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Value of Information(Designing & Managing the Supply Chain: David

Simchi-Levi & others)Information Technology has improved

availability of information and speed of access to information

Accurate and real time information is key to sound decision making

Adequate utilization of information Leads to Lower Inventories in the Supply Chain

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Uninterrupted information flow in a supply chainHelps reduce variability in the supply chain

Suppliers make better forecastsEnables coordination of manufacturing and

distribution systems and strategiesEnables retailers to serve customers better by

locating itemsEnables retailers to react and adapt to supply

problems rapidly

Bull-whip Effect(Forester’ effect)

The amplitude is smallest near the handle but largest near the tip

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Bull-whip EffectIn 1958, Forrester found that, interaction

between flows of supply chain leads to delays and interruptions in delivery of goods

In 1989, Sterman said that decision makers perceive dynamic environment erroneously which

leads to disturbance in the flow of materialsThe resultant disturbance in the supply chain is

called ‘Bull-Whip Effect’

Bull-whip Effect is the uncertainty in the supply

chain caused by distorted information flow

Large variations in demand upstream due to small

variations downstream

• Babies diapers

Suppliers acting on demand signal downstream

Caused by undisclosed discounts and sales

promotions by retailers down stream

Customers rejecting backorders 6

Buildup of safety stock•Lack of confidence in customer’s forecast•Frequent changes in demand forecasts

•Lead time variability•Lack of coordination amongst supply chain

partnersErrors in demand forecasting

Order batching

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The consequencesExcess inventory – high cost

Problems with quality – due to high inventoryIncreased raw materials cost

Overtime expensesIncreased shipping costsLost customer serviceLengthened lead-times

Lost salesUnnecessary capacity created

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How to avoid Bullwhip effect?Use of IT for managing information analysis and

flowSharing Real time information

EDI –timely information availability and Inventory visibility across supply chain

Kanban – real time information driven inventory control

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s/s10 units

Supplier supplies 10 u and orders 10u

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s/s 10 units

Producer supplies 10 u and orders 10u

s/s 10 units

Distributor supplies 10 u

and orders 10u

Retailer supplies

10 u Orders 10 u

Supply chain in equilibrium

consumerOrders 10

u

(s/s120 units)

Supplier supplies 20 u and prepares

240u

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(s/s 60 units)

Producer supplies 20 u and orders

120u (s/s 30 units)

Distributor supplies 20 u

and orders 60u

Retailer supplies

10 u Orders 30 u

Supply chain disrupted

consumerOrders 20

u