Global Supply Chain Management.
Instructions: “Supply Chains are only of any interest to customers when they go wrong. Therefore, Supply Chain Resilience is considered as a very important factor in modern Supply Chains”
The above statement is shown to be true in numerous occasions in the past. Examples include the “Horsemeat Scandal” in processed meat products, “100’s of garment workers crushed to death” in an arguably avoidable factory collapse in Bangladesh, or other “Supply Chain Scandals” in Asia that have affected McDonald’s, Burger King and Starbucks. These scandals (specifically in branded products) have caused significant reputational and financial damage (as well as loss of human life) to different types of industries.
By taking as an example a Supply Chain that you are familiar with, identify and discuss in detail ONE ONLY important obstacle (such as Demand Forecasting, Inventory Management, Bullwhip Effect, Traceability etc.) that must be overcome to manage that Supply Chain successfully (100% of the assignment grade).
Typical examples of Supply Chains may include: production of fresh milk, automobile manufacturing, outpatient appointments or accident and emergency departments in public hospitals, banking services, supermarkets, the garment industry, pharmaceutical products, food supply chains etc.
Some of the data for this assignment may be ‘live’; for instance the horsemeat scandal was reported extensively in the newspapers, on the media and other company accounts. You should use these sources for information on what may go wrong within your chosen Supply Chain. Material for most Supply Chains is easily available and is included in books and articles. Theory of supply chain strategies, relationships and response to breakdown is to be found in textbooks and peer review journal articles.
Global Supply Chain Management.
Executive Summary
The bullwhip effect has been defined as a distribution phenomenon in which demand forecasts lead to inefficiencies along the supply chains. It’s caused by of one or a combination of these factors; updating of demand forecasts by supply chain partners without informing the other stakeholders, order batching with the aim of taking advantage of economies of scale in transportation, price fluctuations resulting to a distortion in consumer buying patterns and rationing. In the South African automotive industry, this phenomenon results in increased stock levels which in turn lead to losses in revenue. Avoiding statistical demand forecasting, focusing on coordination of market information along the supply chain have been suggested as some of the ways of reducing the impacts of the bullwhip effect.
Abstract
The South African automotive industry, which comprises of automotive and component manufacturers, has witnessed significant growth since the economy was liberalized in the early 1990’s. The arrival and entrenchment of large global automotive manufacturers have led to the adoption of supply chain best practices in the domestic sector. This has enhanced the countries competitiveness in the motor industry in the world, leading to significant growth in automotive contribution to the GDP and exports. However, despite industry effort towards best practice, the motor industry operates in a complex supply chain environment, often resulting in inefficiencies. Despite the enormous steps taken to attain a competitive supply chain edge in this industry, inefficiencies abide (Venter, 2009). This has necessitated the need to continually study supply chain best practices in the sector to identify areas of differentiation that would ultimately result in a competitive advantage. This paper discusses the bullwhip effect in the South African auto sector, and its impact on the success of the industry. It explores existing literature on this concept, defines the bullwhip effect, causes and consequences and proposes strategies for overcoming the bullwhip effect.
Introduction
In a globally competitive world, the successful management of the supply chain activities has a direct impact on the success or failure of an organization. This means that for organizations to succeed there is the need for significant investment in the supply chain management process to ensure a smooth supply chain (Naude, 2009). Even in the best managed supply chains, there are always loopholes that more often than not, lead to significant losses, both financial and life, as has been witnessed in some of the world famous ‘supply chain scandals’ such as the “Horsemeat Scandal”, the Mc Donald and Burger King scandals and the Toyota vehicle recall scandal. This often results from supply chain obstacles that include the bullwhip effect, inefficient inventory management processes, inaccurate demand forecasting among others.
The automotive industry is considered as a key driver and contributor to the global economy. It pumps in billions of dollars into the global economy and also supports the development of other industries. For instance, it uses the output from nearly all manufacturing industries and supports both upstream and downstream industries. A thriving automotive industry is asset, labor and material intensive thus it requires articulate operational planning and execution at all levels of the supply chain. While there has been significant government intervention in producers such as China, United States and Brazil, a sub-optimal usage of supply chain management poses a great challenge to automakers in emerging markets like South Africa, in their quest for the attainment of competitive advantage.
The supply chain in the automotive industry in South Africa consists of Original equipment manufacturers (OEM’s), automotive component manufacturers (ACM’s), original equipment suppliers (OES’s), automotive retail channels and the aftermarket support chains. For instance, the BMW is one of the foreign auto manufacturers in South Africa. It has thousands of suppliers for components and systems from Good year tires to Motorola, with each of these manufacturers having many suppliers in turn. Ordinarily, information is not shared between these suppliers and stages of the production process and therefore there is a distortion of demand information. This distortion is even made worse by the mere reality that supply chains today produce vast amounts of product variables (Naude, 2009). The BMW, for instance, produces different models with varying options in each model. This increased variety of products makes it extremely difficult for BMW to attain an effective information flow with the thousands of its suppliers, dealers, retailers and customers. The challenge for any automaker, therefore, is to be able to correctly manage the information coordination despite the presence of multiple ownerships and product varieties.
The lack of coordination occurs when each of the manufacturers and suppliers in the chain observes their own objective, without taking into account their actions’ impact on the entire supply chain. According to Bennett & O’Kane (2006) asynchronous and near-seamless supply chain cannot be achieved unless the stakeholders in the supply chain attain a high level of coordination across the supply chain network, failure to which the bullwhip effect sets in.
Definition
According to Naude&Badenhorst-Weiss (2011), gone are the days when companies competed against companies. Modern institutions derive of their competitive edge in supply chain management. Toyota and its suppliers for instance, usually clash with Ford and its suppliers for competitive advantage in the market. There is, however, an inhibitor in all supply chains, which works to paralyze supply chain management efforts; the’ bullwhip effect’, which, in some supply chains can increase the operational costs by 13-25% Chopra &Meindl, (2007). It’s important, therefore, that supply chain managers know where to invest resources and efforts to counter the effect of the Bullwhip effect.
By definition, the bullwhip effect is the uncertainty caused by information flows from one party to the other in the supply chain. Forecasts become more unreliable as they move up the supply chain from the customers, retailers, dealers, manufacturers to suppliers. It’s a distribution phenomenon in which demand forecasts lead to inefficiencies in the supply chain system. This leads to increased swings in inventory as manufacturers attempt to meet the unpredictable customer demand. Jacobs et al (2009) note that the impact of the bullwhip effect becomes magnified as we move from the ultimate customer to the producer and suppliers, with a slight change in consumer demand causing backward ripple oscillations upstream. Due to changes in demand forecasting resulting to differences in both the supply and demand patterns, inventory accumulates at various stages while delays and shortages occur at others.
Perhaps, Fawcett et al. (2007) give the aptest definition of the bullwhip effect as an ‘exaggeration of fluctuations in demand’. Due to changes in demand, suppliers normally overcompensate to avoid stock outages, therefore under-anticipate trends in future demand. He notes that the bullwhip effect is stronger in larger supply chains with more customer and suppliers and especially where the customer is furthest from the supplier. He concludes that the bullwhip effect is a phenomenon where a small change in demand is translated into much larger changes in the next order replenishment throughout the supply chain mostly due to the absence of unexplained changes in demand .Naude&Badenhorst-Weiss (2011) carried out a study in the South African automotive industry in order to establish the presence, causes and impact of the bullwhip effect. The study consisted of a survey done on ACM’s, with the aim of determining the supply chain problems and the significance of these problems. They documented the automotive supply chain as shown in Fig I below.
Fig I. Source: South African Automotive Yearbook. 2009
The study comprised only members of National Association of Automotive Component and Allied Manufacturers. A questionnaire consisting of 75 questions relating to supply chain problems was sent. Statistical data evaluation techniques were used to analyze the data. Naude&Badenhorst-Weiss (2011) study found seventeen supply chain problems.
The results of the study indicated that automotive component manufacturers often depended on statistical demand forecast information to inform their production capacity. They noted that ACM’s experienced long lead times, fluctuating orders, accumulated and slow moving inventory, order cancellations and lack of coordination. This is characteristic of the presence of the bullwhip effect.
Causes of the Bullwhip Effect
Lee, Padmanabhan&Whang (1997), have published widely on the bullwhip effect. They opine that the bullwhip effect is mainly a consequence of one or a combination of these factors; updating of demand forecasts by supply chain partners without informing the other stakeholders, order batching with the aim of taking advantage of economies of scale in transportation, price fluctuations resulting to a distortion in consumer demand.
Demand Forecast updating
According to Lee et al (2004), the bullwhip effect is a consequence of statistical demand forecasting methods in the supply chains, where orders are based on forecasting as opposed to actual demand. The term demand forecast updating, therefore, refers to instances where a change in demand forecast by one organization becomes amplified in subsequent replenishment orders. Erroneous demand forecasting coupled with poor information sharing amongst the supply chain stakeholders can lead to accumulation of inventory levels as a result of poor information cascading up the supply chain (Lee et al, 2004a). Uncertainty in demand resulting from poor demand data forces organizations to hold additional stocks or to increase their lead times to meet changes in demand. Lead-times increase when suppliers decide to maintain lean inventory but order directly from the suppliers in the event of a customer order (Chopra&Meindl, 2007). Whichever way is adopted by the institution; the inventory levels are increased as a result of problems in demand forecasting.
If there is an increase in lead-times, buyers, based on their conventional reorder points, increase their quantities. Suppliers, on the other hand, interpret the increased order quantities as an increase in demand, and subsequently increase their orders from the suppliers, who in turn increase their production in anticipation of the changes in demand. Just when the suppliers have increased their production capacity to meet the anticipated demand, the demand falls as the retailers notice that they made d a mistake by their over-estimation of the market demand. Excess stocks lead to reduction in orders upstream, leading to suppliers reducing their production capacity by selling unutilized assets and retrenching excess staff (Fawcett et al. 2007)
Webster (2008) notes that manually developed forecasts are even worse, as they tend to be susceptible to the ‘recency’ error, an effect that further amplifies demand volatility on updating the forecasts. The’ recency’ error refers to a phenomenon where people tend to overreact to recent events, to over-adjust demand forecasts in response to market signals, which may not reflect a trend, rather, a one-off market signal. For instance, a recent purchase of a particular BMW model for use by the UN consulate in Johannesburg may be misconstrued to mean an increase in demand, which in turn may inform dealers to increase their inventory, leading to accumulation of inventory since a similar large purchase may not happen, seeing that the UN case was isolated.
Order batching
This is the practice of periodically placing large orders, often more than what is needed in the immediate future. For instance, a retailer may move several units of a product on a daily basis but in order to save on transportation and ordering costs, orders may only be done once every several weeks. In other cases, freight incentives such as discounts on large volumes may result in customers ordering in bulk. The bullwhip effect cancels the gains made on order batching and transportation costs, leading to inventory accumulation by the suppliers in anticipation of larger orders. Webster (2008) research found that order batching saved on transportation costs, but created an irregular and disruptive flow even with a smooth demand. He noted that with the removal of order batching requirements, flow of inventory was smooth with a lesser instance of stock-outs.
Price fluctuations
According to O’Donnell (2009), the bullwhip effect as a result of price fluctuations is easily manifested. Large orders tend to appear before increases in prices goes into effect, especially after there is a government directive such as customs and duty charges that have a direct impact on automobile prices, or in response to automobile promotions. Unforeseen sales promotions, incentive plans, government directives that affect prices often leads to sales distortions (Simchi-Levy et al. 2009) Suppliers observe a sudden increase in demand as buyers sell off excess inventory, resulting in a decline in demand.
Rationing and shortage gaming
Rationing refers to the practice of allocating inventory to customers in the proportion of their order quantities mostly during shortages (CSCMP, 2011). For instance, a retailer may decide to order twice as much as the required numbers with the objective of getting at a half of the quantity ordered. This shortage gaming is mostly a consequence of misaligned goals that may exist among stakeholders in the supply chain.
Aside from the above causes of bullwhip effect, modern literature finds that lead time, coordination and push inventory strategy as well as relationships are also causes of the bullwhip effect especially in the automobile industry (SA Automotive Week. 2009).
In the early 90’s, lags in execution in the supply chain and long cycle times were identified as some of the potential causes of the bullwhip effect and increase in inventory levels (Torres &Maltz, 2010). Longer lead times often result in distortions in demand information, which leads to significant changes in safety stocks, base level stocks, thus leading to changes in order quantities. The actual cycle time results from innate characteristics of the supply chain such as human aspects, distance and manufacturing time.
Relationships built by the dealers with customers are important aspects of supply chain management. Lack of coordination in the buyer/supplier relationship often leads to the bullwhip effect (Beth et al, 2006) .Conflicting goals such as the focus on local optimization, customers’ lack of confidence in the suppliers’ ability to meet demand on time and lack of information sharing are some of the characteristics that identify a supply chain that has a relationship and coordination challenges. Poorly managed relationships could also lead to antagonism amongst suppliers, lack of feedback and lack of trust between parties and duplication of effort in the supply chain (Lysons& Farrington 2006)
Push inventory strategy is used when manufacturing is based on anticipated demand and production is based on long-range forecasting. This means that the actual demand is mostly uncertain, leading to high manufacturing and transportation expenses as a result of the perceived need to respond to the changes in demand (Hugo, et al, 2004) (Lysons& Farrington 2006). Lack of supply chain visibility is another major cause of the bullwhip effect since there is the inability to share with or retrieve supply chain information concerning a trading partner in real time as is desired by other stakeholders in the supply chain.
Consequences of the Bullwhip Effect
The above discussion has shed some light on the consequences of the bullwhip effect on a supply chain. Ravichandran (2008), however, holds that this phenomenon has significant implications on efficiency at various levels. Fundamentally, the bullwhip effect has led to poor service levels, inefficiencies in scheduling, production and associated costs, revenue generation and distribution channels. Operationally, it leads to accumulation of inventory and makes such inventory inaccessible especially when it’s expected to meet sudden demand. At performance level, it destroys revenue expected, erodes revenue realization through promotions and discounts especially when a lot of stock is held and reduces the velocity of cash as a result of holding an extra stock for a longer period.
Reliance on distorted demand information results in excess raw material costs, additional manufacturing expenses such as overtimes, inefficient utilization of resources, excess storage expenses and inflated transportation costs due to premium rates that may be charged on urgent supplies, meaning that the bullwhip effect implies poor service and high costs. In extreme cases, the bullwhip effect could drive costs higher by between 13-25% (Naude, 2009). Thus the organizational costs are significantly increased. Knowledge of where effort and resources need to be invested in overcoming the impact of the bullwhip effect should be a high priority for modern supply chain managers.
Conclusion
The greatest challenge for supply chains is to achieve seamless coordination and information flow despite increased product variety and multiple ownerships. The above discussion notes that the bullwhip effect, which is the effect of small variations in demand at the customer level which often leads to massive variations upstream, results from the lack of coordination amongst stakeholders in the supply chain. These distortions as a result of inaccurate demand data lead to serious cost implications, which may erode the gains made in other areas of the supply chain (Venter, 2009a)
It’s highly recommended that supply chains in the automotive industry pay closer attention to visibility and supply chain integrated information system which would help in sharing demand data to avoid distortions in the supply chain (Gabru, 2008). Supply chains in the automotive industry should also devise means of becoming less dependent on statistical demand forecasting, and focus more on a more coordinated information sharing formulae that would provide information on actual demand to avoid lags in supply or inventory accumulation.
Stakeholders in the supply chain must come together; re-establish a working relationship than helps in planning and execution of supply chain strategies, taking care not to succumb to self-interest at the expenses of other parties in the supply chain.
Finally, since the impact of the bullwhip effect not only affects the manufacturing and distribution of products but also the quality of service to the end user, supply chain managers are advised to identify areas such as demand forecasting that often lead to the bullwhip effect and direct efforts and resources to ensure that the supply chain is properly coordinated and information is shared in real-time with all parties in the supply chain (Cagliano, Caniato, & Spina , 2006).
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