be addressed by providing all key players in the supply chain with access to point of sale (POS) data. Suppliers and customers must then work collaboratively to improve both the quality and frequency of information communication throughout the supply chain. They may also choose to share information through an arrangement such as vendor-managed inventory (VMI). Eliminating practices that introduce spikes in demand, such as order batching, can also help. The higher order cost associated with smaller or more frequent orders can be offset with Electronic Data Interchange (EDI) and computer aided ordering (CAO). Pricing strategies and policies can also help reduce the bullwhip effect. Eliminating incentives that cause customers to delay orders, such as volume transportation discounts, and addressing the causes of order cancellations or reductions can help create smoother ordering patterns. Offering products at stable and fair prices can prevent buying surges triggered by temporary promotional discounts. Special purchase contracts can be implemented to encourage ordering at regular intervals to better synchronize delivery and purchase.

Adopting Supply Chain Management Best Practices Using sound chain management processes and systems will result in the efficient flow of goods from a raw stage to the consumer while enhancing ROI for the company. Reviewing case studies and other resources detailing best practices can suggest opportunities for improvement. Adopting successful practices such as Walmarts use of cross docking, or Dells process of bypassing the middle man by offering made-to-order computers directly to customers, can contribute to a lean supply chain and minimize the bullwhip effect. Reducing the bullwhip effect requires a thorough evaluation of organizational policies, measurements, systems, and practices. Based on the positive implications an efficient supply chain can have on costs, sales, profits and customer satisfaction, its an undertaking well worth the investment and effort.

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Adopting SCM best practised In today's economic environment, doing what you've always doneeven if you do it very wellis no longer acceptable. Under pressure to contain costs and produce results despite challenging circumstances, you (and many other supply chain managers) must transform rather than simply improve your operation. That means adopting the philosophies, methods, and processes that will make your organization "best in class." What makes a supply chain organization best in class? The answer will vary for each company, but there are some practices that many leading companies are adopting now.

Some of these practices may be simple, straightforward, and familiar. Others may be new to company. Implement them all and you will have a strong foundation for supply chain excellence.

1. Establish a governing supply chain council. A governing council's purpose is to give direction and help align supply chain strategy with the company's overall strategy. The council's membership should include the leader of the supply chain organization as well as corporate executives, business unit managers, and other influential company leaders. Ideally the council should hold regularly scheduled meetings. But even if it doesn't, its mere existence will indicate that supply chain management has the endorsement and commitment of senior leadership. We often see supply chain organizations struggling for recognition because their objectives and strategies differ from their companies' stated objectives and strategies. A governing council can prevent that from happening by providing constant, consistent validation that the supply chain strategy directly correlates with the corporate strategy. The council can also help to remove barriers to success that exist within the organization. Every company has such barriersusually individuals or organizations that don't see or accept the value that a wellmanaged supply chain provides. By addressing these barriers, members of the council help to ensure that the supply chain organization is given the opportunity to perform up to its potential. When it is clear that the executive leadership is fully embracing the supply chain organization, it is likely that key business-unit stakeholders will be more willing to work with and support supply chain efforts and initiatives. Finally, the council provides an effective forum for cross-functional communication. An active governing council creates an opportunity for business unit leaders to provide the 12

supply chain management leadership with information regarding future strategies and projects.

2. Properly align and staff the supply chain organization. It can be difficult to organize the supply chain function in a way that will maximize its effectiveness and bring commensurate benefits to the company. Some companies are best served by embedding proficient supply chain management professionals in various business units. For others, a more centralized operation is most effective. Many of the progressive companies we have worked with, however, have adopted a hybrid approach that combines a centralized strategy to gain consensus with decentralized execution to improve service. Another emerging trend we have seen involves placing procurement, logistics, contract management, and forecasting/demand planning and similar management functions under the supply chain leader. This approach, depicted in Figure 1, is not appropriate for all companies, but it does give an idea of current thinking about supply chain management and the reporting structure. Whatever structure you adopt, correctly staffing the supply chain organization is vital to success. Elevating staff members' supply chain management skills and knowledge is always a priority, of course. But top leadership focuses more on strategy and is less concerned about transactional ability. As supply chain leaders move up to join their companies' management teams, therefore, they must have additional characteristics. Best-in-class companies hire supply chain managers who have strong communication and relationship management skills (both internally and externally), the ability to think strategically, and a focus on value creation.

3. Make technology work for you. Too many companies select software they hope will make them more efficient, and they structure their workflows and processes around that chosen technology. Instead, they should first review the processes that need improvement, and only then select the technology that best satisfies those process needs. That may seem self-evident, but I have seen more than a few companies buy first and figure things out later. Perhaps that is why in many companies, the supply chain organization seems to be "feeding the system" (such as an enterprise resource planning system) with information, and they have difficulty retrieving the type of data they need for making sound strategy and business decisions.

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At best-in-class companies, by contrast, managers understand that "the system" should help them better manage their supply chains. They find a way to use technology to produce beneficial information without having to perform various "work-arounds" to extract and view the data. They recognize the importance of an efficient purchase-to-pay process and have adopted strategies and mechanisms to get the greatest benefits from technology.

4. Establish alliances with key suppliers. Best-in-class companies work closely with suppliers long after a deal has been signed. In most circles today, this is called "supplier relationship management." But that implies one-way communication (telling the supplier how to do it). Two-way communication, which requires both buyer and seller to jointly manage the relationship, is more effective. A more appropriate term for this best practice might be "alliance management," with representatives from both parties working together to enhance the buyer/supplier relationship. The four primary objectives of an effective alliance management program with key suppliers include: 1. Provide a mechanism to ensure that the relationship stays healthy and vibrant 2. Create a platform for problem resolution 3. Develop continuous improvement goals with the objective of achieving value for both parties 4. Ensure that performance measurement objectives are achieved With a sound alliance management program in place, you will be equipped to use the talents of your supply base to create sustained value while constantly seeking improvement. 10 ideas from best-in-class supply chain organizations Many leading companies have adopted these 10 best practices. Some may be familiar while others may be new to your company. Implement them all and you will have a strong foundation for supply chain excellence. 1. Establish a governing supply chain council 2. Properly align and staff the supply chain organization 3. Make technology work for you 4. Establish alliances with key suppliers 5. Engage in collaborative strategic sourcing 6. Focus on total cost of ownership, not price 7. Put contracts under the supply chain function 8. Optimize company-owned inventory 14

9. Establish appropriate levels of control and minimize risk 10. Take green initiatives and social responsibility seriously

5. Engage in collaborative strategic sourcing. Strategic sourcing is a cornerstone of successful supply chain management. But a collaborative strategic sourcing initiative produces even better results. Rather than consider strategic sourcing as just a matter for the purchasing department, bestin-class organizations get internal "customers" actively involved in the decision-making process. More importantly, they solicit feedback and information regarding their objectives and strategies from those customers, which may include functional areas such as finance and accounting, engineering, operations, maintenance, safety/health/environment, and quality assuranceany internal business unit or function that will contribute to the initiative's success. This approach not only ensures availability of supplies but also results in lower total cost, streamlined processes, and increased responsiveness to customers' changing needs.

Conclusion The fundamental challenge today is for supply chains to achieve coordination in spite of multiple ownership and increased product variety. The bullwhip effect is the consequence of a lack of coordination among organisations and suppliers in supply chains. The bullwhip effect can be summarised as small variations in demand at the customer end of the supply chain which produce massive variations in orders upstream due to demand information distortion. The distortion of demand information implies that the manufacturer who observes only its immediate order data will be misled by the amplified demand patterns. This has serious cost implications. Since the bullwhip effect can have a major impact on organisations costs, knowing where to invest effort and resources should be a high priority for supply chain managers. The main causes of the bullwhip effect are dependence on demand forecasting information and updating of demand information from customers, a lack of supply chain visibility, a lack of coordination and ineffective management of relationships. This leads to order fluctuations, cancellation of orders, long lead time and price fluctuations

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Refferences 1. www.sap.com.my 2. http://www.simedarbykempas.com 3. logisticabout.com 4. Joseph H. W. (2010) Managing the Bullwhip

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