Bullwhip Effect

The bullwhip effect is the result of uncertainty caused from distorted information flowing up and down the supply chain.  The bullwhip effect is caused by fluctuations in information supplied to firms further up the supply chain. Distorted information causes firms to forecast demand incorrectly.  Thereby, many unnecessary costs are put upon each of the firms along the supply chain.  Nearly all industries are affected!  Firms that experience large variations in demand are at risk.  Firms that depend on suppliers upstream or distributors and retailers downstream may be at risk.   Most firms are affected by the bullwhip effect.  The bullwhip effect used to be considered a normal phenomenon.  However, recently, many firms have been trying to focus on how to improve communication along the supply chain.  The bullwhip effect can inflict many unnecessary costs on business firms.  Inventory costs from stored inventory, problems with quality caused from rapid production, overtime expenses for increased employee labor, and increased units being shipped create costs far and beyond normal levels of production.  Customers can also lose faith in a firms ability to deliver products.  This is because firms are having trouble meeting demand.  Likewise, firms often must lengthen lead time for finished goods, which also may discourage customers, which in turn leads to lost sales.  In a worst case, incorrect forecasts may entice a company to adjust capacity which could be detrimental to the overall success of the company.  To reduce stocked product, retailers may offer sales promotions to customers.  If retailers fail to notify firms upstream in the supply chain, these firms may forecast increased sales as legitimate demand.  Thereby producing product that was not wanted by the customer in the first place.  Furthermore, salesforce incentives may entice selling products to firms to meet targets.  This may cause large inventories for the firm, or the firm may cancel the orders, which causes demand fluctuations in the supply chain.   Firms upstream in the supply chain may feel that the increased demand may be legitimate and increase production and inventory levels to produce more.  However, in reality, the product hardly moved and required a drop in price to be moved off of retailer’s shelves.  Each firm upstream in the supply chain will feel the whip effect.

Here’s the classic illustration from The Bullwhip Effect in Supply Chains by Hau L. Lee • V. Padmanabhan • Seungjin Whang, SLOAN MANAGEMENT REVIEW/SPRING 1997.

 

Supply Chain Strategy

 

 

Here’s a diagram of the effect of lead time and demand uncertainty on supply chain strategy.  Pull strategy works when lead times are short and high demand uncertainty makes building to forecast wasteful.  Dell is an example of this approach.  The number of feature combinations is high and customers are willing to wait a few days to get exactly what they want.  Push makes sense when lead times are long and demand is stable.   Canned soup is an example of where customers won’t wait for the fresh soup to be made and delivered.  Books were examples of the push strategy, but are now moving toward pull as print-on -demand and ebook readers proliferate.  When demand is known and lead times are short Continuous Replenishment or rate-based supply make sense.  Suppliers get point-of-sale data to release shipments on an agreed upon frequency to maintain inventory targets.  Throughout the continuous replenishment supply chain production and distribution operate on pull, and push at the retail outlets.  Positioning inventory strategically is complicated when lead times are long and demand is uncertain.  Strategic Inventory analysis can help sort out how much stock to carry, and where.  The point in the supply chain where risks can be pooled or demand aggregated is usually the place for some statistical safety stock.

It’s time for Hoshin: Annual Operating Plan

Well its getting to be that time of year again… What did I promise to deliver this year, what do we need to do next year?

X-Matrix

The annual operating plan sometimes is developed and displayed using the X-Matrix.  Establish the results of goals for next year, take the strategies and tie them to tactics, make sure the tactics can be measured (targets) and have individuals assigned ownership of tactics and targets.

A3-TeamCharter

Little gets done without marching orders, i.e. a Charter.  The basic document of the hoshin process is the team charter. The A3 format connects the targets (goals) to the tactics and provides another level of critical thinking about execution.  The team charter is a contact between the company to  provide support and resources and the team and team members to do the hard work of problem solving, applying the scientific method, and running experiments on the management operating system.

BowlingChart

What gets measured gets better, and so we set plans and track key performance indicators.

Ready to make your hoshin for next year?

 

 

 

Prepare for the recovery before it’s too late

Dave Jones and Pierre Loewe write in Chief Executive Magazine …

Discontinuities are big, foundational shifts which have the potential to fundamentally change the rules of the game. They occur when trends from different areas combine, resulting in game-changing, long-lasting modifications to the external landscape. If you can identify them earlier and exploit them better than your competitors, you will win. If you don’t, you will be left behind.

You need to assess how the current crisis has affected the discontinuities you were anticipating before the recession hit. Say that until recently, you thought that being “green” meant addressing your carbon footprint. But did you know that by the time we emerge from the recession, “green” will likely mean using efficiently multiple scarce resources, such as water? If your stakeholders are asking about your carbon footprint today, then tomorrow they’ll be asking about your water footprint. You need to get ahead of this opportunity – IBM and Toyota already have.

Lesson: Analyze how the recent events have changed the external landscape — impacted the discontinuities you had previously identified, or created new, unexpected ones.