The Bullwhip Effect - Essay Example

?THE BULLWHIP EFFECT Question what the Bullwhip Effect is. Answer: the unplanned interruptions and supply chain disturbances leads to what is known as Bullwhip Effect. The objective of the supply chain is to match the demand and supply of the finished goods by accurately forecasting the demand, reducing the lead time, managing the safety stock and minimizing the impact of strikes, late delivery and interrupted production. However, this process is not as simple as it seems to be. The high variability of demand, increased backlogs and lack of communication (both upstream and downstream) can result into unmanaged supply chain which results in inventory surplus or inventory shortage. “Bullwhip effect describes how inaccurate information, a lack of transparency throughout the supply chain, and disconnect between production and real-time supply chain information result in lost revenue, bad customer service, high inventory levels and unrealized profits” (Paritosh Agarwal, 2009). The Bullwhip effect can be minimized by studying the drivers of demand and supply patterns. Moreover, companies should try to reduce the cycle time, ensure smooth and quick flow of information and take corrective actions to reduce the impacts of price fluctuations, inaccurate demand forecasts and order batching. Question 2: explain why Volvo manufacturing department believed that customers had started to like green cars in the mid 1990’s. Answer: the demand and supply variations at Volvo resulted in huge stocks of unsold green cars. The overproduction of cars can have a potential impact on unrealized revenues and excessive cost for storing the cars. Therefore, the company planned to offer incentives in order to increase the demand of green cars. On one hand the company was successfully able to sell the excess stock which resulted in the revenue realization of the green cars. However, the production department misinterpreted the sales record and started ordering excessive raw materials in order to produce more cars. This inaccurate assessment of the situation can have a multiplier effect on the profits and production capacity. In future, the company will again have to offer some incentives and attractive deals to deal with the overproduction of cars which will not only reduce the profit margins but it will also lead to increased workload and decline in quality caused by 100% capacity utilization. SUPPLY CHAIN MANAGEMENT AT WAL-MART. Question 3: Discuss how the Bullwhip effect can be reduced. Explain how Wal-Mart uses IT to reduce the Bullwhip Effect. Answer: the Bullwhip effect can be controlled by accurately forecasting demand by gathering the real-time information, which can be acquired by working closely with suppliers and distributors. The regular flow of information combined with the proper management of sales and inventory growth can be helpful in attaining the proposed financial results. From a different perspective, all the parties involved in the supply-chain management process are mutually dependent on each other and they can significantly influence the rest of the industry players with their actions. Therefore suppliers, distributors, production department and customer relationship department should work in coordination with each other in order to improve the business-customers sales record. Apart from this, organizations should try to improve the downstream communication by using the point of sales (POS) data collection method and vendor-managed inventories (VOI) so that demand is not over/under estimated. Also, price fluctuations caused by various discount offers can create variability in demand; therefore, every day low price (EDLP) should be used to keep the prices stable. Moreover, cycle time should be reduced to make the availability of the product faster and easier and “order capacity reservations” could be used by production department so that the retailers reserve a specific quantity of items to be purchased in a given time frame which will help to keep the distributor’s and retailer’s demand stable and predictable (Bean, M. 2011). Wal-Mart has taken proactive measures to overcome the bullwhip effect at its stores. The company improved the accuracy of its demand forecasts by implementing a satellite network and point of sales (POS) system of data collection. The company also used the UPC barcodes technology to analyze the gathered information. Apart from this, Wal-Mart introduced retail link in 1990’s which has increased coordination with suppliers by providing them real time sales data of every sale transaction made at the store. This effort was fruitful enough to made Wal-Mart one of the early adopters to collaborative planning, forecasting and replenishment (CPRF). Wal-Mart also adopted vendor managed inventory (VMI) to handle two important issues; supplier’s stock out and Wal-Mart’s inventory levels. In addition to this, the company also worked on medium term and long-term supply chain strategies for meeting the future objectives of the store. Often video messages were shared with senior management to keep them up to date about the store operations. Question 4: Discuss how Wal-Mart reduces inventory levels. Explain how Wal-Mart uses IT to reduce inventory levels. Answer: one of the most important objectives of Wal-Mart was to keep the growth of inventory level up to half of the sales growth. In order to achieve this objective the supplier’s analysts and Wal-Mart’s personnel worked in coordination to manage the flow of products from supplier’s factories to the distribution centers and ultimately to the stores. In 2006, Wal-Mart decided to reduce its inventory up to the level of 6 billion due to its mixed performance in the international market. It had to close some of its stores as its performance in international market was declining. Wal-Mart’s information system helped the company to match the level of estimated inventory sales close to the actual inventory sales. Its retail link database provided a roadmap for integrating and managing information. Given below is the step by step process of retail link database management. The company uses point of sales (POS) system and collects real time sales record from the cash registers of all the stores. Then the information is transmitted to all the stores through global satellite network to all the employees, senior management and logistic department. Often video messages are used to provide insight to distinctly located executives. The information is gathered in retail link database for providing accessibility to suppliers. The suppliers and Wal-Mart’s personnel work together to analyze the data. They also collect external data to reduce the variance caused by external factors such as weather, economic situation, buying patterns and customer’s tastes and preferences. Then suppliers adjust their production capacity according to the demand forecast to balance the production and demand of the products. The finished goods are transmitted to the stores via Wal-Mart’s trucks to the distribution centers and finally to the stores. This effective use of retail link database helps Wal-Mart to keep the inventory levels low in order to reduce the excessive inventory cost (storage cost). Question 5: Research RFID. Discuss advantages and disadvantages of RFID. Answer: Radio frequency transmission (RFID) is a method of using radio waves to track the information of a person or an object. The object is identified by transmitting the identity (unique serial number) of the object to the operators with the help of a micro chip and antenna. The biggest advantage of the RFID technology is that it identifies the object even if it is not placed closed to the scanner or a reading device. It will be able to locate the abject within a range of 20 feet. Also it is extremely faster in scanning all the purchased items/grocery at a single time and can quickly calculate the bill which makes the job of billing department much easier. On the other hand this technology has disadvantages as well. The first problem is the reader’s collision which means that when two or more customers are closely located and their signals overlap, it can’t recognize multiple signals. The second problem is tag collision which occurs when many tags are available in one specific area; it can’t identify each tag separately. However, since the reading time of each tag is very fast, the retailers should design specially designed queues to shift the customer traffic (Technology LLC 2010) Question 6: In case of Wal-Mart, what would be total costs and benefits (tangible and intangible) of implementing RFID? What would be your recommendations based on your cost / benefit analyses? Should Wal-Mart implement RFID? Answer: The cost and benefits analysis for adopting this new technology leads to the identification of many new factors and drivers which have a potential impact on the company’s policies and strategies. As mentioned in the case study, University Of Arkansas suggested that RFID can lead to 19 % less stock outs with an investment of 17 cents on each product. The most significant benefits that can be achieved from RFID technology is the operational efficiency and product visibility because it helps to easily locate products and the management of the stock becomes easier. Apart from this, it also helps in reduction of cost, improving security standards and increasing customer service levels (Bhatacharya, H. Chu & Mullen 2007). Since the products can be easily tracked at the sales floor, at the backroom and at the distribution centers, therefore, Wal-Mart can expect realistic and accurate flow of information. This information will help the store employees to increase sales, as according to the case study 25% of the stock out inventory is caused due to the dislocation of the product. On the other hand, over stock expenses can also be easily reduced by recording the correct inventory levels. This broad range of benefits will also help to achieve many other benefits. Like, for example, improved visibility will help Wal-Mart in asset management, tracking the customer’s shopping behavior and managing sales return. Similarly, operational efficiency will help Wal-Mart to increase the speed of the sales process, labor productivity will be good and store operations will be properly organized. On one hand, the cost incurred to implement the RFID technology can be a burden on the supplier of Wal-Mart but the implementation expenses can replace or reduce the inventory tracking cost. Product safety cost will be reduced and chances of theft and product damage cost can be reduced as well. However, Wal-Mart will have to face major challenges in implementing the technology. Some these challenges are given below: 1. Privacy issue: RFID technology seriously violates the privacy of people. The customers can be easily tracked with a central database and the store employees can easily track when did the customer leave, how often he/she comes to Wal-Mart? Does he/she go to any other store? What is the buying behavior of that particular customer etc. 2. High cost: the high cost associated with implementing the RFID technology is the major hindrance in adopting the RFID technology by the small suppliers of Wal-Mart. 3. Business process redesign: the amount of information generated through RFID technology is very enormous. Therefore, Wal-Mart needs to redesign its systems so that data filtration becomes easier and less time consuming. Since the amount of sales generated each day and the number of customers arrived are very large, therefore it is not possible to track every product within a limited time. 4. Data integration issues: on one hand RFID technology helps to manage an integrated and tight supply chain but on the other hand, the data generated by this technology requires more staff to handle the information effectively. RECOMMENDATIONS: The process of RFID technology adoption is a top-down process, which means that it is mandated by the large retailers to adopt the new technology and the suppliers have no choice but to adopt the technology because the competition among distributors is increasing rapidly (Rogers 1986). The benefits of the RFID technology will increase will the increased adoption of the technology as the cost of implementing the technology will decline as more and more users will adopt the product. On the whole, I believe that Wal-Mart should adopt this technology, because this will help the company to manage an integrated and tight supply chain which is the core responsibility of the company. Moreover, as we know that, the employees of Wal-Mart are non-union employees, therefore, they will show less reluctance in adopting the technology. Also the potential benefits of implementing the technology are increased customer care, less stock outs, operational efficiency, product visibility and improved security. These benefits are the core objectives that any retail store will want to achieve and RFID technology can potentially translate these benefits into the profitability of the company. In addition to this, product safety will be increased and threats of theft can be reduced. However, the potential threat of using the RFID technology is the vast use of barcodes technology which is easier and simple. REFERENCES: 1. Bhatacharya, C., H-Chu, C. & Mullen, T., “RFID Implementation in Retail Industry: Current Status, Issues, and Challenges”, 2007. http://tmullen.ist.psu.edu/pubs/dsi_draft_2007.pdf accessed on 29 April 2011. 2. AIM, “Technologies: RFID / What is RFID? 2010. http://www.aimglobal.org/technologies/RFID/what_is_rfid.asp accessed on 28 April 2011. 3. Technovelgy LLC, “what is RFID? 2011. http://www.technovelgy.com/ct/Technology-Article.asp. Accessed on 28 April 2011. 4. QuickMBA.com, “the Bullwhip Effect”. http://www.quickmba.com/ops/bullwhip-effect/. Accessed on 26 April 2011. 5. The economists “Chain reaction - Managing a supply chain is becoming a bit like rocket science”. 2006. http://www.economist.com/node/949105?Story_id=949105. Accessed on 26 April 2011. 6. Bean, M., “Bullwhips and Beer: Why Supply Chain Management is so Difficult”, 2006. http://forio.com/resources/bullwhips-and-beer%22%20http://forio.com/resources/bullwhips-and-beer Accessed on 26 April 2011 7. Rogers, E.M., “Communications: The New Media in Society”. 1986. 4th edition. New York: The Free Press. 8. Agarwal, P. “supply chain management – cracking the bullwhip effect”. 2009. http://hosteddocs.ittoolbox.com/pa020609.pdf Accessed on 26 April 2011 9. Raturi, A.S. & Subramani, J. “Upstream vs. Downstream Flexibility in a Production-Distribution Supply Chain”. http://www.business.uc.edu/PDF/SupplyChainFiles/Raturi/raturi_Supply%20chain%20flexibility.pdf Accessed on 26 April 2011 10. Akkermans, H. “The 1st Wave On the road: of bullwhip-effects in supply chains and how to avoid them” 2004, Volume 10. http://www.iseesystems.com/community/connector/Zine/JanFeb04/henk.html. Accessed on 26 April 2011 Read More