IEEM341 Global Supply Chain Management
Assignment #4
Note that the sentences underlined are essential points.
I. Discussion Question in Chap 13 (First. Edition) or 16 (Second Edition)
Problem 2 (5 points)
What is the impact of lack of coordination (the bullwhip) on the performance of the
supply chain?
Lack of coordination results if each stage of the supply chain only optimizes its local
objective without considering the impact on the complete chain. Total supply chain
profits are thus less than what could be achieved through coordination. Lack of
coordination also results if information distortion occurs within the supply chain. The
phenomenon where the fluctuation in order increases as one moves up the supply chain
from stage to stage is referred to as the bullwhip effect. The bullwhip effect results in an
increase in all costs in the supply chain and a decrease in customer service levels, the
impacts are:
1. Increase in Manufacturing cost – the bullwhip effect increases manufacturing cost
in the supply chain. As a result of the bullwhip effect, a company and its supplier try
to satisfy a stream of orders that is much more variable the customer demand. The
company can respond to the increased variability by either building excess capacity or
holding excess inventory, both of which increase the manufacturing cost per unit
produced.
2. Increase in Inventory cost – the bullwhip effect increases inventory cost in the
supply chain. To handle the increased variability in demand, a company has to carry a
higher level of inventory than would be required in the absence of the bullwhip effect.
Then the inventory costs in the supply chain increase. The high level of inventory
also increase the warehousing space required and thus the warehousing cost incurred.
3. Increase in Transportation cost – the bullwhip effect increases transportation cost
within the supply chain. Transportation requirements fluctuation significantly over
time. This raised transportation cost because surplus transportation capacity needs to
be maintained to cover high-demand periods.
4. Increase in Labor cost for shipping and receiving – the bullwhip effect increases
labor costs associated with shipping and receiving in the supply chain. Labor
requirements for shipping at a company and its suppliers fluctuate with orders. A
similar fluctuation will occur for the labor requirements for receiving at distributors
and retailers. The various stages have the option of carrying excess labor capacity or
varying labor capacity in response to the fluctuation in orders. Either option increases
total labor cost.
5. Increase in Replenishment lead time – the bullwhip effect increases replenishment
lead times in the supply chain. The increased variability makes scheduling at a
company and supplier plants much more difficult compared to a situation with level
demand. There are times when the available capacity and inventory cannot supply the
orders coming in. It results in higher replenishment lead times within the supply chain
from both the company and its suppliers.
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6. Lower in level of product availability – the bullwhip effect hurts the level of product
availability and results in more stockouts within the supply chain. The large
fluctuations in orders make it harder for the company to supply all distributor and
retailer orders on time. this increases the likelihood that retailers will run out of stock,
resulting in lost sales for the supply chain.
7. Hurts the relationships across the supply chain – it negatively impacts performance
at every stage and thus hurts the relationships between different stages of the supply
chain. There is a tendency to assign blame to other stages of the supply chain because
each stage feels it is doing the best it can. The bullwhip effect thus leads to a loss of
trust between different stages of the supply chain and makes the potential
coordination efforts more difficult.
The bullwhip effect moves all parties in the supply chain away from the efficient frontier
and results in a decrease of both customer satisfaction and profitability within the supply
chain.
Problem 4 (5 points)
What problems result if each stage of the supply chain views its demand as the orders
placed by the downstream stage? How should firms within the supply chain
communicate to facilitate coordination (reduce the bullwhip effect)?
If each stage of the supply chain views its demand as the orders placed by the
downstream stage, it will result in a small change in customer demand that becomes
magnified as it moves up the supply chain in the form of customer orders. When there is
random increase in customer demand at the retailer, the retailer may interpret part of this
random increase to be a growth trend. This interpretation will lead the retailer to order
more than the observed increase in demand because the retailer expects growth to
continue in the future and thus orders to cover for future anticipated growth. The increase
in the order placed with the wholesaler is thus larger than the observed increase in
demand at the retailer. Part of the increase is a one-time increase. But the wholesaler
cannot interpret the order increase correctly. The wholesaler simply observes a jump in
the order size and infers a growth trend. The growth trend inferred by the wholesaler will
be larger than that inferred by the retailer. The wholesaler will thus place an even larger
order wit the manufacturer. As go further up the supply chain, the order size will be
magnified. When there is random decrease after that period of random increase, the
retailer will now anticipate in declining trend and reduce order size. This reduction will
also become magnified as we move up the supply chain.
The firms within the supply chain can achieve coordination by improving the accuracy of
information available to different stages in the supply chain. This can be done by Sharing
Point of Sales Data – in reality, the only demand that the supply chain needs to satisfy is
from the final customer. If retailers share the point of sales data with other supply chain
stages, all supply chain stages can forecast future demand based in customer demand.
This can help reduce the bullwhip effect because all stages now respond to the same
change in customer demand. Use of appropriate information system facilitates the sharing
of such data. Like internet to share data with supplier. Second, the firm can Implement
Collaborative Forecasting and Planning – Once the point of sales data is shared,
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different stages of the supply chain must forecast and plan jointly if complete
coordination is to be achieved. The manufacturer must be aware of the retailer’s
promotion plans to achieve coordination. Since the forecasts will be different between
retailer and manufacturer when the retailer is planning to have a promotion in order
stimulate sales even they have shared point of sales data. The key is to ensure that the
entire supply chain is operating to a common forecast. Thirdly, the firm should think of
Designing single stage control of replenishment – Designing a supply chain which a
single stage controls replenishment decisions for the entire supply chain can help
diminish the bullwhip effect. When a single stage controls replenishment decisions for
the entire chain, the problem of multiple forecasts is eliminated and coordination within
the supply chain follows. When sales occur through retailers, there are several industry
practices that result in single point control of replenishment. In continuous replenishment
programs(CRP), the wholesaler or manufacturer replenishes a retailer regularly based on
POS data. In VMI, the distributor or manufacturer monitors and manages inventories at
the wholesaler or retailer. The single forecast and control of replenishment by a single
stage are what help eliminate the increased fluctuations because of the bullwhip effect.
Problem 5 (5 points)
What factors lead to a batching of orders within a supply chain? How does this affect
coordination? What actions can minimize large batches and improve coordination
(reduce the bullwhip effect)?
When a firm places orders in batch sizes that are much larger than the batch sizes in
which demand rises, variability of orders is magnified up the supply chain. Firms may
order in large batches because there is a significant fixed cost associated with pricing,
receiving, or transporting an order. Large batches may also occur if the supplier offers
quantity discounts based in batch size. This affects the coordination that a manufacturer
supplying several retailers who batch their orders will face an order stream that is much
more variable than the demand that the retailer experiences. If the manufacturers further
batch their orders to suppliers, the effect is further magnified.
A reduction of batch sizes decreases the amount of fluctuation that can accumulate
between any pair of stages of a supply chain, thus decreasing the bullwhip effect. To
reduce batch sizes, managers must take actions that help reduce the fixed costs associated
with ordering, transporting, and receiving each lot. The batch sizes can be reduced by
aggregating deliveries across many products and suppliers. CAO and EDI help reduce
the fixed costs associated with placing each order. Using web-based ordering can
facilitate ordering in small batches because of reduced ordering costs for customers and
reduced fulfillment costs for companies themselves. In some cases, managers can
simplify ordering by eliminating the use of purchasing orders. Information system also
facilitates the settlement of financial transactions, eliminating the cost associated with
individual purchase orders. Some firms use trucks with deferent compartments, carrying
a variety of products, to help reduce batch sizes. Managers can also reduce lot sizes by
having milk runs that combine shipments for several retailers on a single truck. This
reduced the fixed transportation cost per retailer and allows each retailer to order in
smaller lots. Managers must implement technologies that simplify the receiving process
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and reduce the cost associated with receiving like ASNs, DEX and NEX. They can help
updating inventory records electronically. Another simple way to minimize the impact of
batching is to encourage different customers to order in a way that demand is evenly
distributed over time.
Problem 6 (5 points)
How do trade promotions and price fluctuations affect coordination in the supply
chain? What pricing and promotion policies can facilitate coordination?
Trade promotions and other factors those causing price fluctuations by a manufacturer
result in forward buying where a wholesaler or retailer purchases large lots during the
discounting period to cover demand during future period. Forward buying results in large
orders during the promotion period followed by very small orders after that. The trade
promotions and price fluctuations thus result in a variability in manufacturer shipments
that is significantly higher than the variability in retailer sales. Hence bullwhip effect
incurred.
The managers can diminish the bullwhip effect by devising pricing strategies that
encourage retailers to order in smaller lots and reduce forward buying. The manufacturer
can think of Moving from Lot sized-based to Volume-based quantity discounts – offering
a volume-based quantity discounts eliminates the incentives to increase the size of a
single lot because it considers the total purchases during a specified period like one year,
rather than purchases in a single lot. This can result in smaller lot sizes, thus reducing
order variability in the supply chain. The managers can also Stabilize the Price –
bullwhip effect can dampen the bullwhip effect by eliminating promotions and charging
Everyday Low Price (EDLP). The elimination of promotions removes forward buying by
retailers and results in orders that match customer demand. Also, managers can place
limits on quantity that may be purchased during a promotion to decrease forward buying.
Another approach is to tie the promotion dollars paid to the retailer to the amount of
sell-through rather than the amount purchased by the retailer. As a result, retailers obtain
no benefit from forward buying and purchase more only if they can sell more. The
presence of specific information systems facilitates the tying of promotions directly to
customer sales. These can all dampen the bullwhip effect.
Acknowledgement:
Thanks very much for CHUNG, Siu Chung who provides
the original version for my reference.
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IEEM341 Global Supply Chain Management
Assignment #03
I. Discussion Question in Chap. 2
Problem 1 (4 points)
How would you characterize the competitive strategy of a high-end department
store chain such as Nordstrom? What are the key customer needs that
Nordstrom aim to fill?
For a high-end department store such as Nordstrom, Nordstrom targets
upper-end customers with high responsiveness requirements. These
customers are willing to pay a high price to get the products that they want
timely. To support this strategy, Nordstrom must use inventory. A large variety
and quantity of stocks can make sure a high level of availability to satisfy the
customer’s needs. In fact, Nordstrom stocks a significantly larger amount of
inventory than other department stores. So the price of their goods is much
higher than that of others.
The customer needs are the following:
1.
2.
3.
4.
5.
6.
a large range of quantity required
short lead time
a large variety of products required
increase number of channels through which products maybe be acquired
plenty of innovation and new designs
a high service level
The supply chain responsiveness includes a supply chain’s ability to do:
1. respond to wide ranges of quantities demanded
2. meet short lead time
3. handle a large variety of products
4. build highly innovative products
5. meet a very high service level (including after-sale service)
6. handle supply uncertainty
As the customers’ needs increase, it causes the implied demand uncertainty
also increase.
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Problem 3 (4 points)
What level of responsiveness would be most appropriate for Nordstrom’s
supply chain? What should the supply chain be able to do particular well?
The supply chain strategy of Nordstrom should be a high level of
responsiveness. Nordstrom’s customers want their preferred products
available in time and they are willing to pay a premium price. In order to satisfy
target customers and gain more profit, Nordstrom must provide a high
availability of variety of products and shorten customers’ response time by
stocking a lot of inventory. Moreover, Nordstrom should pay much attention to
enhance service quality and fashion design in order to keep customers’ loyalty.
As the above, it can sum up in the following cost-responsiveness efficient
frontier. Nordstrom is placed at a high responsiveness and high cost (dotted
circle).
Responsiveness
High
Highly responsive
Fig.: Cost-responsiveness
Efficient Frontier
Low
High
Cost
Low
Problem 4 (4 points)
How can Nordstrom expand the scope of strategic fit across its supply chain?
Suppliers
Manufacturer
Distributor
Retailer
Customer
Competitive Strategy
Product Development Strategy
Supply Chain Strategy
Marketing Strategy
Intercompany Interfunctional Scope is essential today because the competitive
playing field has shifted from company versus company to supply chain versus
supply chain. A company’s partners in the supply chain may well determine the
company’s success, as the company is intimately tied to its supply chain. To
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maximum supply chain surplus view, only the positive cash flow iconsidered is
not enough. Nordstrom should also consider all other cash flows generated in
the supply chain. The supply chain surplus represents the total profit to be
shared across all companies in the supply chain. When the supply chain
surplus is increased, the amount shared among all members of the supply
chain is also increased. Supply surplus is maximized only when all the supply
chain stages coordinate together. This can be done by intercompany
interfunctional scope, in which all the stages are coordinated across all
functional to ensure that together they can best meet the customers’ needs
and maximize supply chain surplus. On the other hands, the whole chain can
quickly respond and get the right product to the right place / customer at the
right time. The most critical point in the speed is at the interface between the
boundaries of different stages of a supply. So Nordstrom can manage the
interfaces which becomes a key to provide speed to customers. The
intercompany scope can focus every stage of the supply chain to look across
the supply chain and evaluate the impact of its actions on other stages as well
as on the interfaces.
II. Discussion Questions in Chap. 3
Problem 7 (8 points)
How can the full set of four drivers be used to create strategic fit for a PC
manufacturer targeting time-sensitive customers?
In order to satisfy the time-sensitive customers, the PC manufacturer needs to
provide the right products at a specific time window. This can be done by the
following decisions.
Facilities
For a PC manufacturer targeting time-sensitive customers, the location and
capacity of their facilities are very important. In order to satisfy the
time-sensitive customers, the manufacturer had better decentralize facilities so
as to become more responsive by being closer to the customers. Also a large
amount of excess capacity allows the facility to be very flexible and to respond
to wide swings in the demands.
Inventory
Since the manufacturer requires a very high level of responsiveness. It can use
inventory to achieve this responsiveness by stocking a lot of inventory which is
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close to the customers’ needs. i.e., decentralize stocking.
Cycle inventory and safety inventory are the ways to achieve the
manufacturer’s goal. For safety inventory, the inventory is held in case demand
exceeds expectation; it is held to counter uncertainly. Since demand is
uncertain and there is a chance that the demand will exceed expectation. Once
it exceeds forecast, the safety inventory can be used to accommodate the
extra high demand. In contrast, when the demand is perfectly predictable, only
the cycle inventory will be used.
Seasonal inventory can also help satisfy the aimed customers. Because every
product will have their demand pattern, demand will be high in a particular
period such as summer vocation in PC industry. So the manufacturer can use
the forecast to keep proper inventories. This can ensure there is enough stock
to satisfy the customers’ needs in a specific time.
As a manufacturer, it requires many different suppliers to provide the
components. So sourcing is a critical aspect, because it will affect all other
inventory decisions and the level of responsiveness and efficiency. What can
be outsourced and what will be self-performed are important. The aimed target
of this company is to provide their goods at a correct time windows. So if
outsourcing, they want to decide source from one single or a portfolio suppliers.
After the manufacturer selects supplier(s) who they will negotiate contract with.
Once the suppliers and contract are confirmed, procurement processes that
will facilitate the placement and delivery of orders play a major role. The
contract needs to be clearly defined the role of each supply source in order to
ensure the reliable sourcing. Further, the manufacturer can take
configure-to-order strategy so that only components are held but not
finished-goods.
Transportation
Transportation must be cooperated with other drivers such as inventory,
facilities and information. For the time-sensitive customers, a high level of
responsiveness is required. So it should select a reliable and suitable mode of
transportation. Air is the fastest but it is expensive. Truck is relatively fast and
inexpensive mode with high level of flexibility. There still have other choices
such as rail, ship etc. For the time-sensitive people, it can combine air and
truck. Air is the fastest and reliable while truck can provide door-to-door service.
Besides the transportation mode, the route and network selection are also
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main decisions. The company should decide either to use direct shipment
(when time is tight) or to use a series of distribution layers (when time is
sufficient).
Since transportation is needed to cooperate with inventory. As some of the
tasks are outsourced, the transportation function needs to both perform
in-house and outsource shipment. So the transportation system is much
complex and the company should design its system which can serve the
in-process shipment and customers’ order shipment.
Information
Information serves as the connection between different stages in a supply
chain. It allows them to communicate and coordinate and increase their
benefits and overall profitability. Also information can improve the
responsiveness within a supply chain. For a PC manufacturer, it is a kind of
push system which requires information in the form of elaborate MRP systems
to take the master production schedule, roll it back and create schedules for
suppliers with parts types, quantities and delivery date. So coordination and
information sharing is very important. It can maximize the profit and ensure the
high level of responsiveness. For example, the manufacturer can coordinate
with the retailer and supplier to share their actual sales data, forecast data and
production information. So each party can have the most updated information
to make their decision. On the other hands, the manufacturer can make use
the current data to forecast the future demand. A frequent forecast is preferred,
since it can use the most updated information to predict the future demand.
Once they get the forecast demand, they can turn it to production by aggregate
planning.
As the trade-off between responsiveness and efficiency, higher the level of
responsiveness is and lower the efficiency is. Although high inventory can
increase the responsiveness, it costs an expensive holding cost. Using air
instead of ship to transportation must be faster, it also have a much higher cost.
In this case, the time-sensitive customers require a correct and reliable
delivery schedule. So the manufacturer can make use of the above decision to
satisfy the customers’ needs.
Acknowledgement:
Thanks very much for Ho Ka Kiu who provides the
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original version for my reference.
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