Management of Demand and Distribution

Supply Chain of Petrol

Every time we visit petrol pump, we find that it is available every time,
all the time. For you, and for countless other motorists.

Think, somebody must have put the petrol into the tank for you to pump from.

The supply chain for Petrol is indeed quite reliable, so much so that most consumers take it for granted
A) B)

Somebody must have prospected for oil, found it, and then dug the well to extract it. Next, somebody must have shipped the oil to a refinery, converted it into Petrol , and then transported the it to your favorite petrol station.

Demand predictions are reliable and effective Distribution system is efficient

Demand pattern:: Analysis..1

Order Size

Customer Demand

Time

Demand assessment: Ordering by retailer

Order Size

Customer Demand Retailer Orders

Time

Demand assessment: Ordering by distributor

Distributor Orders

Order Size

Customer Demand Retailer Orders

Time

Demand assessment: Production Plan

Production Plan

Distributor Orders

Order Size

Customer Demand Retailer Orders

Time

Bullwhip Effect in Supply Chains

Forrestor: Industrial Dynamics, HBR, 36:4, 1958 BWE describes the increasing amplification of orders occuring within a SC
Resembles a whip lash

Occurs even if end-item demand is fairly stable!

Forrestor studied a simulation model of the simplest tandem supply chain with four entities: Retailer, DC, W/H, Plant

Bullwhip Effect
The bullwhip effect is a phenomenon observed in supply chains wherein the demand variability increases as one moves upstream from retailers to distributors to manufacturers

Retailers Warehouses/ Distributors Manufacturers

Bullwhip Effect

In 2001, Cisco was forced to write down $2.2 billion worth of obsolete inventory, due to uncertain variations in its demand in its supply chain.

Bullwhip Effect Example: P&G Diapers

Impacts of Bullwhip
It distorts the order information & amplifies order variability.

Impact of Bullwhip Effect:

-- Inventory: More safety stock needed -- Transportation: Lower utilization of transportation -- Warehousing: More warehouse capacity needed -- Manufacturing: Lower capacity utilization -- Customer Service: Lower service level, more likely to cause stockouts and lost sales Higher costs

Bullwhip effect - an example

Chronology of company Xs supply chain problem. Company X produces SOAPS for sale on the open market. Customer demand for Company Xs SOAPS become stagnant Retailers offer a sales promotion to boost sales of Company X widgets

Example continued
Retailers fail to notify manufacturers of sales promotion Company X recognizes that demand for SOAPS have increased. Company X increases inventory to allow for increased manufacturing of SOAPS Company X notifies part suppliers of increased demand. Suppliers increase inventory to meet demand.

Moral of the story

Distorted information along the supply chain caused inventory levels to increase along the supply chain which may result in increased inventory costs, poor customer service, adjusted capacity and many other problems associated with the bullwhip effect.

Supply Chain in Equilibrium

Customer demand forecast = 10 units
Information
Products & Services
10 Units 10 Units 10 Units

Suppliers

Producers

Products & Products & Services Distributors Services

10 Units 10 Units 10 Units

Retailers

Cash
Retailers are selling product at a constant rate and price. Firms along the supply chain are able to set their inventory to meet demand.

Key:

= Inventory Levels

Supply Chain Disrupted

Customer Demand forecast = 20 units Information Flow
Suppliers Products & Services
80 Units 160 Units 80 Units

Producers Products & Distributors Products & Services Services

40 Units 40 Units 20 Units

Retailers

Cash Flow
As demand increases, the distributor decides to accommodate the forecasted demand and increase inventory to buffer against unforeseen problems in demand. Each step along the supply chain increases their inventory (double in this example) to accommodate demand fluctuations. The top of the supply chain receives the harshest impact of the whip effect.

Key:

= Inventory Levels

Bullwhip :: Major causes..1..

Demand forecasting updating Neglecting to order in an attempt to reduce inventory No communication up and down the supply chain No coordination up and down the supply chain Delay times for information and material flow

Bull whip :: Major causes ..2..

Forecasting is often updated based on the order history from immediate customers The longer the lead time, the greater the fluctuation The longer planning horizon, the greater possibility of scheduling changes and demand changes

Demand Forecasting Updating

Natural economic behavior Periodic ordering - the economics of transportation such as full truckload (FTL) and less-than-truckload rates Push ordering

Remedial measures to counteract bullwhip effect ..1..

Avoid multiple demand forecast updates Break order batches Stabilize prices

Remedial measures to counteract bullwhip effect..2..

Reduce variability and uncertainty.

1. POS 2. Sharing information 3. Year round low pricing

Reduce lead times.

1. EDI 2. Cross Docking

Alliance arrangements.
1. Vendor managed inventory 2. On-site vendor representative

Summary and Lessons

Effective management of demand essentially requires::
Correct and timely forecast Seamless information flow across organization Effective management of resources Relationship with channel partners Commitment towards customer This will lead to productivity and profitability to all channel partners as a whole