Value Of Information
- 1. SE 492: Supply Chain Systems Modeling The Value of Information Dr. Mohamed Ben Daya Professor of Industrial Engineering & Operations Research
- 2. Introduction Information age Databases, EDI, DSS, Internet, Intranets, … Implication of availability of information on effective design and management of the integrated supply chain. This abundant information: Helps reduce variability in the SC Helps suppliers make better forecasts Enables the coordination of manufacturing and distribution systems and strategies Enables retailers to better serve their customers by offering tools for locating desired items Enables lead time reductions
- 3. Can valid information be a substitute for inventory? Information Informed managers Less uncertainty Better decisions Less inventory Why focus on information? It costs less than inventory and poses fewer risks.
- 4. Bullwhip Effect In recent years, many suppliers and retailers have observed that while customer demand for specific products does not vary much, inventory and back-order levels fluctuate considerably across their supply chain Ex: Pampers disposal diapers This increase in variability as we travel up the SC is referred to as the bullwhip effect
- 5. Bullwhip Effect The magnification of variability in orders in the supply-chain Order Quantity Time Retailer’s Orders A lot of retailers each with little variability in their orders…. Order Quantity Time Wholesaler’s Orders … can lead to greater variability for a fewer number of wholesalers, and … Order Quantity Time Manufacturer’s Orders … can lead to even greater variability for a single manufacturer.
- 6. Impact of increase in variation on SC Consider the second stage: Wholesaler Wholesaler receives orders from the retailer and places orders to the Distributor Uses orders placed by the retailer to perform his forecasting Variability in orders placed by the retailer is significantly higher than variability in customer demand wholesaler is forced to carry more safety stock than the retailer to meet same service level This analysis can be carried over to the distributor as well as the factory, resulting in higher inventory levels and therefore higher costs
- 7. Causes Demand forecasting Lead time Batch ordering Price fluctuations Inflated orders (gaming)
- 8. Demand forecasting Min-max inventory policy Reorder point = average demand during lead time + safety stock Safety stock = multiple of the standard deviation of demand during lead time
- 9. Lead time With longer lead times, a small change in the estimate of demand variability implies a significant change in safety stock, reorder level, and thus in order quantity
- 10. Batch ordering If the retailer uses batch ordering, the wholesaler will observe a distorted and highly variable pattern. There are several reasons for batch ordering: Fixed ordering cost Transportation discounts Sales
- 11. Price fluctuation Retailers attempt to stock up when prices are lower Promotions and discounts
- 12. Inflated orders Inflated orders placed by retailers during shortage periods Suspect that a product will be in short supply Gaming
- 13. Coping with the bullwhip effect Reducing uncertainty Reducing variability Lead time reduction Strategic partnership
- 14. Reducing uncertainty Reduce uncertainty by centralizing demand information Centralizing demand information can significantly reduce the bullwhip effect
- 15. Reducing variability Reduce the variability of customer demand EDLP: by eliminating price promotions, retailer can eliminate many of the dramatic shifts in demand
- 16. Lead time reduction Lead time magnify the increase in demand variability Order lead time: the time it takes to produce and ship the item Cross-docking Information lead time: the time it takes to process an order EDI
- 17. Strategic partnership VMI : the manufacturer manages the inventory of its product at the retailer outlet and therefore determines for itself how much inventory to ship to the retailer in each period In VMI the manufacturer does not rely on the retailer orders, thus avoiding the bullwhip effect entirely.
- 18. Using information to improve SC performance Effective forecasts Information for the coordination of systems Locating desired products Lead time reduction Integrating the supply chain
- 19. Planning personnel often act as “expeditors” - reacting to supply constraints and fighting fires instead of planning! Effective Forecasts Sales: we can sell 200 Marketing: the promotion will sell 400 Finance: we have budget of 300 Manufacturing: they will only sell 150 Various departments have conflicting goals or make inconsistent plans! Poor communication, lack of visibility Planning Dept. Planning 20% Responding 80% Disconnect between planning and execution
- 20. Effective forecasts Information leads to more effective forecasts Retailers forecasts (pricing, promotions, release of new products, …). Some of these issues are controlled by the retailer but some are controlled by the distributor, wholesaler, manufacturer, or the competitors. Distributor and manufacturer forecasts are influenced by factors under retailer control. Manufacturer or distributor has fewer products to consider more information about these products Cooperative forecasting systems: sophisticated information system involving participation of all
- 21. Produce a consensus forecast for the supply chain Collaborative planning, forecasting, and replenishment A strategy intended to improve communication throughout the retail supply chain, and, in particular enable better forecasting between partners With CPFR, retailers give suppliers freer access to point-of-sale data Such information is necessary for making joint forecasting and replenishment programs work more effectively The goal - to give the supplier/manufacturer more upfront time and more information so that they can make better informed manufacturing plans Share plans for sales and promotions Provide seasonality change information
- 22. How CPFR Impacts Sales and SC Costs Promotional Planning : better estimates of demand response to promotions, and better timing of replenishment with advertising Service Levels : fewer stock-outs, higher percentage of orders delivered on time due to advanced forecasting and planning prior to order
- 23. CPFR Impacts, cont. Inventories : reduced safety stocks because of greater confidence in forecasting and planning process Production smoothing : removal of promotional spikes that result in ramping up costs followed by underutilization
- 24. CPFR Impacts, cont. Average Improvements for Manufacturers Through CPFR
- 25. Information for the coordination of systems Supply chain systems: Manufacturing systems Storage systems Transportation systems Retail systems Managing any of these systems involves a series of complex trade-offs These systems are connected Output of mftg input transportation or storage sys. Need to consider the entire system and coordinate decisions Common owner versus different owners
- 26. Coordination of systems (contd’) Whose best interest is it to reduce overall system cost and how saving are shared? System not coordinated local optimization Global optimization : What is best for the entire system Who will optimize? How the savings are shared? Information must be available: Production status and costs, transportation availability, quantity discounts, inventory costs, inventory levels, various capacities and customer demand, etc.
- 27. Locating desired products There is more than one way to meet customer demand Being able to locate ( info ) and deliver goods is sometimes as effective as having them in stock لا يؤمن أحدكم حتى يحب لأخيه ما يحب لنفسه Distributor integration DI used to create a large pool of inventory across the entire network. Dealers are contractually bound to exchange parts lower inv. Cost & higher service level
- 28. Lead time reduction Lead time reduction leads to: Ability to quickly fill customer orders Reduction in bullwhip effect More accurate forecasts (decreased forecast horizon) Reduction in finished goods inventory Distribution network design. Effective information systems (EDI, Internet, Intranet, …) Effective IS cut lead time by reducing order processing, stock picking, transportation delays, etc. Strategic partnership
- 29. Information and SC trade-offs Challenge: replace sequential planning with global optimization Sequential planning: Each stage optimizes its profit with no regard to the impact of its decision on other stages. Global optimization: The objective is to coordinate SC activities to maximize SC performance Different stages have conflicting goals It is necessary to find incentives to bring about integration of SC facilities
- 30. Integrating the supply chain Conflicting objectives in the SC Information allow SC to be designed to come closer to meeting the apparently conflicting goals Designing the SC for conflicting goals The lot size-inventory trade-off The inventory - Transportation cost trade-off The lead time - transportation cost The product variety – inventory trade-off The cost-customer service trade-off
- 31. Designing the SC for conflicting goals In the past for some of these goals to be met, others have to be sacrificed. Through the use of advanced information technology and creative network design, conflicts can be eliminated or reduced
- 32. The lot size inventory trade-off Manufacturers would like to have large lot sizes per unit setup costs are reduced, expertise increase, processes are easier to control Typical demand does not come in large lot sizes smaller lot sizes is the trend lately Solutions: Setup time reduction and other modern manufacturing practices geared towards reducing inventory and improving system responsiveness Retailers and distributors would like shorter lead times and wide variety of products Information availability Manufacturers have time to react to the needs of downstream SC members Retailers and Distributors can quote lead times more accurately and reduce inventory
- 33. Inventory - Transportation Full track loads minimize transportation cost. higher inventory costs IT can be use to reduce the effect of this conflict Combine shipment of # products Cross-docking
- 34. Lead time - Transportation Transportation is one of the components of lead time Full track loads longer lead times Transportation right after production reduce lead time Information can be used to reduce its effects
- 35. Product variety - Inventory Product variety increases both transportation and warehousing cost Solution: Delayed differentiation Ship a generic product to the warehouse that will be customized later according to customer demand
- 36. Cost – customer service Reducing inventories, manufacturing costs, transportations costs typically come at the expense of customer service Solutions: Transshipping Direct shipping Mass customization: delivering highly specialized goods and services at reasonable prices and at high volume
Editor's Notes
- #22: Being developed by VICS, an inter-industry consortium that is creating standard processes for collaborative forecasting