Operations and Supply Chain Management The Core

GLOBAL SOURCING AND PROCUREMENT chapter 13 431
constraints related to the maximum that the customer is willing to carry, required
service levels, and other billing transaction processes. Selecting the proper process
depends on minimizing the balance between the supplier’s delivered costs of the item
over a period of time, say a year, and the customer’s costs of managing the inventory.
This is discussed later in the chapter in the context of the “total cost of ownership” for
a purchased item.
The Bullwhip Effect
In many cases, there are adversarial relations between supply chain partners as well as dysfunctional
industry practices such as a reliance on price promotions. Consider the common
food industry practice of offering price promotions every January on a product. Retailers
respond to the price cut by stocking up, in some cases buying a year’s supply—a practice
the industry calls forward buying. Nobody wins in the deal. Retailers have to pay to carry
the year’s supply, and the shipment bulge adds cost throughout the supplier’s system. For
example, the supplier plants must go on overtime starting in October to meet the bulge.
Even the vendors that supply the manufacturing plants are affected because they must
quickly react to the large surge in raw material requirements.
The impact of these types of practices has been studied at companies such as Procter
& Gamble. Exhibit 13.2 shows typical order patterns faced by each node in a supply chain
Forward buying
A term that refers to
when a customer,
responding to a
promotion, buys far
in advance of when
an item will be used.
Increasing Variability of Orders Up the Supply Chain
exhibit 13.2
Consumer Sales
Retailer’s Orders to Wholesaler
20
20
Order Quantity
15
10
5
Order Quantity
15
10
5
0
Time
0
Time
Wholesaler’s Orders to Manufacturer
Manufacturer’s Orders to Supplier
20
20
Order Quantity
15
10
5
Order Quantity
15
10
5
0
Time
0
Time