The Value of

Information

David Simchi-Levi
Philip Kaminsky
Phil Kaminsky
kaminsky@ieor.berkeley.edu
Edith Simchi-Levi
 Value of Information
 “In modern supply chains, information replaces inventory”
– Why is this true?
– Why is this false?
 Information is always better than no information. Why?
 Information
– Helps reduce variability
– Helps improve forecasts
– Enables coordination of systems and strategies
– Improves customer service
– Facilitates lead time reductions
– Enables firms to react more quickly to changing market conditions.

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 The Bullwhip Effect
and its Impact on the Supply Chain

 Consider the order pattern of a single color

television model sold by a large electronics
manufacturer to one of its accounts, a national
retailer.

Figure 1. Order
Stream

Huang at el. (1996), Working paper, Philips Lab

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 The Bullwhip Effect
and its Impact on the Supply Chain

Figure 2. Point-of-sales
Data-Original

Figure 3. POS Data After

Removing Promotions

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 The Bullwhip Effect
and its Impact on the Supply Chain

Figure 4. POS Data After Removing Promotion & Trend

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Higher Variability in Orders Placed by
Computer Retailer to Manufacturer Than
Actual Sales

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Increasing Variability of Orders
Up the Supply Chain

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 We Conclude ….

 Order variability is amplified up the

supply chain; upstream echelons
face higher variability.
 What you see is not what they

face.

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 What are the Causes….
 Promotional sales
– Forward buying
 Volume and transportation discounts
– Batching
 Inflated orders
– IBM Aptiva orders increased by 2-3 times when
retailers thought that IBM would be out of stock
over Christmas
– Motorola cell phones
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 What are the Causes….

 Single retailer, single manufacturer.

– Retailer observes customer demand, Dt.
– Retailer orders qt from manufacturer.

Dt qt
Retailer Manufacturer
L

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 What are the Causes….
 Promotional sales
 Volume and transportation discounts

 Inflated orders

 Demand forecasting

– Order-up-to points are modified as forecasts

change – orders increase more than
forecasts
 Long cycle times
– Long lead times magnify this effect
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 What are the Causes….
 Single retailer, single manufacturer.
– Retailer observes customer demand, Dt.
– Retailer orders qt from manufacturer.

Dt qt
Retailer Manufacturer
L

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 How big is the increase?

 Suppose a P period moving average is used.

2
Var (q ) 2L 2L
 1  2
Var ( D) P P

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Var(q)/Var(D):
For Various Lead Times
14
L=5
12

10

8 L=3
6

4 L=1
L=1
2

0
0 5 10 15 20 25 30

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Consequences….

 Increased safety stock

 Reduced service level

 Inefficient allocation of

resources
 Increased transportation costs

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Multi-Stage Supply
Chains
 Consider a multi-stage supply chain:
– Stage i places order qi to stage i+1.
– Li is lead time between stage i and i+1.

qo=D Retailer q1 Manufacturer q2 Supplier

Stage 1 L1 Stage 2 Stage 3
L2

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Multi stage systems

 Centralized: each stage bases orders on retailer’s

forecast demand.
2
k
 k

2 Li 2  Li 
Var (q k )
 1 i 1
  i 1 2 
Var ( D) P P
 Decentralized: each stage bases orders on
previous stage’s demand
k 
2 Li 2 Li 
2
Var (q k )
  1   2 
Var ( D) i 1  P P 

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Multi-Stage
Systems:Var(q )/Var(D)
k

30
25 Dec, k=5

20
15
Cen, k=5
10
Dec, k=3
5 Cen, k=3
k=1
0
0 5 10 15 20 25

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 The Bullwhip Effect:
Managerial Insights
 Exists, in part, due to the retailer’s need to
estimate the mean and variance of demand.
 The increase in variability is an increasing function
of the lead time.
 The more complicated the demand models and
the forecasting techniques, the greater the
increase.
 Centralized demand information can significantly
reduce the bullwhip effect, but will not eliminate it.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Coping with the Bullwhip Effect
in Leading Companies

 Reduce uncertainty
– POS
– Sharing information
– Sharing forecasts and policies
 Reduce variability
– Eliminate promotions
– Year-round low pricing
 Reduce lead times
– EDI
– Cross docking
 Strategic partnerships
– Vendor managed inventory
– Data sharing

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Example:
Quick Response at Benetton
 Benetton, the Italian sportswear
manufacturer, was founded in 1964. In 1975
Benetton had 200 stores across Italy.
 Ten years later, the company expanded to
the U.S., Japan and Eastern Europe. Sales
in 1991 reached 2 trillion.
 Many attribute Benetton’s success to
successful use of communication and
information technologies.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Example:
Quick Response at Benetton
 Benetton uses an effective strategy, referred to as
Quick Response, in which manufacturing,
warehousing, sales and retailers are linked
together. In this strategy a Benetton retailer
reorders a product through a direct link with
Benetton’s mainframe computer in Italy.
 Using this strategy, Benetton is capable of
shipping a new order in only four weeks, several
week earlier than most of its competitors.

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 How Does Benetton
Cope with the Bullwhip Effect?
1. Integrated Information Systems
• Global EDI network that links agents with production

and inventory information

• EDI order transmission to HQ
• EDI linkage with air carriers
• Data linked to manufacturing
2. Coordinated Planning
• Frequent review allows fast reaction
• Integrated distribution strategy
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Information for Effective
Forecasts
 Pricing, promotion, new products
– Different parties have this information
– Retailers may set pricing or promotion without
telling distributor
– Distributor/Manufacturer might have new
product or availability information
 Collaborative Forecasting addresses these
issues.

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Information for
Coordination of Systems
 Information is required to move from local to global
optimization
 Questions:
– Who will optimize?
– How will savings be split?
 Information is needed :
– Production status and costs
– Transportation availability and costs
– Inventory information
– Capacity information
– Demand information

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Locating Desired
Products
 How can demand be met if products are not
in inventory?
– Locating products at other stores
– What about at other dealers?
 What level of customer service will be
perceived?

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi

 Lead-Time Reduction
 Why?
– Customer orders are filled quickly
– Bullwhip effect is reduced
– Forecasts are more accurate
– Inventory levels are reduced
 How?
– EDI
– POS data leading to anticipating incoming
orders.
McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi
 Information to Address
Conflicts
 Lot Size – Inventory:
– Advanced manufacturing systems
– POS data for advance warnings
 Inventory -- Transportation:
– Lead time reduction for batching
– Information systems for combining shipments
– Cross docking
– Advanced DSS
 Lead Time – Transportation:
– Lower transportation costs
– Improved forecasting
– Lower order lead times
 Product Variety – Inventory:
– Delayed differentiation
 Cost – Customer Service:
– Transshipment

McGraw-Hill/Irwin © 2003 Simchi-Levi, Kaminsky, Simchi-Levi