Operations and Supply Chain Management The Core

432 OPERATIONS AND SUPPLY CHAIN MANAGEMENT
Bullwhip effect
The variability in
demand is magnified
as we move from
the customer to
the producer in the
supply chain.
Continuous
replenishment
A program for
automatically
supplying groups of
items to a customer
on a regular basis.
that consists of a manufacturer, a distributor, a wholesaler, and a retailer. In this case,
the demand is for disposable baby diapers. The retailer’s orders to the wholesaler display
greater variability than the end-consumer sales; the wholesaler’s orders to the manufacturer
show even more oscillations; and, finally, the manufacturer’s orders to its suppliers
are the most volatile. This phenomenon of variability magnification as we move from the
customer to the producer in the supply chain is often referred to as the bullwhip effect.
The effect indicates a lack of synchronization among supply chain members. Even a slight
change in consumer sales ripples backward in the form of magnified oscillations upstream,
resembling the result of a flick of a bullwhip handle. Because the supply patterns do not
match the demand patterns, inventory accumulates at various stages, and shortages and
delays occur at others. This bullwhip effect has been observed by many firms in numerous
industries, including Campbell Soup and Procter & Gamble in consumer products;
Hewlett-Packard, IBM, and Motorola in electronics; General Motors in automobiles; and
Eli Lilly in pharmaceuticals.
Campbell Soup pioneered a program called continuous replenishment that typifies
what many manufacturers are doing to smooth the flow of materials through their supply
chain. Here is how the program works. Campbell establishes electronic data interchange
(EDI) links with retailers and offers an “everyday low price” that eliminates discounts.
Every morning, retailers electronically inform the company of their demand for all
Campbell products and of the level of inventories in their distribution centers. Campbell
uses that information to forecast future demand and to determine which products require
replenishment based on upper and lower inventory limits previously established with each
supplier. Trucks leave the Campbell shipping plant that afternoon and arrive at the retailers’
distribution centers with the required replenishments the same day. Using this system,
Campbell can cut the retailers’ inventories, which under the old system averaged four
weeks of supply, to about two weeks of supply.
This solves some problems for Campbell Soup, but what are the advantages for the
retailer? Most retailers figure that the cost to carry the inventory of a given product for a
year equals at least 25 percent of what they paid for the product. A two-week inventory
reduction represents a cost savings equal to nearly 1 percent of sales. The average retailer’s
profits equal about 2 percent of sales, so this saving is enough to increase profits by
50 percent. Because the retailer makes more money on Campbell products delivered
through continuous replenishment, it has an incentive to carry a broader line of them and
to give them more shelf space. Campbell Soup found that after it introduced the program,
sales of its products grew twice as fast through participating retailers as they did through
other retailers.
Functional products
Staples that people
buy in a wide range
of retail outlets, such
as grocery stores
and gas stations.
Supply Chain Uncertainty Framework
The Supply Chain Uncertainty Framework (Exhibit 13.3) is designed to help managers
understand the nature of demand for their products and then devise the supply
chain that can best satisfy that demand. Many aspects of a product’s demand are
important—for example, product life cycle, demand predictability, product variety, and
market standards for lead times and service. Products can be categorized as either primarily
functional or primarily innovative. Because each category requires a distinctly different
kind of supply chain, the root cause of supply chain problems is a mismatch between the
type of product and type of supply chain.
Functional products include the staples that people buy in a wide range of retail outlets,
such as grocery stores and gas stations. Because such products satisfy basic needs,
which do not change much over time, they have stable, predictable demand and long life