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Lecture-1 slide.pdf
1. The Supply Chain Dynamics
David Simchi-Levi
Professor of Engineering Systems
Massachusetts Institute of Technology
Tel: 617-253-6160
E-mail: dslevi@mit.edu
2. ŠCopyright 2021 D. Simchi-Levi
Outline of the Presentation
ďľ The Bullwhip Effect
ďľ Causes
ďľ Impact
ďľ Strategies
3. ŠCopyright 2021 D. Simchi-Levi
The Bullwhip Effect
and its Impact on the Supply Chain
⢠Consider the order pattern of a single color
television model sold by a large electronics
manufacturer to one of its accounts, a
national retailer.
Figure 1. Order
Stream
Huang at el., Working paper, Philips Lab
4. ŠCopyright 2021 D. Simchi-Levi
Figure 2. Point-of-sales
Data-Original
Figure 3. POS Data After
Removing Promotions
The Bullwhip Effect
and its Impact on the Supply Chain
5. ŠCopyright 2021 D. Simchi-Levi
Figure 4. POS Data After Removing Promotion & Trend
The Bullwhip Effect
and its Impact on the Supply Chain
6. ŠCopyright 2021 D. Simchi-Levi
Higher Variability in Orders Placed by Computer
Retailer to Manufacturer Than Actual Sales
Retail sales versus Orders to PC Manufacturers
7. ŠCopyright 2021 D. Simchi-Levi
Increasing Variability of Orders
Up the Supply Chain
Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review
8. ŠCopyright 2021 D. Simchi-Levi
We Conclude âŚ.
⢠Order Variability is amplified up the
supply chain; upstream echelons face
higher variability.
⢠What you see is not what they face.
10. ŠCopyright 2021 D. Simchi-Levi
What are the CausesâŚ.
⢠Promotional sales
⢠Volume and Transportation Discounts
â Forward Buying: Forward buying involves
purchasing during manufacturer
promotional periods enough products to
meet retailer demands for many months
⢠Inflated orders
- IBM Aptiva orders increased by 2-3 times
when retailers thought that IBM would be out
of stock over Christmas
- Same with Motorolaâs Cellular phones
11. ŠCopyright 2021 D. Simchi-Levi
What are the CausesâŚ.
⢠Single retailer, single manufacturer.
â Retailer observes customer demand,
Dt.
â Retailer orders qt from manufacturer.
Retailer Manufacturer
Dt qt
L
12. ŠCopyright 2021 D. Simchi-Levi
Order-up-to-Policy
L
z
L
B Ď
Âľ +
=
⢠= Expected daily demand
⢠= Standard deviation of daily demand
⢠L = Lead Time
⢠z = Safety Factor
Âľ
Ď
13. ŠCopyright 2021 D. Simchi-Levi
What are the CausesâŚ.
⢠Promotional sales
⢠Volume and Transportation Discounts
⢠Inflated orders
⢠Demand Forecast
⢠Long cycle times
14. ŠCopyright 2021 D. Simchi-Levi
What are the CausesâŚ.
⢠Single retailer, single manufacturer.
â Retailer observes customer demand,
Dt.
â Retailer orders qt from manufacturer.
Retailer Manufacturer
Dt qt
L
15. ŠCopyright 2021 D. Simchi-Levi
Var(q)/Var(D):
For Various Lead Times
L=5
L=3
L=1
0
2
4
6
8
10
12
14
0 5 10 15 20 25 30
L=5
L=3
L=1
Var(Q)
Var(D)
Number of (Monthly) Demand Data used to Generate a Forecast
16. ŠCopyright 2021 D. Simchi-Levi
What are the CausesâŚ.
⢠Single retailer, single manufacturer.
â Retailer observes customer demand,
Dt.
â Retailer orders qt from manufacturer.
Retailer Manufacturer
Dt qt
L
17. ŠCopyright 2021 D. Simchi-Levi
ConsequencesâŚ.
⢠Increased safety stock
⢠Reduced service level
18. ŠCopyright 2021 D. Simchi-Levi
Inventory and Service Levels
Service
Level
L H
H
L
Inventory
Level
100% service level
19. ŠCopyright 2021 D. Simchi-Levi
Inventory and Service Levels
Service
Level
L H
H
L
Inventory
Level
100% service level
20. ŠCopyright 2021 D. Simchi-Levi
Inventory and Service Levels
Service
Level
L H
H
L
Inventory
Level
For a given inventory level
service level is reduced
21. ŠCopyright 2021 D. Simchi-Levi
Inventory and Service Levels
Service
Level
L H
H
L
Inventory
Level
For a given service level,
inventory level is
increased
22. ŠCopyright 2021 D. Simchi-Levi
Responsiveness
Efficiency
High
Cost
Low
Cost
Short
Response
Long
Response
A
C
B
Current
Strategy
Trade-Offs between Responsiveness vs. Efficiency
22
23. ŠCopyright 2021 D. Simchi-Levi
⢠Single retailer, single manufacturer.
â Retailer observes customer demand,
Dt.
â Retailer orders qt from manufacturer.
ConsequencesâŚ.
Retailer Manufacturer
Dt qt
L
24. ŠCopyright 2021 D. Simchi-Levi
ConsequencesâŚ.
⢠Increased safety stock
⢠Reduced service level
⢠Inefficient allocation of resources
⢠Increased transportation costs
25. ŠCopyright 2021 D. Simchi-Levi
Multi-Stage Supply Chains
Consider a multi-stage supply chain:
â Stage i places order qi to stage i+1.
â Li is lead time between stage i and
i+1.
Retailer
Stage 1
Manufacturer
Stage 2
Supplier
Stage 3
qo=D q1
q2
L1 L2
27. ŠCopyright 2021 D. Simchi-Levi
The Bullwhip Effect:
Managerial Insights
⢠Exists, in part, due to the retailerâs need to estimate
the mean and variance of demand.
⢠The increase in variability is an increasing function of
the lead time.
⢠The more complicated the demand models, the
greater the increase.
⢠Centralized demand information can reduce the
bullwhip effect, but will not eliminate it.
28. ŠCopyright 2021 D. Simchi-Levi
Coping with the Bullwhip Effect
in Leading Companies
⢠Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
⢠Reduce Lead Times
- EDI
- Cross Docking
⢠Alliance Arrangements
â Vendor managed inventory
â On-site vendor representatives
29. ŠCopyright 2021 D. Simchi-Levi
Coping with the Bullwhip Effect
in Leading Companies
⢠Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
⢠Reduce Lead Times
- EDI
- Cross Docking
⢠Alliance Arrangements
â Vendor managed inventory
â On-site vendor representatives
31. Exhibit 12 Weekly Demand for Barilla Dry Products from Corteseâs Northeast Distribution Center to the
Pedrignano CDC, 1989.
Source: Barilla SpA (A), Janice H. Hammond, Harvard
32. Implementation at a CPG
Company
Source: Barilla SpA (A), Janice H. Hammond, Harvard
33. Implementation at a CPG
Company
Source: Barilla SpA (A), Janice H. Hammond, Harvard
34. ŠCopyright 2021 D. Simchi-Levi
Inventory and Service Levels
Service
Level
L H
H
L
Inventory
Level
100% service level
35. ŠCopyright 2021 D. Simchi-Levi
Inventory and Service Levels
Service
Level
L H
H
L
Inventory
Level
100% service level