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Lean Supply Chains:
The Foundation

System’s Perspective
 Understand
supply chain dynamics and adopt a
holistic view.
 Consider the business ecosystem in which you are
operating.

Supply Chain Dynamics
 Enterprises
can experience huge variations at each
step in the chain, with variations typically more
pronounced the further upstream the enterprise is
from the ultimate user.
Demand Distortion

Results in:
 Larger
inventory carrying costs
 Lost sales from stock outs
 Lack of responsiveness to customer demand
Bullwhip Effect
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A slight motion of the handle of a bullwhip can make
the top thrash wildly at up to 900mph.
Increasing demand variability as you move upstream.
Most demand distortion is caused by the supply chain
itself, not by the customer.
Results in:
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excessive inventory investment
poor customer service
lost revenues
misguided capacity planning
ineffective transportation
Ineffective production schedules.
The Beer Game

Underscores the importance of understanding supply
chain dynamics and applying systems thinking to
coordinate activities within and between enterprises.
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Explains the crucial role lead times play in enhancing
or inhibiting competitiveness
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Elaborates on the role of information systems in the
lean supply chain.
Assumptions
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Assumes a linear SC, 4 enterprises, one type of beer
Factory
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Distributor
Wholesaler
Retailer
Goal is to manage demand as imposed by it’s customer
Each enterprise has only one manager
Runs for 50 wks.
Assumptions
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Each week, an enterprise receives an order from
downstream customers and places an order
upstream.
Two week lead time between when an order is
placed and when it is received.
Another two week lead time before the order is
delivered.
Each enterprise starts with 12 cases of beer.
At the beginning of each week we know what
demand will be.
Playing the game
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Everyone acts in their own self
interest on the basis of their own
forecasts
The system is in a steady state with
demand at four cases each week.
In week 5, demand is disrupted to 8
cases a week and remains constant.
Each player’s ordering policy is
based on two rules
Demand Forecast Rule
The forecast rule: The weekly demand for
each of the next four weeks is the
average of the weekly demand over the
four most recent weeks. Four period
moving average: (4+4+4+4)/4=4
Order Quantity Rule
Given the forecasts, the amount ordered is
just enough to replenish the ending
inventory (Four weeks from now-when
the order arrives) to a target of 12 cases.
12+(Forecast demand for next 4 weeks)(current inventory)-(Orders already
placed for the next three weeks.
week 4:Customer/Retailer/Wholeseller
Customer and Retailer: Week 4
Forecast Demand: (4+4+4+4)/4
Demand (this period)
Demand(next 3 periods): 4+4+4
Target Safety Stock
Order
4
4
12
12
4
4 Order just received
12 Orders on the way: 4+4+4
12 Inventory on hand
Retailer and Wholeseller: Week 4
Forecast Demand: (4+4+4+4)/4
Demand (this period)
Demand(next 3 periods): 4+4+4
Target Safety Stock
Order
4
4
12
12
4
4 Order just received
12 Orders on the way: 4+4+4
12 Inventory on hand
week 5: Customer/Retailer/Wholeseller
Customer and Retailer: Week 5
Forecast Demand(4+4+4+8)/4
Demand (this period)
Demand(next 3 periods): 5+5+5
Target Safety Stock
Order
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4  8 cases
The retailers order to the wholesaler increased by
200%
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4 Order just received
12 Orders on the way: 4+4+4
8 Inventory on hand
Consumer demand increased by 100%
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5
8
15
12
12
4  12 cases
The retailer doubled the variation in demand
week 5: Customer/Retailer/Wholeseller
Retailer and Wholeseller: Week 5
Forecast Demand (4+4+4+12)/4
Demand (this period)
Demand(next 3 periods): 6+6+6
Target Safety Stock
Order
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6
12
18
12
20
4 Order just received
12 Orders on the way: 4+4+4
4 Inventory on hand
The wholesaler’s order to the distributor increased by
400%.
 4  20
week 5: Wholeseller/Didtributor/Factory
Wholeseller and Distributor: Week 5
Forecast Demand (4+4+4+20)/4 8
Demand (this period) 20
Demand(next 3 periods): 8+8+8 24
Target Safety Stock 12
Order 36
Distributor and Factory: Week 5
Forecast Demand (4+4+4+36)/4
Demand (this period)
Demand(next 3 periods): 12+12+12
Target Safety Stock
Order
12
36
36
12
68
4 Order just received
12 Orders on the way: 4+4+4
-4 Inventory on hand
4 Order just received
12 Orders on the way: 4+4+4
-20 Inventory on hand
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Retailer
Wholesaler
Distributor
Factory
200%
400%
800%
1,600%
The variation doubles at each stage.
However, of the 64-case increase in the factory's
orders, only four cases were directly attributable to a
change in consumer demand.
The lead times present in this value stream created
94 percent of the variation observed in the factory’s
orders.
The Implications of Lead Time
on the Bullwhip Effect
Retailers
Manufacturers
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Warehouses/
Distributors
Lead times significantly exacerbate the bullwhip effect
Reducing lead time, in combination with improved
visibility along the supply chain, can significantly and
positively relieve the bullwhip effect
The impact of information
Assume all of the same factors except
that each stage is aware of the
customer’s orders.
 Assume we know that demand for week
six and onward is five cases.
 Following exactly the same steps.
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The impact of information
Forecast Demand: (4+4+4+8)/4
Demand (this period)
Demand(next 3 periods):5+5+5
Target Safety Stock
Order
5
8
15
12
12
4 Order just received
12 Orders on the way:4+4+4
8 Inventory on hand
Forecast Demand
Demand (this period)
Demand(next 3 periods):5+5+5
Target Safety Stock
Order
5
12
15
12
16
4 Order just received
12 Orders on the way:4+4+4
4 Inventory on hand
Forecast Demand
Demand (this period)
Demand(next 3 periods):5+5+5
Target Safety Stock
Order
5
16
15
12
20
4 Order just received
12 Orders on the way:4+4+4
0 Inventory on hand
Forecast Demand
Demand (this period)
Demand(next 3 periods):5+5+5
Target Safety Stock
Order
5
20
15
12
24
4 Order just received
12 Orders on the way:4+4+4
-4 Inventory on hand
Retailer
Retailer orders 12 cases- a 200%
increase
Wholesaler
Wholesaler orders 16 cases- a 300%
increase
Distributor
Distributor orders 20 cases- a 400%
increase
Manufacturer
Manufacturer order Raw Materials to make
24 cases- a 500% increase
The Impact of Information on the
Bullwhip Effect
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Perfect forecasting does not eliminate the
bullwhip effect
Lesson: The bullwhip effect is present even if
there is perfect information about the future that
is shared among all channel partners.
The Impact of Lead Time on the
Bullwhip Effect
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Lead times can multiply the variation in demand and
so everyone in the supply chain should be working to
reduce lead times.
The implications of Little's Law are that when
inventory in the supply chain is high, lead times
increase, and, conversely, longer lead times result in
more inventories in the pipeline.
This problematic and cyclical relationship between
lead times and inventory is a powerful reason for
reducing lead times.
Structure Drives Behavior:
Causes of the Bullwhip Effect
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Lack of visibility
Long lead time
Many stages in the supply chain
Lack of pull signals
Order batching
Price discount and promotions
Forward buying
Rationing
Other Behaviors that Cause the
Bullwhip Effect
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Over-reaction to backlogs
Neglecting to order to reduce inventory
Hoarding customers
Shortage gaming for customers
Demand forecast inaccuracies
Attempts to meet end-of-month metrics
Ways to Mitigate the Bullwhip Effect
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Reduce lead times
Use/sharing of POS data
Smaller orders
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Use stable pricing, “everyday low prices”
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Work with suppliers on more frequent deliveries of smaller
order increments
Levels out customer demand
Allocation based on past sales