Beruflich Dokumente
Kultur Dokumente
FEBRUARY 2014
Keywords: supply chain management, global supply chain, matching supply and demand, demand volatility, bullwhip effect,
product life cycles, communication & coordination
1
In response to an increasingly turbulent and competitive business environment, businesses
have adopted several corporate strategies and expansion into global markets so as to remain
aggressive while improving customer value (Ari-Pekka Hameri et al., 2009; Rohit
Bhatnagar and Chee-Chong Teo, 2009; Gunja Soni and Rambabu Kodali, 2011). A
global supply chain is 'an entirely different endeavour than overseeing one based in one
country' (Catherine Capozzi, no date) and thus, a supply chain which is internationalized
involves a wider spectrum of challenges and risks as compared to one which is based
domestically. While globalizing provides a business with access to cheaper labour, raw
materials and bigger markets, better financing opportunities and government incentives
(Kogut and Kulatilaka, 1994), global supply chains involve a high level of complexity to
minimizing operating costs and mitigating risks, supply chain managers are also responsible
for the shortening of lead times across several continents and matching demand and supply
according to varying tastes and preferences of consumers from around the world. Since all
supply chains seek profit maximization (Nelson and Toledano, 1979; Manuj & Mentzer,
2008), to be responsive (Holweg M. and Miemczyk J., 2002; Holweg M. et al., 2005; Doug
Pasquale, 2013), flexible (A. Gunasekaran, 1998; A. Gunasekaran, 1999a), efficient and
effective, it is integral that supply chain managers are well aware and updated about the
challenges and disruptions that could cause a downfall in their business in terms of revenue,
increased downtime, delivery interruptions, lost customers and even a damaged reputation
(Deloitte, 2013) due to inability to retain customer loyalty while satisfying them.
According to Simchi-Levi and Kaminsky (2003), supply chain management is "a set of
so that merchandise is produced and distributed at the right quantities, to the right locations,
and at the right time, in order to minimize systemwide costs while satisfying service level
requirements". To put it simply, supply chain management is about matching supply
complexity with demand volatility. A typical supply chain involves acquiring raw materials,
moving them from one place to another, maintaining a stock-keeping unit (SKU) and
Hameri et al., 2009). However, due to 'the number of nodes in the network' (BearingPoint,
2007), a global supply chain comes with a greater challenge in terms of forecasting demand
and communicating the demand signals upstream to its suppliers and manufacturers. With
regards to an extended supply chain, William Brandel (2007) believes that while global
sourcing brings cost advantages to a business, "the rise of global and low-cost-country
sourcing is the primary reason for the complexity and length [of its supply chain]" because by
increasing geographic reach, global supply chains are exposed to variable lead times and
demand, thus causing a greater challenge in inventory management where customers and
Managing an extended chain could involve conflicting objectives among chain partners with
While employees of a business are considered the engines of marketing and production,
suppliers and other upstream partners are the fuel to those engines and therefore, failure to
reach a common consensus and understanding in a business would create a 'broken chain' and
cause detrimental impact on its level of customer service and ability to fulfil customers'
expectations and demands. Denis R Towill (1996) identifies the 'classic conflict of interests
between marketing, production and materials management' where marketing initiatives aim to
promote products for a surge in overall sales; the production unit tends to focus on achieving
economies of scale; and the materials department team seeks to reduce warehousing and
supply chain where three key flows are concerned—material flow, resource flow and
information flow (John Mangen et al, 2011). Where material flows facilitate delivery of
merchandise from one place to another, resource flows involve the financial transactions
between a company and its suppliers. Information flows enable responsiveness in a supply
chain by matching demand and supply. However, a global supply chain is more complex than
having to manage just three flows. It is estimated that each international end-to-end
(CEMT, 2004; Ari-Pekka Hameri et al, 2009). Considering the large number of parties and
collaborations within a global supply chain, timely exchange of information from country to
country in different time zones becomes a major challenge. Catherine Capozzi (no date)
inaccuracies or volume and mix requirement changes (Steele and Court, 1996; Noordewier
et al., 1990; Walker and Weber, 1984; George A. Zsidisin, 2003), there will be a need for
immediacy to make critical changes which, if not done quickly, would affect the supply chain
and its lead time and/or delivery of final products at end-consumer point. Differing time
zones and hours of operation could hinder smooth and efficient flow of information and
materials within the supply chain and while some businesses include a 24-hour
communication option as part of their contract agreement with foreign vendors, information
system compatibility (Hau L. Lee et al., 1997) and utilization of IT is essential to 'the
management of information flows, cash flow and process/work flow' (Tyndall et al., 1998).
For example, the electronic data interchange (EDI) assists a supply chain in overcoming
supply chin (Watson et al., 1998; A. Gunasekaran et al., 2004), especially in a global
context where information sharing helps in effective and efficient management among parties
of a supply chain with regards to forecasted and actual demand. The point-of-sale (POS)
system produces reports and historical data that track customer preferences and ordering
behaviour to better identify future trends (Owen E. Richason IV, no date) that will help
Although the availability of IT systems better assist a supply chain in forecasting and
market conditions still persist. While Martin Christopher (2010) considers it more difficult
that forecasting for 'aggregate volume to enable the company to plan for the capacity and the
resources that will be required to produce that volume', William Brendel (2007) disagrees
and believes that since having a demand-driven mentality will instil stress on businesses'
ability to control costs, forecast accuracy can be better achieved by forecasting at the
individual item level. The rationale behind the mismatch of views is that it actually really
depends on the volume and variability of demand (D' Alessandro and Baveja, 2000) of a
supply chain's products. In the case where volume and variability of demand is high, the
former writer's opinion on forecasting for the aggregate volume stands true where most
products are make-to-stock (MTS) whereas in cases where volume and variability of demand
model (Kate L. Vitasek et al, 2003; J. Olhager, 2012). Where MTS is an appropriate
approach in situations where the demand for the product can be forecasted based on past
experience or where the product has a seasonal element i.e. demand for Christmas trees and
inventory (FPMA, 1999). Identifying and understanding the volume and variability of
demand of a supply chain's line of products alone is not enough. Supply chain managers are
also to consider the challenges that follow a business' or its competitor(s) actions be they new
demand which can be difficult to measure and forecast. Therefore, the key challenge with
matching supply with unpredictable demand lies with the supply chain manager's ability to
keep track of customer demands and market activities on a day-to-day basis, developing a
forecasting system between customer demands to possible market changes and supplier
Vitasek et al (2003) believe that companies should set their inventory levels based on real
customer demand instead. This can be seen in Seven Eleven Japan (SEJ) where the Point-of-
Sale (POS) strategy is implemented. SEJ has a clear understanding of the movement of its
products and achieves a micro matching of demand and supply by the locations of its outlets
in different times of the day and week in different seasons (UT Dallas, no date). SEJ is
variations. In a global supply chain, products are distributed to different parts of the world
where different cultures, perceptions and tastes are to be considered. In the case where
demand is hardly ever constant or regular, supply chain managers are to understand the
external environment where customers from different parts of the world are. Information is
key to forecasting demand and supply and although it is unlikely or even impossible to match
actual demand, supply chain managers are able to narrow the gap between supply complexity
and demand volatility by collecting more detailed historical data that includes, for example,
the gender and age of customers and their purchases on the POS system to better understand
the movement of products at any time of the day, week or month. Therefore, the ultimate
challenge to match demand and supply where volume and variability of demand is high in a
supply chain is to identify the different groups of consumers and understand their individual
needs and wants in real time through the POS system for a higher level of accuracy for future
For the case of a MTO system, products are catered to the specifications and demands of
customers. Since there is a customization element to products under this system, inventory
management of components are carefully maintained in the supply chain before the final
product is produced. Given that flexible customization creates additional time, the challenge
here lies in the supply chain manager's ability to keep a strategic level of stock control and
inventory buffers (A. Gunasekaran & E.W.T. Ngai, 2004) while producing high-quality
products worth their customers' wait. Benetton, a fashion manufacturer-cum-retailer from the
retail industry, is an example of a business which adopts the MTO system. Market trends
affect consumers' tastes and likings and therefore, to sustain and compete in the retail
industry, Benetton was to adopt a speedy response to fashion changes. Inventory management
is tricky in this industry where product life cycles tend to be shorter and unpredictable and
Benetton reacted to this by adopting the process innovation strategy (Hau Lee, 1998) of
dying sweaters after they are knitted while controlling product variety. In industries where
volume and variability of demand is at low-medium range, customers demand more custom-
made products to satisfy their individual needs (Ari-Pekka Hameri et al., 2009). Therefore,
supply chain managers are required to consider how much customization the business should
allow on its products, what component(s) it should keep at minimum reasonable inventory
(MRI) (Denis R. Towill, 1996) and at which stage of the supply chain customization should
take place.
Due to increasing market competitiveness, businesses are pushed to adopt the element of
customization, thus offering and providing product variety to customers. The challenge here
is being cost-effective while satisfying diverse needs of the global market of highly
configurable products. According to Hau Lee (1998), 'companies lose control of global
supply chain efficiency as product varieties proliferate and product lifecycles get shorter and
shorter', following increase in global market competition and customer demand for tailored
products. Product life cycles tend to affect the dynamics of supply chains and therefore, it is
important to understand the distinction between functional products with steady demand
patterns and long product life cycles and innovative products under volatile demand with
short-life cycles (Fisher, 1997) as well as the concepts of maturity and de-maturity
(Abernathy, 1978). In the case of innovative products where demand gets unpredictable and
volatile due to product variety and competition, Chopra & Meindl (2003) noted that at
product maturity stage, demand and supply becomes more predictable and businesses tend to
'move from responsiveness to efficiency to achieve a strategic fit of the supply chain' (Kotler,
1999; Chopra & Meindl, 2003). At the introduction stage of a product life cycle, marketing
and sales initiatives 'control the diffusion speed' (Higuchi et al., 2005) where the more a
business spends on advertising, the faster the product gets popular and where the smaller the
marketing efforts, the slower the diffusion. Sales growth at this stage is slow and gradual; and
affects the life of the product and is vital in assisting supply chain managers make judgment
and future preparation in terms of matching demand and supply. The growth stage of a
product life cycle expects a large increase of sales volume in response to effective marketing
production process due to upstream manufacturers and suppliers' inability to respond to the
immense market expansion at this stage, thus incurring opportunity loss. In addition to bulk
productions to achieve economy of scale, bullwhip effects and phantom demand are also
caused in the process. It becomes a 'critical factor for supply chains to estimate trend of
demand correctly' (Higuchi et al., 2005) and take capacity constraints into consideration.
Supply chain managers are also to consider faster revolution of products which contributes to
shorter life spans of products, thus causing in part procurement problems in terms of
designing, sourcing, change over etc. Since the position of the customer order decoupling
point (CODP) affects the management of any supply chain (J Olhager, 2012), the challenge
at this point lies in the supply chain manager's ability to reduce the gap between demand and
supply by improving the production and information system and flows as well as instil
effective and efficient communication upstream and downstream within the supply chain
Despite having looked at the importance of communication and coordination upstream and
downstream, understanding product types, their nature and life cycles to provide a supply
chain manager with valuable information to determine the CODP, unplanned demand
oscillations in the supply chain will still prevail as an 'inevitable part of the order-to-delivery
cycle' (R. Michael Donovan, no date), thus causing a direct impact on the production,
inventory and delivery of products downstream (B. Sundarakani et al., 2010). Also known
as the 'bullwhip effect', Hau L. Lee et al. (1997) identify it in the supply chain where orders
to downstream members are of larger variance than actual sales downstream and 'the
distortion propagates upstream in an amplified form'. The same group of writers also
classifies five causes of the bullwhip effect being demand forecasting, supply shortages, lead
times, batch ordering and price variations (Hau L. Lee et al., 1997; Frank Chen et al.,
2000). At the point closest to the consumer i.e. retailer, order placed by the retailer to its
member upstream is likely to be equal to actual demand. However, although the retailer has
accurate and first-hand knowledge of the observed customer demands, he will estimate the
mean and variance of demand for the next order from his upstream member. Consequently,
the manufacturer would see an increase in variability and thus, send orders of higher demand
variability to his supplier based on the assumption that demand variability increases as one
moves up a supply chain (Frank Chen et al., 2000). R. Michael Donovan (no date) expands
his understanding of how bullwhip is created by noting that sales promotions, transportation
incentives and sales targets cause 'lump(s) of demand'. So in order to minimize distortion of
information, it is important for supply chain managers to identify the factors that drive
'consumer demand planning and inventory consumption' (R. Michael Donovan, no date) as
they are the causes for replenishment order quantities at any one point in the supply chain.
Besides avoiding 'misperceptions of feedback' (Sterman, 1989), Hau L. Lee et al. (1997)
and Frank Chen et al. (2000) notes that although it defies the traditional approach of keeping
sales and inventory data confidential, sharing of such information, together with order
While global supply chains bring a business several advantages, it makes management more
difficult as well. The information flow is most critical and facilitates material and resource
flow upstream and downstream in a supply chain. Although external forces in an unstable
business environment is almost impossible to predict and control, supply chain managers are
able to reduce the gap between demand and supply by improving and enhancing internal
practices and processes (Yves Belanger & Yves Leclerc, 2013); systems, performance; and
coordination to better react to volatile demands. Although retailers are not obliged to share
sales data and inventory status data with their upstream members, doing so allows better
Hameri et al., 2009) and may mitigate and overcome the bullwhip effect in a supply chain.
Also, varying product types and product life cycles require different approaches of supply
chain management and therefore, managers are expected to match their supply chain to the
marketplace by understanding the constraints of the marketplace (R. Mason Jones et al.,
2000).
Total word count (excluding cover page and reference list): 2956
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