PGXPM152BAP BALA

SUPPLY CHAIN MANAGEMENT

Final Examination

(You MUST enhance your answers using real-life examples you encountered in various class sessions as
well as your professional experiences)

1. Discuss the significance of decoupling point (i.e., order penetration point) in achieving
competitive advantage within global supply chains. Now, enhance your discussion by considering
each of the following characteristics in tandem with the decoupling point (with appropriate
examples) (20 points):

a. Product characteristics
b. Demand characteristics
c. Supply chain strategy

The decoupling point (order penetration point) refers to the stage in the production
process where customer orders are accepted by the manufacture. It defines the stage in the manufacturing
value chain, where a particular product is linked to a specific customer order. It may differ between
products and over time for a particular manufacturing firm. The major factors are demand volume and
volatility, and the relationship between delivery and production lead times. Different manufacturing
environments such as make-to-stock (MTS), assemble-to order (ATO), make-to-order (MTO) and engineer-
to-order (ETO) all relate to different positions of the OPP.

Increasing competition with global markets and shorter product life cycles, the choices and shifts between
make-to-order (MTO) and make-to-stock (MTS) policies must be made faster and at a strategic level.
Business wants the best possible utilization of the resources to be achieved while maintaining optimum
level of operation and providing maximum level of satisfaction to the customers so that to survive in this
competitive market place. So that the profit margin of the product sold in the market also place a role in
survival. It explores the approach of agile decoupling point to suggest the most suitable supply chain
practices, processes and procedures. A low margin corresponds to a competitive market place with many
competitors, which is a common for mature products that typically are produced to stock. On the other
hand, a high margin is more typical for products that are customized or where the product range is wide,
offering the customer a wider choice. In order to achieve the advantage of Value, Cost and Margin, the Role
of Decoupling Points in Value Chain Management can apply a single approach for the value chain.

There are two types of Decoupling Points for the two constituent flow pipelines, the Product transfer
pipeline and Information transfer pipeline.
1|Page
 PGXPM152BAP BALA

Material Decoupling Point - a position in the product transfer pipeline to which the customers order
penetrates. Material decoupling point refers to the physical allocation of the goods and indicates how
deeply the customer order penetrates into the physical flow

Based on the Manufacturing type the Order Penetration point is plotted in the table below

Product Fabrication/Manufacture Final Assembly Shipment

Design

make-to-stock (MTS) OPP

assembly-to-order
OPP
(ATO)

make-to- order (MTO) OPP

engineer-to-order
OPP
(ETO)

Information Decoupling Point - The point to which a marketplace order data penetrates without
modification. Information decoupling point is where information turns from the high value actual
consumer demand data to the typical upstream distorted, magnified and delayed order data. Demand
information constantly suffers from a delay and distortion as it moves through supply chains. Therefore, in
order to increase a number of companies which have direct, actual and on-line demand information from
the market, it is recommended to locate information decoupling point as far upstream as it is possible. An
appropriate location of material and information decoupling points is one of the most pivotal aspects of
effective supply chains. The placement of these points may have a significant impact on the nature of
supply chain collaboration, determining the way the physical flow in a product pipeline transfer is
managed.

a. Product characteristics

Production costs and market mediation costs are the two supply chain cost that any
manufacturer of product will go through. Raw Material, Manufacturing cost, Labour, overhead costs and
technology investment are the cost involved in production cost.

Market variability decides the Market mediation cost. Inventory holding costs, product mark-down costs,
and opportunity costs for not having the right products to meet the demands are the cost involved in
Mediation cost.

2|Page
 PGXPM152BAP BALA

The below table talks about the product decoupling characteristic relationship matrix

Customization Industries Companies

Food and
make-to-stock (MTS) Standardized Beverages, FMCG Barilla, Lefe
etc.

assembly-to-order Minimal Customization, Base Personal Computer

Dell
(ATO) Platform is Standardized Manufacturers etc.

Base Raw Fashion, Jewelry,

materials/components etc.
Raymond's Made to
make-to- order (MTO) standardized but can be
Measure
customized into different
product types/categories

Products are made to Specialized Plant

engineer-to-order (ETO) Paper Mill
Specification machinery

Characteristics explanation:

Make-to-stock (MTS): Stock is maintained in locations according to the demand forecast, but the
products are standardized. Examples like Soft drinks, Sugar, salt etc..

Assembly-to-order (ATO): Basically customization possible to a long range of extent for the products and
it is based up on the standard platform. Paint colors can be an example here where mixing the color is
based on the requirement. Luxury cars for an example come with custom made interiors and exteriors
options (From the pre listed catalogue).

Make-to- order (MTO): A Variety of products which uses the same raw material and components. . The
make-to-order reflects custom built products. Examples include custom manufactured clothing (i.e., men's
suits; wedding dresses) and jewellery. For example, Airbus and Boeing follow a make-to-order strategy.
Their product does not change much. There may be minor changes in spec but all the components and raw
materials remain same.

Engineer-to-order (ETO): This is comes under specially engineered products according to specific
specification. Few components may share the same platform but rest are all specially designed to the

3|Page
 PGXPM152BAP BALA

requirement. Custom made choppers can be a best example as every custom chopper bike is unique to its
specific requirement.

b. Demand characteristics

There are 2 types of demand in supply chain, Forecast driven and market driven. OPP is in between
both. Forecast driven demand is more of push type demand and Market driven is a pull type demand.
Forecast driven push type is recommended as it is driven by the market forecast data.

Demand management does not limit to forecasting. The goal of the processes is to execute the plan with
minimal disruptions, increase flexibility and reduce variability. Demand planning process is a systematic
exploration and identification of a demand plan which may be implemented regarding the future
environmental operating conditions. It is based on the prediction of future events and selection of certain
options enabling to achieve the state recognized by managers as desired

The scope of demand data used in demand planning process in supply chains is determined by the methods
of gathering information which, in turn, are conditioned upon the location of information decoupling
point.

Information Decoupling Point Position design in a supply chain can be in one of the four points

Retailer

Distributor

Warehouse

Producer/Factory

From the results of stochastic studies we find that the information decoupling point when moved more
upstream i.e., towards the production yields better performance

c. Supply chain strategy

There are two fundamental types of supply chain strategies followed, Lean and agile. Lean
means developing a value stream focused on eliminating all kinds of waste. . Lean practices require a
stable product demand in order to facilitate a level production schedule, which in turn leads to reduced
cycle time, work-in-process, and finished goods inventories. The major objective of a lean supply chain
strategy is to reduce cost and enhance efficiency through elimination of wastes. In contrast to lean, the
goal of an agile supply chain is to provide customer driven products with unique features to the market
quickly in order to maintain a competitive advantage in a rapidly changing environment. Being agile and

4|Page
 PGXPM152BAP BALA

responsive implies that the supply chain can handle unpredictability and a constant stream of new,
innovative products with speed and flexibility. For example, this might involve the subassembly of
components into modules in a lower-cost process, with final assembly done close to the point of demand in
order to localize the product.

Based on material and information decoupling points the supply chain strategy will be as follows.

Manufacturing Planning: Supply chain will be highly agile and responsive to make full use of the
upstream decoupling point

Distribution and Information Systems Planning: Supply chain will have a seamless information flow
across the various vendors, suppliers and distributors

Procurement Planning: Just in time for material sourcing and manufacturing to account for variability
of for market demand

Demand Planning: Forecast should be revised on a regular basis based on the market data and the period
should be less than the lead time of order penetration

2. Discuss the various aspects of designing a supply chain network. Based on the discussions we
had in class as well as your own experience, showcase some of the innovations that companies
could adopt in optimizing their supply chain network design (and save cost). Also, discuss the
benefits of cross-docking and when it is the best suited design (Hint: please use the Merloni case as
an illustrative example of cross-docking and discuss). (25 points)

Supply Chain Management is primarily concerned with the efficient integration of suppliers,
factories, warehouses and stores so that merchandise is produced and distributed in the right quantities, to
the right locations and at the right time, and so as to minimize total system cost subject to satisfying
service requirements.

The Role of Network Design in the Supply Chain

Facility role What role should each facility play? What processes are performed at each facility?

Facility location Where should facilities be located?

Capacity allocation How much capacity should be allocated to each facility?

Market and supply allocation What markets should each facility serve? Which supply sources should
feed each facility?

5|Page
 PGXPM152BAP BALA

Strategic Factors A firms competitive strategy has a significant impact on network design decisions
within the supply chain. Firms that focus on cost leadership tends to find the lowest cost location for their
manufacturing facilities, even if that means locating very far from the markets they serve. Firms that focus
on responsiveness tend to locate facilities closer to the market and may select a high-cost location if this
choice allows the firm to react quickly to changing market needs.

Optimizing logistics network - Optimizing network nodal points and inter-related transport flows.

Designing the supply chain network involves

Designing the distribution network- role of distribution, factors influencing distribution

Design options, e-business and its impact

Distribution networks in practice

Network design in the supply chain, role of network

Factors affecting the network design decisions, modeling for supply chain

Distribution is a key driver of the overall profitability of a firm because it affects both the supply chain cost
and the customer experience directly. The appropriate distribution network can be used to achieve a
variety of supply chain objectives ranging from low cost to high responsiveness

For Example: Dell distributes its PCs directly to end consumers, whereas companies such as HP distribute
through resellers. Dell customers wait several days to get a PC, whereas customers can walk away with an
HP PC from a reseller.

Performance of a distribution network should be evaluated along two dimensions:

Customer needs that are met

Cost of meeting customer needs

The customers needs that are met influence the companys revenues, which along with cost decide the
profitability of the delivery network.

Changing the distribution network design affects the following supply chain costs:

Inventories

Transportation

Facilities and handling

Information

6|Page
 PGXPM152BAP BALA

Optimizing logistics network:

Transportation management is different from other processes in the supply chain as many of those
processes happen only once, but transportation must be addressed again and again throughout the life
cycle of product development and delivery. distribution network modeling decisions to be made from a
holistic perspective by giving companies complete end-to-end supply chain visibility. The ability to
manage and simulate the entire supply chain enables you to move from a static collection of discrete
points and events to a dynamic, connected DATA CHAIN that flows and adapts with ever changing
supply chain events and business conditions.

The Benefits of Logistics Network Optimization:

Reduced logistics costs

Improved distribution network and asset utilization

Increased inventory turns

Improved customer delivery compliance

Increased carrier capacity and collaboration

Improved cost to service

Reduced cross functional waste

Increased visibility to out of plan/network activity to promote root cause awareness and corrective
action

Supply chain resiliency ability to survive, adapt, and grow during turbulent change

From Our learning we have observed that

24% of goods vehicle kms in Europe is running empty

When carrying load, vehicles are typically only 57% loaded as a percentage of maximum gross weight. So
Transport network restructuring is necessary. Below are the options that we explored during our class
session.

Freight Forwarders
Vendor-Managed Inventory
Third-party Logistics Providers (3PLs)
Cross Docking
Collaboration with other firms to match weight/volume.
7|Page
 PGXPM152BAP BALA

Cross Docking

There are numerous factors that need to be considered when making an informed decision to implement
cross-docking into an organisation. Every organisation has their priorities in terms of costs, warehouse
space, geographical specifics, and product types. Therefore the advantages and disadvantages of
implementing cross-docking into your organisations supply chain need to be considered and weighed up in
order to make the right decision. The below list of advantages and disadvantages is designed to assist in
this process.

Advantages and Disadvantages of cross-docking; using Merloni case.

Advantages of cross-docking

Reduced labour costs (no packaging and storing). Cost of warehouse maintenance staff.

No need for large warehouse areas

Handling time of material is reduced. In Merloni case transport is from central warehouse to regional

warehouse then again to distributors and retailers, Instead of directly from central ware house to
Distributors and Retailers

Time to reach customer is reduced.

Product quality is easier to screen

Products are moved more quickly through a cross dock.

Warehouse need is reduced to store the products. In Merloni case we dont have the need of regional

warehouses.

Transportation has fuller loads for each trip therefore a saving in transportation costs while also being

more environmentally friendly. Transport using the large and small trucks of Merloni is well planned
and up to capacity.

Elimination of processes such as pick-location and order picking. Orders are more effectively fulfilled.

Cross docking terminals are less expensive to construct than your average warehouse. Construction of

T junctions is way less than a proper warehouse.

High turnover of products with everything moving quickly through the cross docking
terminal. Products usually spend less than 24 hours here.

Products destined for a similar end point can be transported as a full load, reducing overall

distribution cost.

8|Page
 PGXPM152BAP BALA

Disadvantages of cross-docking

Weather and Geographical conditions play an important role and cross docking should be planned in

all year accessible locations not like in Merloni where the Central warehouse was not accessible in the
Winter etc.

Much management attention, time and planning is necessary to make it work effectively. As is the case

in Merloni where Managers had a lot of overheads in terms of time and planning.

Setting up the cross docking terminal structures would take quite a bit of time and capital to start

with. This was not the case in Merloni but if it was a permanent solution it would have taken
considerable cost.

Some suppliers would not be able to deliver customer ready products to the cross docking

terminal. This was not the case in Merloni but some Assemble to order or configurable goods have
these issues.

A sufficient number of transport carriers are necessary for the cross docking terminal to run smoothly,

therefore is mainly dependent on trucking. This was the case where minimum Two Large trucks and
three small trucks were the minimum requirement in Cross Docking

A high volume of product is necessary to be cost effective. This was the case in Merloni for running full

truck load to minimize cost.

The organisation has to have a comfortable reliance that their suppliers will deliver the right product

in its right amount to the cross docking terminal on time which doesnt leave too much room for
error. This again was the case in Merloni where meticulous planning was required from the Managers.

Some Companies with best Cross docking techniques

Best Example:

BMW AG / Kuehne + Nagel

The logistics company Kuehne + Nagel is operating logistics centers for BMW in Germany. Kuehne + Nagel
organises the transportation services between the supply center and the BMW production sites
Additionally, the logistics company is in charge of warehousing services, sequencing, the commissioning of
components, reverse logistics, customs clearance and various security tasks. This supply center is used as a
cross-dock to supply all Bavarian BMW plants. The company has got more than 1,000 locations in more
than 100 countries.

9|Page
 PGXPM152BAP BALA

Volkswagen AG / Schnellecke Logistics

Volkswagen implemented a cross docking center in Bratislava (Slovakia). Suppliers deliver their products
to this center where the products will be sorted and bundled. The aim is to maximize the loading factor of
the outgoing trucks. These trucks move the goods to the single plants of company VW then. Different
forwarding agencies are in charge for the supply of the cross docking center. The cross docking center
itself is managed by another logistics company. The distribution to the plants of Volkswagen is organized
by forwarding agencies.

Logwin / Douglas

The logistics service provider, Logwin is operating a new cross docking center in the Western region next
to Stuttgart since 2010. User of the center is the perfume selling company Douglas. This center offers also
some other value added services. About 80 agencies are supplied by this cross docking center. Each ingoing
package will be unpacked, scanned, priced and protected if necessary or obligatory. Then, the products will
be put into reusable boxes. The products will be sorted so that the right products will be next to each other
in the shelf in the shops. The agencies get the boxes which are allocated to a special shelf and not mixed.
This is a big advantage for the agencies to fill up their shops with new supplies. The agencies get boxes
instead of partial shipment. It reduces storage costs and saves time. This time period can be used for
providing customers in the agencies.

3. As part of our course, we had discussed the various challenges that are faced within the
apparel industry. Please answer the following questions focused on this industry. (30 points)

a) First, in a very general sense, discuss some of the key challenges that are faced by the
industry and illustrate how these challenges have been (or could be) overcome (Hint: in addition
to your own experience, you must also use the lessons you learned from the cases, articles and the
global supply chain simulation game).

A wide range of challenges faced by apparel industry starting from fickle fashion trends to highly
seasonal buying, has always made this category tough. But there are five bigger barriers in apparel market.

Appealing to a radically shifting customer base (Needs)

Figuring out how to leverage big data
Standing out from the competition
Appealing to online and digital-savvy shoppers
Weathering challenging economic trends

10 | P a g e
 PGXPM152BAP BALA

Responsiveness is characterised by short time-to-market, the ability to scale up (or down) quickly and the
rapid incorporation of consumer preferences into the design process. it is argued that conventional
organisational structures and forecast-driven supply chains are not adequate to meet the challenges of
volatile and turbulent demand which typify fashion markets today. Instead, the requirement is for the
creation of an agile organisation embedded within an agile supply chain.

Apparel fashion markets as typically exhibiting the following characteristics:

a. Short life-cycles the product is often ephemeral, designed to capture the

mood of the moment: consequently, the period in which it will be saleable is likely to be very short and
seasonal, measured in months or even weeks.

b. High volatility demand for these products is rarely stable or linear. It may be influenced by the
vagaries of weather, films, or even by pop stars and footballers.

c. Low predictability because of the volatility of demand it is extremely difficult to forecast with any
accuracy even total demand within a period, let alone week-by-week or item-by-item demand.

d. High impulse purchasing many buying decisions by consumers for these products are made at the
point of purchase. In other words, the shopper when confronted with the product is stimulated to buy it,
hence the critical need for availability.

Todays fashion market place is highly competitive and the constant need to refresh product ranges
means that there is an inevitable move by many retailers to extend the number of seasons i.e. the
frequency with which the entire merchandise within a store is changed. In extreme cases, typified by the
successful fashion retailer Zara, there might be twenty seasons in a year. The implications of this trend for
supply chain management are clearly profound.

The combined effect of these pressures clearly provides a challenge to logistics management. Traditional
ways of responding to customer demand have been forecast-based, with the resultant risk of over-stocked
or under- stocked situations.

Much of the pressure for seeking low cost manufacturing solutions has come from retailers. At the same
time there have been moves by many retailers in the apparel business to reduce significantly the number of
suppliers with whom they do business. This supply-base rationalisation has been driven by a number of
considerations, but in particular by the need to develop more responsive replenishment systems -
something that is not possible when sourcing is spread over hundreds, if not thousands, of suppliers.
Shorter lead-times mean, by definition that the forecasting horizon is shorter - hence the risk of error is
lower.

11 | P a g e
 PGXPM152BAP BALA

There are three critical lead-times that must be managed by organisations that seek to compete
successfully in fashion markets:

Time-to-Market - how long does it take the business to recognize a market opportunity and to translate
this into a product or service and to bring it to the market?

Time-to-Serve - how long does it take to capture a customers order and to deliver the product to the
retail customers satisfaction?

Time-to-React - how long does it take to adjust the output of the business in response to volatile demand?
Can the tap be turned on or off quickly?

The Solution would be Agile Supply Chain

In recent years there has been a growing interest in the design and implementation of agile supply chain
strategies. The idea of agility in the context of supply chain management focuses around responsiveness.
Conventional supply chains have been lengthy with long lead-times and hence, of necessity, have been
forecast-driven. By contrast, agile supply chains are shorter and seek to be demand-driven. A further
distinction is that because conventional supply chains are forecast-driven that implies that they are
inventory-based. Agile supply chains are more likely to be information-based.

By their very nature, fashion markets are volatile and difficult to predict. Hence is the need for agility.

It has been suggested that an agile supply chain has a number of characteristics. Specifically the agile
supply chain is:

market sensitive it is closely connected to end-user trends

virtual it relies on shared information across all supply chain partners

network-based it gains flexibility by using the strengths of specialist players

process aligned it has a high degree of process interconnectivity between the network members

b) Second, compare and contrast how Sport Obermeyer & Zara use their supply chain to tackle
the uncertain fashion market.
Below is the comparison between Sport Obermeyer and Zara
Comparison:
Zara setup had perfect quick response agile supply chain but the Supply chain strategy of Sport
Obermeyer needs reworking.

12 | P a g e
 PGXPM152BAP BALA

Zara had no automatic integration of sales data and Sport Obermeyer had product category
challenges & Operational changes to reduces the cost of mismatched supply and demand
Zaras Organizational setup has been aligned to meet the demand, planning and forecasting was
accurate but Sport Obermeyers capacity planning and forecasting was inaccurate.
Zaras Linkage between supply and demand is in real time but Sport Obermeyer was out of control.
Zaras quality and reliability of product were good but Sport Obermeyer depends on the Quality and
reliability of products produced in China
For Zara Order Quantity depends on demand variability and catered to customers expectation, on
the other hand Sport Obermeyer a larger minimum order need to be placed and quota restrictions
due to outsource in China.
Zaras materials are from single supplier where Sport Obermeyer raw material is procured from
different vendors from different countries increased the lead rime.

Recommendations

Sport Obermeyer

Obtain early feedback from retailers and use historic data to improve forecast
Improve quality of labor and decrease lead time to obtain raw materials
Introduce drop shipping and establish new distribution centers
Target improvements in new markets to gain market share to increase profits
Increase bargaining power with suppliers by ordering via big supplier that can commit on timeline
Collect stock raw materials which is based on Ski cloth production
Increase distribution channel to a country that have different period of product usage

Zara - ensure its information decoupling point is more upstream than downstream.

Zara should most likely develop a second central distribution center in the Americas to decrease
logistics in order to deliver fashionable goods in a faster manner.
Their second central distribution facility should be an expansion of one of their smaller distribution
centers located in Argentina, Brazil or Mexico.
Upgrade IT systems considering the market competitors
Use software which is used by its suppliers to ensure seamless flow of information.
Ensure its information decoupling point is more upstream than downstream.
Zara could differentiate its product from location to location to increase shopper traffic.

13 | P a g e
 PGXPM152BAP BALA

4. The beer game is designed to showcase how variability (bullwhip effect) manifests in supply
chains. Answer the following questions based on your experience, knowledge of the game and the
Barilla case: (also provide appropriate real-life examples you have encountered). (25 points)

a. Write a few lines about your personal experience while playing the game.
What do you think were the main reasons for achieving negative profit when you played the
game the first time?
In your mind, was there anything that was not realistic in the game?

The object of the game is to meet customer demand for cases of beer through the
distribution side of a multi-stage supply chain with minimal expenditure on back orders and inventory.
There are four stages, manufacturer, distributor, supplier, retailer, with a two week communication gap of
orders toward the upstream and a two week supply chain delay of product towards the downstream. The
Beer Game introduced a real life supply chain scenario with one major variable which is not realistic i.e.,
the total profitability of the complete network. Mostly this Variable is not available, not calculated or
simply not possible to calculate.

The Transparency required for calculating this variable was simply not possible in the real world unless
the complete supply chain was owned by a single entity. My Initial goal in the game or any other game is
the score for me and that was what I was concentrating. This blindsided me to other contributing factors.
And another point is even after realization of this phenomenon I was not able to control it due to
communication gaps between my peers. Finally after communication was established and information was
passing the streamlining started. Setting up infrastructure is just one aspect of the puzzle making your
peers understand about the total network profitability is way different and Majority lies in competition
and greed.

Results are on for Negative Profitability

Lack of Information exchange

Erratic Demand Pattern

Individual greed

Lack of Education on Total Profitability

Speculation at different levels

No understanding of peers roles and responsibilities

14 | P a g e
 PGXPM152BAP BALA

So this game need to be played in a manner by not over processing. Only place the order for the incoming
quantity requirement. If you try to over stock a little then it leads to disaster. For A seamless supply chain
profitability the stock in the warehouse should be adequate to supply t in coming demand only.

b. What do you think are the reasons for the bullwhip effect along the supply chain? Provide
some suggestions (at least three) that would reduce the bullwhip effect along the supply chain.
Discuss your suggestions in sufficient detail.

Bullwhip effect is a phenomenon in Forecast driven distribution channels. It is the increase

in the variability of order as it moves from the Customer to the Manufacturer

Below are the reasons for the bullwhip effect along the supply chain
Un-forecasted sales promotions
No proper Sales incentives
Lack of customer confidence
Customers turning back sales orders
Freight incentives
Erratic Demand pattern
Speculation at different levels along the supply chain
Lack of Information exchange
Panic Ordering
Fear of Opportunity Loss

Bull Whip effects results in

Excessive inventory
Poor product forecast
Insufficient capacities
Long backlogs
Uncertain Product planning
Lost customer service
Lengthened lead time
Lost sales
Unnecessary adjusted capacity

15 | P a g e
 PGXPM152BAP BALA

Some of the models that can counter this effect are

Avoid Multiple Demand Forecast Updates

Just in Time replenishment

Vendor Managed Inventory

Improve communication along the supply chain

Strategic Partnership

Break Order Batches

Stabilize Prices

Countermeasures to shortage gaming

Avoid Multiple Demand Forecast Updates

Forecasting at each level of supply chain.

Processing the demand input from the immediate downstream member.

The downstream data should be made available to the upstream site VMI/CRP

Companies using VMI are P&G, Nestle, HP etc.

Multiple organizations in a supply chain should use the same forecasting method.

Bypassing the downstream site like in case of Dell.

Just In Time Replenishment/Inventory.

The dynamic time and period of Ordering of goods based on Economic Order quantity is called as Just In
Time Ordering. Alternatively Just-in-time (JIT) inventory refers to an inventory management system with
objectives of having inventory readily available to meet demand, but not to a point of excess where you
must stockpile extra products. Maintaining inventory takes time and has costs, which is what motivates
companies to implement JIT programs.

Break Order Batches

Variable, non-periodic schedule from the downstream.

Total Cost = Ordering Cost + Carrying Cost

Use of Electronic Data Interchange (EDI).

16 | P a g e
 PGXPM152BAP BALA

Use of full-truckloads Mixed-SKU (P&G), Composite Distribution (eg. TESCO, Sainsbury), third
party logistics.

Stabilize prize

Reduce the frequency and level of wholesale price discounting.

No exaggeration of orders.

Vendor-managed inventory

Vendor Managed inventory allows the supplier to monitor downstream demand and to make a well-
informed decision about how much to keep on-hand and how much to ship to its customers. Thus, the
supplier does not have to rely on order data to forecast demand and thus reduces the bullwhip effect.

Countermeasures to shortage gaming

Proportional rationing schemes are countered by allocating units based on past sales. Ignorance of supply
chain conditions can be addressed by sharing capacity and supply information. Unrestricted ordering
capability can be addressed by reducing the order size flexibility and implementing capacity reservations.
For example, one can reserve a fixed quantity for a given year and specify the quantity of each order
shortly before it is needed, as long as the sum of the order quantities equals to the reserved quantity.

Stabilize prices

High-low pricing can be replaced with everyday low prices (EDLP). Special purchase contracts can be
implemented in order to specify ordering at regular intervals to better synchronize delivery and purchase.

Improve communication along the supply chain

Retailers notifying firms upstream of sales promotions will help clarify demand signals from
consumers

Improved information will improve demand forecasts upstream in the supply chain.

Work with firms upstream and downstream in the supply chain

Create smaller order increments to decrease time between orders. Order processing will
become closer to real-time.

Work to develop consistent pricing of products to avoid demand fluctuations from the sale of
inexpensive products.

17 | P a g e
 PGXPM152BAP BALA

Information sharing can be most effective and least disruptive for all concerned when done by
implementing the available technological tools, which would accomplish the process in a controlled and
secured way thereby streamlining the global supply chain operations.

c. While the beer game involved only a single product, the Barilla case discusses variability
within a multiple product supply chain. Discuss how you think the Barillas JITD program
would help it overcoming the variability in their supply chain?

This amplification in demand variability in the supply chain is known as the bullwhip effect,
and it strains Barillas manufacturing and logistics operations.

Several factors contribute to this effect:

1. Transportation discounts, which induce distributors to order larger quantities less frequently

2. Trade promotions and volume discounts that create demand fluctuations.

3. Delivery leads times of an average of 10 days from Barilla to the distributors.

4. Product proliferation, which makes forecasting more difficult.

5. Poor communication between parties in the supply chain.

6. Sequential decision-making process in the supply chain, i.e., no collaboration.

The JITD program transfers decision-making authority for determining Barilla-distributor shipments from
the distributor to Barilla. Rather than simply filling orders specified by the distributor, Barilla would
monitor the flow of its product through the distributors warehouse, and then decide what to ship to the
distributor and when to ship it. This system alleviates many of the problems listed above, and enables
Barilla to make manufacturing and logistics decisions that benefit the entire system.

The most significant internal barrier to JITD is raised by the sales reps, who feel that JITD would diminish
their role in managing inventory and setting up promotions, potentially threatening their job security.
JITD would help the sales reps to manage the orders more efficiently by increasing visibility of the demand
process. JITD is not a substitute for the sales force; it is a tool that is made available to them for better
customer service

The proposed system will be effective if it can be implemented correctly, and indeed, subsequent results
showed that JITD was very effective. In order to show value, it would be useful to demonstrate that JITD
benefits the distributors (lowering inventory, improving their service levels, and increasing their returns on
assets) by running experiment at one or more of Barillas 18 depots. If customers will not agree to JITD,
they may at least agree to collaborative forecasting or increased supply chain visibility

18 | P a g e
 PGXPM152BAP BALA

JITD will improve Barillas visibility with the trade and make distributors more dependent on Barilla it
should improve the relationship between the distributor and Barilla. Planning can be improved because
the distributor data will be available to Barillas sales organization. JITD will enhance the selling
opportunity.

Customer service would be increased because of JITD because the retailers can be as accurate as possible
to the customers on informing them about when the product will be available. Have in-depth discussions
about the JITD proposal with the distributor. Speak to the distributor on importance of JITD and how it
will decrease the inventories and improve their fill rate to their stores.

Provide in-house pilots of the JITD and explain the distributor of its benefits. Something like what Toyota
did do its Supply Chain). Increase the distributors attraction by giving them incentives if they go the JITD
way. Once they understand about the benefits, the incentives can be removed.

Have a strategic partnership like Vendor Managed Inventory. Try to have a global optimization rather
than a local optimization the same needs to be done for individual products to ensure the effectiveness in
the supply chain.

- END -

19 | P a g e