ISQA 458/558

Distribution & Replenishment

Professor Mellie Pullman

Point-of-sales Data: Original

POS Data After Removing Promotions

Promotions and their Impact on the Supply Chain

POS Data After Removing Promotion & Trend

Promotion & TrendImpact on the Supply Chain

Increasing Variability of Orders Up the Supply Chain

= Bullwhip Effect

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

We Conclude ….

• Order Variability is amplified up the supply chain; upstream echelons face higher variability.

• What one member experiences is not what upstream members face.

What are the Causes….

• Promotional sales

• Inflated orders to manage risk

- IBM Aptiva orders increased by 2-3 times when retailers though that IBM would be out of stock over Christmas

• Demand Forecast

• Long cycle times

• Order Batching

Consequences….

• Increased safety stock

• Reduced service level

• Inefficient allocation of resources

• Increased transportation costs

The Bullwhip Effect:Managerial Insights

• Exists, in part, due to the retailer’s need to estimate the mean and variance of demand.

• The increase in variability is an increasing function of the lead time.

• The more complicated the demand models and the forecasting techniques, the greater the increase.

• Centralized demand information can reduce the bullwhip effect, but will not eliminate it.

Coping with the Bullwhip Effect

• Reduce Variability and Uncertainty

- POS

- Sharing Information

- Year-round low pricing (Every day Low Prices EDLP)• Reduce Lead Times

- EDI

- Cross Docking• Alliance Arrangements

– Vendor managed inventory– On-site vendor representatives

Distribution Strategiesand Information Systems

Pull Vs. Push Strategies

Push Strategies• Single retailer, single manufacturer.

– Retailer observes customer demand, Dt.

– Retailer orders qt from manufacturer.

Retailer ManufacturerDt qt

L

Problems with Push Strategies:

• Excess finished goods inventory • Inefficient production• Inefficient operations, high costs, low service

levels

- Excess capacity

- Low utilization of resources

- High transportation cost

Distribution Strategiesand Information Systems

Pull Strategies

POS Data

Retailer ManufacturerDt qt

L

Pull Strategies• Production is demand driven• Faster information flow mechanisms are used• Inventory levels are reduced• Distribution facilities are transformed from

storage points to coordinators of flow.• But:

– Harder to leverage economies of scale– Doesn’t work in all cases

Distribution Strategies and Information Systems

Distribution Strategies

• Warehousing

• Direct Shipping– No DC needed– Lead times reduced– “smaller trucks”– no risk pooling effects

Distribution StrategiesStrategy Attribute

Direct Shipment

Cross Docking

Inventory at Warehouses

Risk Pooling

Take Advantage

Transportation Costs

Reduced Inbound Costs

Reduced Inbound Costs

Holding Costs

No Warehouse Costs

No Holding Costs

Demand Variability

Delayed Allocation

Delayed Allocation

Supply Chain Management:Pitfalls and Opportunities

Conflicting Objectives in the Supply Chain1. Purchasing

• Stable volume requirements• Flexible delivery time• little variation in mix• large quantities

2. Manufacturing• Long run production• High quality• High productivity• Low production cost

Supply Chain Management:Pitfalls and Opportunities

3. Warehousing• Low inventory• Reduced transportation costs• Quick replenishment capability

4. Customers• Short order lead time• High in stock• Enormous variety of products• Low prices