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.

– 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.

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

A) Demand predictions are reliable and effectiveB) Distribution system is efficient

Demand pattern:: Analysis..1 O

rder

Siz

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Time

CustomerDemand

Demand assessment: Ordering by retailer

Ord

er S

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Time

CustomerDemand

Retailer Orders

Demand assessment: Ordering by distributorO

rder

Siz

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Time

CustomerDemand

Retailer Orders

Distributor Orders

Demand assessment: Production Plan

Ord

er S

ize

Time

CustomerDemand

Retailer Orders

Distributor Orders

Production Plan

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

RetailersWarehouses/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.

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Bullwhip EffectExample: P&G Diapers

Impacts of Bullwhip

It distorts the order information & amplifies order variability.

• Impact of Bullwhip Effect:

-- Inventory: More safety stock needed

-- Customer Service: Lower service level, more likely to cause stockouts and lost sales

-- Manufacturing: Lower capacity utilization

-- Transportation: Lower utilization of transportation

-- Warehousing: More warehouse capacity neededHigher costs

Bullwhip effect - an example

Chronology of company “X’s” supply chain problem.

• Company X produces SOAPS for sale on the open market.

• Customer demand for Company X’s 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

Suppliers Producers Distributors Retailers

Products & Services

Products & Services

Products & Services

Information

Cash

Key: = Inventory Levels

10 Units 10 Units 10 Units

10 Units 10 Units 10 Units

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

Supply Chain Disrupted

Customer Demand forecast = 20 units

SuppliersProducers

Distributors

Retailers

Products & Services

Products & Services

Products & Services

Information Flow

Cash Flow

Key: = Inventory Levels

160 Units 80 Units 40 Units

80 Units 40 Units 20 Units

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.

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