Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

2.3.5 Operational Management Level: Collaborative Order Processing — Avoiding the Bullwhip Effect

Intended learning outcomes: Produce an overview on collaborative planning, forecasting, and replenishment (CPFR). Describe vendor-managed inventory (VMI) and continuous replenishment planning (CRP). Identify planning & control tasks for a partnership relationship. Explain the bullwhip effect.



To fulfill the objectives of the collaboration, not only must planning & cont­rol systems be linked, but close contact among the participants is also key.

Collaborative planning, forecasting, and replenishment (CPFR) is a process whereby supply chain partners can jointly plan key supply chain activities from production and delivery of final products to end customers. Collabo­ration comprises business planning, fore­casting, and all operations required to replenish raw materials and finished goods (cf. [APIC16]).

A high degree of res­ponsibility and powers of authoriza­tion for well-trained trans­corporate teams are typical of functional supply chains. Such teams have a mutual under­­standing of problems with regard to quality, pro­duction processes, and delivery, and they strive toward continual impro­ve­ment of order processing, following the idea of a learning organization. [note 206] Further measures include techniques of trans­corporate data accessing and data revising:

  • Vendor-managed inventory (VMI), or supplier-managed inventory (SMI): The supplier has access to the customer’s inventory data and is responsible for managing the inventory level required by the customer. This includes in-time inventory replenishment as well as removal of damaged or outdated goods. The vendor obtains a receipt for the restocked inventory and invoices accordingly. Cf. [APIC16].
  • Continuous replenishment (CRP): The supplier is notified daily of actual sales or warehouse shipments and commits to replenishing these sales without stock­outs and without receiving replenishment orders. Cf. [APIC16].

An implementation of such procedures entails a lowering of associated costs and an improvement in speed and stock-inventory turnover.

The planning & control system for customer order processing is composed of the tasks shown in Figure 2.3.5.1. Systemic aspects and the systematic of planning & control within a supply chain will be examined in later sec­tions. Here, we present the terms without further definition or commentary.

Fig. 2.3.5.1        Planning & control tasks for a partnership relationship.

It is very important in supply chain management to implement counter­measures to prevent the bullwhip effect (also called the Forrester effect).

The bullwhip effect is an extreme change in the supply position upstream generated by a small change or no change in customer demand. Inventory can shift quickly from being highly backordered to being excess.

Observations show that the variation of inventory and order quantities increases up the supply chain from customers to the various tiers of suppliers. In addition, the longer the lead times of goods, data, and control flow, the stronger the bullwhip effect. See [Forr58], [LePa97], and [SiKa07]. Figure 2.3.5.2 shows this effect.

A famous example, analyzed and published by Procter & Gamble, is de­mand for Pampers® disposable diapers. The bullwhip effect is caused mainly by information processing obstacles in the supply chain; the obstacles are in­formation time lag and distortion (by the actual orders). A counter­measur­e is adapting manufacturing lead times (see [SöLö03]), based on rapid infor­mation exchange on consumption, or demand, by point-of-sale scanning.

Fig. 2.3.5.2        Open order quantities and inventories / backorders in a supply chain: the bullwhip effect (or Forrester effect).

Point of sale (POS) is the relief of inventory and computation of sales data at the time and place of sale, generally through the use of bar coding or magnetic media and equipment ([APIC16]).
In distribution control, the term quick response program (QRP) stands for an information system that links retail sales along with the production and shipping schedules back through the distribution chain. At the point of sale, it employs electronic scanning and data transfer. It may use direct shipment from a factory to a retailer.

This type of information system can transmit information on demand from end user back to the highest tier in the supply chain. All partners in the network can rapidly adapt their capaci­ties to current demand and thus avoid large fluctuations in inventory. Experience has shown that this type of information is exchanged only in networks characterized by complete trust.


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Course section 2.3: Subsections and their intended learning outcomes