Value of information

Question 1

What are the benefits of information in the supply chain?

Answer 1

• Reduces variability in SC
• Suppliers make better forecasting
• Enables collaboration of manufacturing and distribution systems and strategy
• Retailers
  
  • Provide better customer service by locating desired product
  • Reacts & adapts to SC problem more rapidly
• –Lead-time reduction

Question 2

What is the simple definition of The Bullwhip Effect?

Answer 2

–Demand variability increases as we move away from market and towards suppliers

Question 3

What are the three levels illustrated in the bullwhip effect?

Answer 3

• Single Retailer
• Single Wholesaler
• Single Factory

Question 4

Explain the ordering from the view of the wholesaler

Answer 4

–Wholesaler receives order from retailer.
–Wholesaler doesn’t have access to consumer data.
–Wholesaler’s forecast is based on the order received from retailer.
–Wholesaler places order to factory based on above forecast.

Question 5

How and why (not) do the volumes of the retailers orders to the wholesaler differ from the actual consumer demand?

And how does it looK?

Answer 5

Why?

• Batch orders
• Fixed elements of order cost (k)
• Economies of Scale (Transportation)

Question 6

What is the problem of not having real consumer demand information?

Answer 6

• Variability in retailer’s orders > Variability in consumer demand.
• -> Because of variability, wholesaler should carry higher safety stock to maintain Same Service Level

Question 7

From the factory level, how does the ordering look then?

And why?

Answer 7

Why?

• Batch orders
• Fixed elements of order cost (k)
• Economies of Scale (Transportation)

Question 8

How is the relationship between participant level (retailer, wholesaler, factory) and safety stock?

Answer 8

• To Maintain Same Service Level
• SC participants in upper level should carry more safety stock (capacity)

Question 9

What are the five causes of the Bullwhip effect?

Answer 9

1. Demand Forecasting
2. Lead time
3. Batch ordering: Min-max (S, s) inventory policy
4. Price fluctuation
5. Inflated order

Question 10

Explain how demand forecasting is a cause of the bullwhip effect

Answer 10

• Min-max inventory policy
  
  • Whenever inventory is less than ‘re-order point’, it raises inventory to ‘order-up-to-level’.
  • More data => More estimates (AVG and STD of demand)
  • ‘Re-order point and order-up-to-level constantly updated => increasing variability
• Also, if wholesalers and manufacturers don’t have the actual demand data they need to use “orders” as a proxy to the real demand=> increasing variability

Question 11

Explain how demand Lead-time is a cause of the bullwhip effect

Answer 11

• Increase in variability can be magnified with increasing lead-time.
  
  • Thus, with longer lead time, a small change in demand variability (STD) can increase
    
    • Re-order point
    • Safety stock
    • => Significant change in order quantity!!
    • Increase in variability

Question 12

Explain how demand Batch ordering is a cause of the bullwhip effect

Answer 12

• Batch ordering: Min-max (S, s) inventory policy
  
  • Retailer uses batch ordering
    
    • Wholesaler observes
    • Large order
    • Long period of no order
    • Distorted & highly variable order pattern

Question 13

Explain how demand Price fluctuation is a cause of the bullwhip effect

Answer 13

– Price fluctuation => Retailers ‘Stock Up’ when low price. Also ‘Promotion’, ‘Discount’.

Question 14

Explain how demand Inflated orders is a cause of the bullwhip effect

Answer 14

• Inflated order
  
  • Retailer places inflated order in shortage time => magnifies bullwhip effect
    
    • (to get higher priority and security)

Question 15

How to cope with the bullwhip effect?

Answer 15

1. Reducing uncertainty (Very effective)
2. Reducing variability
3. Lead time reduction
4. Strategic partnership

Question 16

Explain how reducing uncertainty can help to cope with the bullwhip effect?

Answer 16

• Centralizing Demand information (sharing)
• Providing each stage of SC with actual customer demand info
• However Bullwhip effect still exits
  
  • Different forecasting methods
  • Different buying practice
  • etc.

VERY effective

Question 17

Explain how reducing variability can help to cope with the bullwhip effect?

Answer 17

• Reducing variability inherent in customer demand process
• How? No Promotion!
  
  • Regular price with periodic promotions => increases bullwhip
  • So instead, Everyday low price (EDLP)

Question 18

Explain how reducing lead time can help to cope with the bullwhip effect?

Answer 18

• Lead time amplifies bullwhip effect
• Should consider both types of lead time
  
  • Delivery lead time => Cross docking
  • Information lead time => EDI (electronic data interchange)

Question 19

Explain how reducing Strategic Partnerships can help to cope with the bullwhip effect?

Answer 19

• Strategic partnership can reduce bullwhip effects by affecting
  
  • The way information is shared
  • The way inventory is managed
• VMI (vendor managed inventory) (supplier of the product takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer’s consumption location)