Supply Chain Management: Contracts, JITD, Bullwhip Effect & Strategies

Posted on Sep 6, 2024 in Economy

Chapter 4: Supply Contracts and Their Impact on the Supply Chain

Question 1: Contract Suitability and Choice Factors

Various supply contracts can incentivize retailers to purchase more items from suppliers, ultimately boosting sales to customers. These contracts mitigate the retailer’s risk of unsold inventory by sharing it with suppliers. However, demand uncertainty also increases the probability of higher sales.

Factors Influencing Contract Type Selection:

  1. Business Convention: Companies often opt for contracts prevalent in their industry.
  2. Information Availability: Contract implementation depends on accessible information. Different contract types require varying information from suppliers and buyers, which may be easier or harder for each party to obtain.
  3. Decision Making and Incentives: Collaborative decision-making is crucial for optimizing system-wide profit and allocation. Parties must acknowledge shared control, and contract type selection hinges on the level of control they are willing to share.

Contract Types: Advantages and Disadvantages

Buy-back Contracts:
  • Advantages:
    • Widely used in various businesses.
    • Coordinating prices are relatively insensitive to demand distribution.
  • Disadvantages:
    • Suppliers may need to repurchase significant quantities during low demand.
    • Incur extra transportation and restocking costs for returned items.
Revenue-sharing Contracts:
  • Advantages:
    • Easy to comprehend.
    • Optimal decision variable values are relatively insensitive to demand distribution.
  • Disadvantages:
    • Require monitoring of total revenue.
Quantity-flexible Contracts:
  • Advantages:
    • Commonly used in many businesses.
  • Disadvantages:
    • Optimal decision variable values are sensitive to demand distribution.
    • Incur extra transportation and restocking costs for returned items.
Sales-rebate Contracts:
  • Advantages:
    • Provide a direct incentive for retailers to increase sales.
  • Disadvantages:
    • Difficult to track and implement.

Chapter 5: Bullwhip Effect and Supply Chain Strategies

Question 1: Barilla’s Bullwhip Effect and JITD Implementation

a) Bullwhip Effect at Barilla:

Barilla faces significant fluctuations in pasta demand despite relatively stable end-customer demand. This amplification of demand variability, known as the bullwhip effect, strains Barilla’s manufacturing and logistics operations.

Contributing Factors:
  1. Transportation discounts incentivize distributors to order larger quantities less frequently.
  2. Trade promotions and volume discounts create demand fluctuations.
  3. Long delivery lead times (average 10 days) from Barilla to distributors.
  4. Product proliferation complicates forecasting.
  5. Poor communication between supply chain parties.
  6. Sequential decision-making without collaboration.

Just-in-Time Distribution (JITD) Program:

The JITD program shifts decision-making authority for Barilla-distributor shipments from the distributor to Barilla. Instead of merely fulfilling distributor orders, Barilla monitors product flow through distributor warehouses and decides shipment timing and quantity. This system addresses many issues mentioned above, enabling Barilla to make system-wide beneficial manufacturing and logistics decisions.

b) Internal Barriers to JITD and Addressing Sales Force Concerns:

Sales representatives pose a significant internal barrier to JITD, fearing diminished roles in inventory management and promotion setup, potentially jeopardizing job security. Giorgio Maggiali needs to demonstrate that JITD enhances customer service by reducing stock-outs and potentially saving costs. JITD improves order management efficiency by increasing demand process visibility. It’s a tool for better customer service, not a sales force replacement. Maggiali must emphasize that JITD is a company-wide initiative crucial for Barilla’s long-term success.

c) Customer Perspective on JITD:

Initially, JITD might be unsettling for customers due to loss of inventory control. Barilla needs to showcase specific JITD benefits convincingly.

d) Effectiveness and Value Demonstration of the Proposed System:

Proper implementation is key to JITD’s effectiveness, and subsequent results confirmed its success. Demonstrating JITD’s benefits for distributors (lower inventory, improved service levels, increased returns on assets) through experiments at Barilla depots can showcase its value. If customers resist JITD, collaborative forecasting or increased supply chain visibility might be acceptable alternatives.

Question 2: Impact of Various Factors on the Bullwhip Effect

a) E-commerce and the Internet:

E-commerce and the internet provide upstream parties (e.g., suppliers) with access to more accurate demand information. This mitigates the bullwhip effect by reducing demand information distortion and miscommunication and shortening order processing lead times.

b) Express Delivery:

Express delivery reduces lead times and associated demand variance. Demand variability is proportional to lead times in the system (refer to formulas in Sections 4.2.1 and 4.2.2).

c) Collaborative Forecasts:

Collaborative forecasts help supply chain stakeholders achieve a common, agreed-upon forecast of end-customer demand, reducing the bullwhip effect.

d) Periodic Promotions vs. Everyday Low Pricing:

Periodic promotions create artificial demand peaks and troughs, increasing customer demand variance and amplifying the bullwhip effect. Everyday low pricing can prevent these fluctuations, partially mitigating the bullwhip effect.

e) Vendor-Managed Inventory (VMI):

VMI allows suppliers to monitor downstream demand and make informed decisions about on-hand and shipped quantities. Suppliers don’t solely rely on order data for forecasting, reducing the bullwhip effect.

f) Supply Contracts:

Supply contracts align incentives within the supply chain and reduce demand uncertainty by establishing agreed-upon supply limits, mitigating the bullwhip effect.

Question 3: Inventory Sharing as Risk Pooling and Incentive Mechanisms

Inventory sharing is a form of risk pooling because it reduces the required safety stock at each retail store without compromising service levels. This lowers inventory holding costs or improves service levels. Additionally, transportation costs may decrease due to deliveries from closer sources during stock-outs.

Incentives for Inventory Sharing:

Appropriate incentives are essential to encourage retailers to share inventory. For example, if retailer one holds less safety stock than retailer two, retailer one will experience more frequent stock-outs and order from retailer two. However, retailer two might hesitate to share unless compensated by retailer one for the additional holding costs incurred. Retailer two’s extra inventory is a competitive advantage. Consider a small and a large Chevy dealer in the same town. The larger dealer’s ample inventory is advantageous; constantly supplying the smaller dealer diminishes this advantage.

Question 4: Strategies for Lead Time Reduction in the Supply Chain

Several strategies can effectively reduce supply chain lead times:

  1. Electronic Data Interchange (EDI): Reduces information lead time in order processing.
  2. Cross-docking: Minimizes or eliminates the time items spend in inventory.
  3. Inventory Sharing: Reduces lead time during stock-outs by utilizing nearby retail stores’ inventory.
  4. Demand Information Sharing: Enables rapid responses to demand fluctuations throughout the supply chain.
  5. Delayed Differentiation: Pushes generic products further down the supply chain, facilitating easier accommodation of demand for various related products.
  6. Vendor-Managed Inventory (VMI): Allows suppliers to be more responsive to changes in inventory levels.
  7. Express Delivery Services: Reduces transportation lead time (e.g., using UPS).
  8. Technology Adoption: Implementing technologies like machine automation to shorten manufacturing lead time.

Question 5: Conflicting Objectives in the Cereal Supply Chain

Different parties in the cereal supply chain often have conflicting objectives:

  1. Farmers: Prefer large, stable demand to dedicate land to specific crops (e.g., wheat, corn).
  2. Manufacturing Division: Favors long production runs with minimal setups and a low product mix to minimize production costs.
  3. Logistics Division: Aims for full truckloads to reduce transportation costs.
  4. Marketing Division: Prefers a high product mix with short lead times for marketing purposes, emphasizing product variety.
  5. Distribution Arm (Grocery Chain): Seeks rapid stock replenishment while minimizing inventory and transportation costs.
  6. Grocery Store Manager: Requires on-time delivery of diverse products with short notice to respond to varied end-customer demand.

Note that upstream supply chain parties generally prefer stable demand with a low mix, while downstream parties prioritize shorter lead times and a higher mix.