Ko ç University

OPSM 305 Supply Chain Management

Class 20: Vendor Managed Inventory

Zeynep Aksin [email protected]

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The Bullwhip Effect: Managerial Insights

    Exists, in part, due to the retailer ’ s 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 and the forecasting techniques, the greater the increase.

Centralized demand information can reduce the bullwhip effect, but will not eliminate it.

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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 – – Vendor managed inventory On-site vendor representatives 3

Barilla SpA

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Barilla SpA Part A

 Barilla SpA is the world’s largest pasta manufacturer  The company sells to a wide range of Italian retailers, primarily through third party distributors  During the late 1980s, Barilla suffered increasing operational inefficiencies and cost penalties that resulted from large week-to week variations in its distributors’ order patterns 5

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Distribution

Factories 25

%65

CDC 2

%90

GD

150 SKU

14 days stock DO

800 SKU %10

Zincir Mağazalar

45% of dry products

12 days stock Bağımsız marketler

%20

10 days stock

%35

Depots 18 Signora Maria (Bakkal)

%35

14 days stock

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C D C Warehouse

Fresh

Ordering Process

Depots

Dry

8-10 days Warehouse Distributors GD Daily Orders 24-48 hours

Signora Maria (Bakkal)

Chains OD Independent Markets 8

What is driving this order pattern?

Exhibit 12 Weekly Demand for Barilla Dry Products from Cortese’s Northeast Distribution Center to the Pedrignano CDC, 1989.

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Causes for Demand Fluctuations

        Transportation discounts Volume discount Promotional activity No minimum or maximum order quantities Product proliferation Long order lead times Poor customer service rates Poor communication 10

How does Barilla compare to the beergame?

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What is the impact of fluctuations?

   Utilization of central distribution low, yet need to be prepared for fluctuations  Inventory costs: finished goods yet also stockouts due to unexpected peaks in certain SKUs Transportation costs high due to variability in demand for trucking  Because of high product changeover:

either

inefficient production inventory,

or

excess finished goods Excess capacity at distributor due to need to store items bought during promotions 12

Impact of Bullwhip in general

   High inventory/lost sales/backlog cost Low customer satisfaction Low operational efficiency - underutilization    - overtime - expediting Unnecessary capacity investment Swings in working capital Blaming others; frustration, helplessness 13

JITD

 To address this problem, the director of logistics suggests the implementation of Just-in-Time Distribution (JITD), with Barilla’s distributors.

 Under the proposed JITD system, decision-making authority for determining shipments from Barilla to a distributor would transfer from the distributor to Barilla.

 Specifically, rather than simply filling orders specified by the distributor, Barilla would monitor the flow of its product through the distributor’s warehouse, and then decide what to ship to the distributor and when to ship it.

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Basic premise of JITD

 Replace Sequential optimization with Global optimization – Who will optimize?

 Eliminate some of the ‘false’ economics that drive traditional ordering processes 15

Strategic Partnering

Types of SP:



Quick Response

: Vendors receive POS data from retailers, and use this information to synchronize production and inventory activities at the supplier. In this strategy, the retailer still prepares individual orders, but the POS data is used by the supplier to

improve forecasting and scheduling.

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Strategic Partnering



Continuous Replenishment

: Vendors receive POS data and use it to prepare shipments at previously agreed upon intervals to maintain agreed to levels of inventory.

– Wal-Mart 

Advanced Continuous Replenishment:

Suppliers may gradually decrease inventory levels at the retailer’s store or distribution center as long as service levels are met. Inventory levels are thus continuously improved in a structured way.

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Strategic Partnering



Vendor Managed Inventory

(VMI):JITD – VMI Projects at Dillard Department Stores, J.C. Penney, and Wal-Mart have shown sales increases of 20 to 25 percent, and 30 percent inventory turnover improvements.

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Requirements for Effective SP



Advanced information systems



Top management commitment



Mutual trust

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Main Characteristics of SP

Criteria Types Quick Response Continuous Replenishment Advanced Continuous Replenishment VMI Decision Maker Retailer Contractually Agreed to Levels Contractually agreed to & Continuously Improved Levels Vendor Inventory Ownership Retailer Either Party Either Party Either Party New Skills Employed by vendors Forecasting Skills Forecasting & Inventory Control Forecasting & Inventory Control Retail Management 20

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