Chapter 5 Value of Information

Information Types Inventory levels Orders Production Delivery status

5.1 Value of Information “In modern supply chains, information replaces inventory” Why is this true? Why is this false? Information is always better than no information. Why? Information Helps reduce variability Helps improve forecasts Enables coordination of systems and strategies Improves customer service Facilitates lead time reductions Enables firms to react more quickly to changing market conditions.

5.2 Bullwhip Effect While customer demand for specific products does not vary much Inventory and back-order levels fluctuate considerably across their supply chain P&G’s disposable diapers case Sales quite flat Distributor orders fluctuate more than retail sales Supplier orders fluctuate even more

The Bullwhip Effect and its Impact on the Supply Chain Figure 2. Point-of-sales Data-Original Figure 3. POS Data After Removing Promotions

Higher Variability in Orders Placed by Computer Retailer to Manufacturer Lee, H, P. Padmanabhan and S. Whang (1997), Sloan Management Review

Bullwhip Effect - PROCTER & GAMBLE

Bullwhip Effect – GM Daily Production at each tier (stage) in the supply chain Final Assembly Assembly Tier 1 Tier 2 Jan 1990 Feb Mar Apr May Tier 3 500 1000 2000 Tier 1 supplier Tier 2 supplier Tier 3 supplier

What’s the Bullwhip effect? - Definition Demand information distortion across a supply chain (Increasing Variability of Orders Up the Supply Chain) = BULLWHIP EFFECT Order variability is amplified up the supply chain; upstream echelons face higher variability. What you see is not what they face. 과도한 재고 투자 낮은 고객 서비스 수준 판매기회손실 잘못된 생산 Capacity 계획 비효율적인 생산/수송 계획 Bullwhip Effect의 영향 =

Causes of Bullwhip Effect = Variability in Supply Chain Key Factors: Demand Forecast (수요예측) Lead Time (주문인도기간) Batch Ordering (덩어리로 (따라서 필요이상으로) 주문) Price Fluctuations & Promotions (가격 변동) Inflated Orders (실체보다 부풀려진 주문) Others: Ineffective Information Systems Lack of partnerships

DEMAND FORECAST Retailer Wholesaler Distributor Factory Customer Demand Order Lead Time Delivery Production Supply chain의 각 Entity는 자신의 바로 윗 Tier의 Order 정보를 Market demand의 Trend로 간주하는 경향이 있음 (착시 효과!) 정보의 Noise로 인해 각 Entity는 Increased demand trend를 인지한 것처럼 생각해서 Order quantity를 늘려 잡는 경향이 있음

LEAD TIME Lead time의 증가는 가변성의 증가를 더욱 확대시킨다! Reorder Point = z (안전재고) +  (주문인도기간 평균수요) 주문인도기간 = L일 1일 수요 = d개 1일 수요 표준편차 = a 주문인도기간 수요 표준편차 = √ L a 안전재고 = √L a * z Reorder Point = √L a * z + d*L 따라서 Lead time이 긴 경우는 수요의 표준편차 즉, 변동성이 조그만 증가해도 안전재고와 재주문점에 큰 영향을 미칠 수 있음!

BATCH ORDERING Batch Ordering ≈ Fixed Time Period 재고관리 위 Tier에 대한 주문 가변성이 증가하게 됨! WHY Batch Ordering? 주문발주비용 (고정비 부분) Full-truckload (FTL) vs. less-than-truckload (LTL) 요금 체계 : Larger, less-frequent order를 선호하게 함 영업사원에 대한 Sales incentives : 영업사원에 대한 평가가 Regular basis (월/분기)로 이루어짐

PRICE FLUCTUATIONS 가격변동이 발생하게 되는 요인 Price Discounts Quantity Discounts 가격 변동이 존재한다면, Retailer는 가격이 떨어졌을 때 필요 이상으로 많은 물량을 확보하고자 함 수요 패턴과 전혀 무관한 이러한 행위는 결국 위 Tier가 보는 시장의 수요 정보를 왜곡시키게 됨 가격변동이 발생하게 되는 요인 Price Discounts Quantity Discounts Coupons Rebates

INFLATED ORDERS - Shortage Gaming Retailer가 재고부족으로 Lost Sales를 경험했다면, 실제 이상으로 수요를 과장(exaggerate) 해서 “Phantom Order”를 내는 경우가 있음. 그러나 후에 수요가 수그러들기 시작하면, 이 phantom order들은 갑자기 사라지고 Supply chain의 위 Tier들은 심각한 Bullwhip Effect를 경험하게 됨. 1992 and 1993 Xmas shopping season에 휴대폰 수요가 급증, Motorola는 Distributor들에게 충분한 물량을 제공하지 못하는 사태가 발생. AirTouch Communications, Baby Bells 같은 Distributor들은 94년에도 그러한 공급부족 사태를 예상하여 drastically over-ordering at end of 1994 (Business Week, March 6, 1995). 그러나 Wall Street는 Motorola Dealer들의 재고가 넘쳐나는 것을 보고 새로운 주문들이 Phantom Order라는 것을 알게 되었음. Motorola’s stock tumbled almost 10%!

Coping with the Bullwhip Effect in Leading Companies Reduce uncertainty POS Sharing information Sharing forecasts and policies Reduce variability Eliminate promotions Year-round low pricing Reduce lead times EDI Cross docking Strategic partnerships Vendor managed inventory Data sharing

Example: Quick Response at Benetton Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy. Ten years later, the company expanded to the U.S., Japan and Eastern Europe. Sales in 1991 reached 2 trillion through successful use of communication and information technologies.

Example: Quick Response at Benetton Retailer Wholesaler Distributor Factory Customer Demand Order Lead Time Delivery Production Benetton uses an effective strategy, referred to as Quick Response, in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton’s mainframe computer in Italy. Using this strategy, Benetton is capable of shipping a new order in only four weeks, several week earlier than most of its competitors.

To Cope with the Bullwhip Effect, Benetton Uses: 1. Integrated Information Systems • Global EDI network that links agents with production and inventory information • EDI order transmission to HQ • EDI linkage with air carriers • Data linked to manufacturing 2. Coordinated Planning • Frequent review allows fast reaction • Integrated distribution strategy