Bullwhip Effect in Supply Chain

Supply Chain Class Module 2, Lesson 3 Question 1 Develop a small group consensus on the impact ( affixs, decreases, no fix) of the Bullwhip Effect on two of the following sestet run chain performance measures manufacturing equal, caudex approach, replenishment lead time, cargo ships cost, shipping and receiving cost, level of product availability profitability. ane of the two measures that your squad spots must be livestock cost. For inventory be, be certain to be specific intimately the kinds of inventory be impacted (in-storage cycle run carrying costs, ordering costs, stockout costs, or base hit stock carrying costs).Clearly explain your groups reasoning or rationale for the impact you have agreed to that is c atomic number 18fully explain why the bullwhip effect any increases, decreases of has no effect on the given performance measure. In separately of your explanations, drill down into the factors that jam each measure, explaining how those factors are affec ted by the Bullwhip effect. MANUFACTURING COSTS It is the consensus of Team 10 that the bullwhip effect increases costs associated with the manufacturing of products.We know that the bullwhip effect results in an amplification of the magnetic declination of product and material pick up as angiotensin-converting enzyme travels upstream in the supply chain from consumer to material suppliers. In most cases the manufacturer of products bequeath be removed from the factual consumer by multiple layers in the supply chain. The variation in requisite (variation in orders) that the manufacturer leave alone bear will be signifi hatfultly greater than the variation in demand from the actual consumers. There are several costs incurred in the manufacturing of products. Among these costs are channel material costs, direct labor costs and bash costs.The increased variability in quantity of products demanded from the manufacturer has an impact on each of these items. For most manufacture d products, the cost of materials is a signifi s chairt voice of the cost of the end item. As the demand for products varies from the manufacturer, these swings in demand are amplified and passed on to the material suppliers and confused other sub-suppliers. During periods of high demand, the manufacturer is to a greater extent than likely to be forced to pay the material suppliers and sub-suppliers additional fees to press out front shipments.During periods of low demand, the manufacturer is more likely to find itself with a gigantic stock of unused material on hand. These variations similarly make it more intemperate to negotiate matched damages with the suppliers, further adding to the cost of the bullwhip effect. In an case to protect against some of this variation, manufacturers will often stockpile materials, adding further store and capital costs. Labor costs are another key luck of the total cost of most products, including products which may be manufactured in shore in low-wage countries.In periods of super high demand, manufacturers are faced with an option of either hiring more employees or working their existing employees longer hours and paying(a) extra time. Most companies are extremely reluctant to hire additional workers, oddly if they have reason to believe that the spike in demand will only be temporary. As a result, companies will typically choose to work longer hours and pay overtime wages to their employees. Paying overtime is costly, not only from a wage standpoint but in like manner from an effectiveness standpoint.Employees are not robots, and diminishing marginal return should be expected when working employees longer hours. As hours go up, productivity typically declines at a rate that increases as the severity of the work muniment increases. The result is an increasing cost per unit of the products produced. Likewise, when product demand is extremely low, employees are not able to be utilized as in effect and labor c ost per unit also increases. Further, there are the command processing overhead costs which are affected by the variation in demand amplified by the bullwhip effect.When manufacturers create facilities and purchase processing equipment, they often size their operations found upon what they believe will be the highest levels of demand for their products. When demand for products varies greatly, the support result is that the processes, equipment and facilities are surplusageively large (and costly) compared to what the legitimate demand superpower actually require. This results not only in excessive costs to discipline up these operations, but it also rotter create a scenario where it becomes difficult to operate these facilities efficiently when the takings requirements are lower.Another element for consideration is the cost of quality. Manufacturing operations thrive on lie downency. When manufacturers have to contend with wildly-varying production schedules, there is an i ncrease in the state of flux in the operations. This can getting even the form of delayed maintenance on machines, fatigued workers, using pitch suppliers for materials, etc. All of these elements that are exacerbated by large swings in production schedule can contribute to higher scrap rates, manufacturing errors, equipment downtime and, potentially, product defects that hand the consumer.INVENTORY COSTS Demand variability amplification can have a significant impact on increasing inventory costs. Business Dictionary. com defines inventory costs as the cost of holding goods in stock. Expressed usually as a percentage of the inventory value, it includes capital, warehousing, depreciation, insurance, taxation, obsolescence, and shrinkage costs. Typically, the inventory costs increase out-of-pocket to excessive or obsolete inventory as a result of poor demand forecasting. This situation is clearly outlined in an article about Ciscos need to write-down $2. billion in inventory in 2001. However, one must plop deeper into specific inventory performance measures to better understand the effects of the bullwhip effect on inventory costs. Safety Stock Safety stock can be delimitate as inventory held as buffer against mate between forecasted and actual consumption or demand, between expected and actual delivery time, and unfore castn e interminglencies. From a positive standpoint, safety stock can help to potentially reduce stock out situations however is also contributes to the bullwhip effect.Specifically with demand forecast updating using exponential smoothing, ordering of safety stock will create larger swings for suppliers and even move for orders rigid to the manufacturer (Lee, p 95). Furthermore, naughtily ordered safety stock that becomes excess or obsolete can lead to increased expense or in a worst-case scenario, written-off or scrapped completely. Stockout Cost Stockout cost, also called shortage cost, is defined as the economic consequences of n ot being able to meet an infixed or outdoor(a) demand from the current inventory. Such costs consist of internal costs (delays, labor time wastage, lost production, etc. and external costs (loss of profit from lost gross revenue, and loss of future profit referable to loss of goodwill). One piss of stockout cost can be attributed to poorly updated demand forecast where the appropriate amount of inventory was not aforethought(ip) for the current demand. This is in contrast to the safety stock example which leads to an increase in inventory and excess or obsolete material. Another cause is rationing and shortage gaming where the demand for the product exceeded the supply (Lee, p97). The stockout cost is the expense of the lost sales or the potential of losing the customer committedness completely to a fierce competitor.Module 2, Lesson 3 Question 2 At the end of the article Bullwhip Effect in Supply Chains by Lee, et. al. , is Table 1. In this table Lee presents a number of init iatives, much(prenominal) as vendor-managed inventory, for counteracting the four causes of the Bullwhip Effect. Select one or more of the initiatives and break dance a small group consensus on a list of the top five impediments to the initiatives that you have selected five impediments in total, not five impediments for each initiative that you select. Select two impediments and for each impediment please explicitly explain why the impediment is difficult to overcome.Finally in your groups opinion, which of your impediments is typically the most difficult to overcome? Please explain why. BULLWHIP tack COUNTERMEASURES EDI, VMI, ECHELON-BASED INVENTORY SYSTEMS There is a range of initiatives to mitigate the effects of the bullwhip effect, or amplified distortions in replenishing orders. by dint of EDI and vendor managed inventory (VMI), distortions may be bring down through transparent serving-out of real time demand reading through the inherent supply chain. Demand distortio n begins with faulty assumptions inherent future demand projections.One counter-measure for this challenge is real time exchange of instruction and increased transparency at point of sale. Many retailers use selective selective information generated at point of sale to automatically adjust their inventories and trigger reorder as inventories are depleted. Simultaneous transmission of this information to the supplier would avail a clearer view of consumption and retail inventory. Point of sale EDI divided across the supply chain from the manufacturer to retail outlet, would smooth the orders and frustrate demand distortion that occurs with regression driven forecasts.Increased control of the total inventory can be achieved with echelon inventory management, through cooperative information sharing and a jointly agreed upon single point of inventory control. One model for this is vendor-managed inventory (VMI) which is a continuous replenishment of inventory based upon a push fro m the supply to the retail outlet based on EDI signals at point of sale and inventory depletion. ECHELON-BASED INVENTORY SYSTEMS Echelon-based inventory systems chuck up the sponge transparency of the inventory flow of the down-stream levels in the supply chain by the upstream levels.This acts to reduce the bullwhip effect by preventing exaggeration of demand fluctuations by multiple levels in the chain. This is a useful policy, but it can be difficult to implement. First, one must consider the integrity of the source of the information. If an upstream extremity of the chain intends to rely on reports generated by the downriver member, desire must be a mutual component of the relationship. The downstream phoner may feel that it doesnt want to share the information about their own inventory and/or demand, especially if it engages (or has any intention of engaging) in a practice of shortage gaming.Some elements of the shared selective information can be filtered, if this is found to be helpful to the downstream member. If the downstream member engages in price hedging or shortage gaming, the increased transparency to the upstream member would inhibit or completely prevent the downstream conjunction from harnessing the perceive buffer that the practice enables. Some elements of the shared info can be filtered, if mutually agreeable to all members of the supply chain. Through non-disclosure agreements and data parsing, streams of proprietary data can be cleansed to be little sensitive.Connectivity of various operating systems is another hurdle. Many suppliers and retailers will not allow direct feed of data into their core operating systems, requiring a data merge in a safe environment that then can share data between the operating systems of the companies exchanging data. The work of scrubbing data and ontogeny the necessary connectivity also requires IT resources. One must also consider the inferior of information that is constantly changing. The valu e of inventory data to the upstream member could be limited as it changes continuously and obsolesces almost as curtly as its generated.The upstream member must always be willing to loosely interpret the inventory and demand data since an remarkably large order, or an unusual decline in orders, could occur at any time. Also, downstream members transparency leads the upstream member to increase the relative frequency with which they update their demand forecasting. Frequently updating these forecasts is itself a bullwhip effect-exacerbating practice, so the upstream member would need to exercise discretion in its policies on how it reacts to the information that it receives from downstream.Implementation of these initiatives requires addressing and overcoming certain impediments Trust between supply chain partners or perceived competitive risk Data integrity challenges with changing/obsolete data Reduced downstream gaming ability (shortage and price hedge forward buying) education technology resources to facilitate connectivity Increased frequency of upstream re-forecast due to downstream transparency The two most difficult impediments are the prototypic two blaspheme amongst supply chain partners, and the challenges of sharing meaningful data.Trust perceived Competitive Risk The challenge with establishing swear amongst supply chain partners is one of competitive risk. The real time data on point of sale, inventories held, or pricing activities engaged are all considered proprietary. The sharing of that data requires trust through the entire supply chain, and a willingness to incur significant licit, technological, and uninflected resources to develop and deliver data that is accurate and meaningful.Lack of transparency and trust on the part of down stream members is the primary driver of the shortage and price gaming, to build inventories and prevent stock-outs or hedge for future price increases. In order to share transparent information through the supply chain, legal and technological hurdles must be addressed to reduce competitive risk, and allow necessary trust through protective agreements (NDA) and safe systems connectivity. Through non-disclosure agreements and data parsing streams of proprietary data can be cleansed to be less sensitive and reduced competitive risk. ) Data Integrity Changing and old Information The real time exchange of information supports accurate forecasts and apropos order replenishment only if that data is meaningful. Data is meaningful if it clearly conveys the supply/demand picture. Upstream suppliers must be able to see the sale/demand data and existing inventory data in real time in order to push order replenishment. If downstream members obscure the inventories to retain shortage gaming power, this will impact the the true of the inventory replenishment trigger to the upstream supplier.Connected systems are susceptible to cross-system failures. errant data in one system pollutes the forec ast assumptions of the connected systems. measuring rod of exchange, or timing of the data flows is a factor in relevance. If sales or order cancellations have changed inventories significantly since the last update, the information change can be obsolete. The bullwhip effect is culmination of iterative forecast variations, and self-protecting vindicatory actions on the part of supply chain members to hedge uncertainty. With increased trust and transparency, the forecast variations and uncertainty can be reduced.With collaboration through the entire supply chain, trust can be built, real time, meaningful data exchanged, and the cost of surplus inventories taken out of the chain. 1 . Comments on Information Distortion in a Supply Chain The Bullwhip Effect by Lee, H. L. Padmanabhan, V. and Whang, S. , p 1888 2 . http//www. businessdictionary. com/definition/safety-stock. hypertext mark-up languageixzz286djGuPB). 3 . http//www. businessdictionary. com/definition/stockout-costs. htmlixzz286iDNySD