Lean Supply Chains: The Foundation System’s Perspective

Understand supply chain dynamics and adopt a holistic view.

Consider the business ecosystem in which you are operating.

Supply Chain Dynamics Enterprises can experience huge variations at each

step in the chain, with variations typically more pronounced the further upstream the enterprise is from the ultimate user.

Demand Distortion Results in:

Larger inventory carrying costs Lost sales from stock outs Lack of responsiveness to customer demand

Bullwhip Effect A slight motion of the handle of a bullwhip can make

the top thrash wildly at up to 900mph. Increasing demand variability as you move upstream. Most demand distortion is caused by the supply chain

itself, not by the customer. Results in:

excessive inventory investment poor customer service lost revenues misguided capacity planning ineffective transportation Ineffective production schedules.

 The Beer Game

Underscores the importance of understanding supply chain dynamics and applying systems thinking to coordinate activities within and between enterprises.

Explains the crucial role lead times play in enhancing or inhibiting competitiveness

Elaborates on the role of information systems in the lean supply chain.  

Assumptions Assumes a linear SC, 4 enterprises, one type of beer

Goal is to manage demand as imposed by it’s customer Each enterprise has only one manager Runs for 50 wks.

RetailerFactory Distributor Wholesaler

Each week, an enterprise receives an order from downstream customers and places an order upstream.

Two week lead time between when an order is placed and when it is received.

Another two week lead time before the order is delivered.

Each enterprise starts with 12 cases of beer. At the beginning of each week we know what

demand will be.

Assumptions

Playing the game Everyone acts in their own self

interest on the basis of their own forecasts

The system is in a steady state with demand at four cases each week.

In week 5, demand is disrupted to 8 cases a week and remains constant.

Each player’s ordering policy is based on two rules

Demand Forecast Rule

The forecast rule: The weekly demand for each of the next four weeks is the average of the weekly demand over the four most recent weeks. Four period moving average: (4+4+4+4)/4=4

Order Quantity Rule

Given the forecasts, the amount ordered is just enough to replenish the ending inventory (Four weeks from now-when the order arrives) to a target of 12 cases.

12+(Forecast demand for next 4 weeks)-(current inventory)-(Orders already placed for the next three weeks.

week 4:Customer/Retailer/WholesellerCustomer and Retailer: Week 4

Forecast Demand: (4+4+4+4)/4 4Demand (this period) 4 4 Order just received

Demand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4Target Safety Stock 12 12 Inventory on hand

Order 4

Retailer and Wholeseller: Week 4Forecast Demand: (4+4+4+4)/4 4

Demand (this period) 4 4 Order just receivedDemand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4

Target Safety Stock 12 12 Inventory on handOrder 4

week 5: Customer/Retailer/WholesellerCustomer and Retailer: Week 5

Forecast Demand(4+4+4+8)/4 5Demand (this period) 8 4 Order just received

Demand(next 3 periods): 5+5+5 15 12 Orders on the way: 4+4+4Target Safety Stock 12 8 Inventory on hand

Order 12

Consumer demand increased by 100% 4 8 cases

The retailers order to the wholesaler increased by 200% 4 12 cases

The retailer doubled the variation in demand

Retailer and Wholeseller: Week 5Forecast Demand (4+4+4+12)/4 6

Demand (this period) 12 4 Order just receivedDemand(next 3 periods): 6+6+6 18 12 Orders on the way: 4+4+4

Target Safety Stock 12 4 Inventory on handOrder 20

week 5: Customer/Retailer/Wholeseller

The wholesaler’s order to the distributor increased by 400%. 4 20

Distributor and Factory: Week 5Forecast Demand (4+4+4+36)/4 12

Demand (this period) 36 4 Order just receivedDemand(next 3 periods): 12+12+12 36 12 Orders on the way: 4+4+4

Target Safety Stock 12 -20 Inventory on handOrder 68

Wholeseller and Distributor: Week 5Forecast Demand (4+4+4+20)/4 8

Demand (this period) 20 4 Order just receivedDemand(next 3 periods): 8+8+8 24 12 Orders on the way: 4+4+4

Target Safety Stock 12 -4 Inventory on handOrder 36

week 5: Wholeseller/Didtributor/Factory

200% 400% 800% 1,600%

FactoryRetailer Wholesaler Distributor

The variation doubles at each stage. However, of the 64-case increase in the factory's

orders, only four cases were directly attributable to a change in consumer demand.

The lead times present in this value stream created 94 percent of the variation observed in the factory’s orders.

The Implications of Lead Time on the Bullwhip Effect

Warehouses/Distributors

Manufacturers

Retailers

Lead times significantly exacerbate the bullwhip effect Reducing lead time, in combination with improved

visibility along the supply chain, can significantly and positively relieve the bullwhip effect

The impact of information

Assume all of the same factors except that each stage is aware of the customer’s orders.

Assume we know that demand for week six and onward is five cases.

Following exactly the same steps.

The impact of informationForecast Demand: (4+4+4+8)/4 5

Demand (this period) 8 4 Order just receivedDemand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4

Target Safety Stock 12 8 Inventory on handOrder 12

Forecast Demand 5Demand (this period) 12 4 Order just received

Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4Target Safety Stock 12 4 Inventory on hand

Order 16

Forecast Demand 5Demand (this period) 16 4 Order just received

Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4Target Safety Stock 12 0 Inventory on hand

Order 20

Forecast Demand 5Demand (this period) 20 4 Order just received

Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4Target Safety Stock 12 -4 Inventory on hand

Order 24

Retailer

Wholesaler

Distributor

Manufacturer

Retailer orders 12 cases- a 200% increase

Wholesaler orders 16 cases- a 300% increase

Distributor orders 20 cases- a 400% increase

Manufacturer order Raw Materials to make 24 cases- a 500% increase

The Impact of Information on the Bullwhip Effect Perfect forecasting does not eliminate the

bullwhip effect Lesson: The bullwhip effect is present even if

there is perfect information about the future that is shared among all channel partners.

The Impact of Lead Time on the Bullwhip Effect Lead times can multiply the variation in demand and

so everyone in the supply chain should be working to reduce lead times.

The implications of Little's Law are that when inventory in the supply chain is high, lead times increase, and, conversely, longer lead times result in more inventories in the pipeline.

This problematic and cyclical relationship between lead times and inventory is a powerful reason for reducing lead times.

Structure Drives Behavior:Causes of the Bullwhip Effect Lack of visibility Long lead time Many stages in the supply chain Lack of pull signals Order batching Price discount and promotions Forward buying Rationing

Other Behaviors that Cause the Bullwhip Effect Over-reaction to backlogs Neglecting to order to reduce inventory Hoarding customers Shortage gaming for customers Demand forecast inaccuracies Attempts to meet end-of-month metrics

Ways to Mitigate the Bullwhip Effect

Reduce lead times Use/sharing of POS data Smaller orders

Work with suppliers on more frequent deliveries of smaller order increments

Use stable pricing, “everyday low prices” Levels out customer demand

Allocation based on past sales