The bullwhip effect

Posted on 18 Apr 2008 by The Manufacturer

Supply chain optimisation is not just a matter of IT or complex algorithms, says Malcolm Wheatley, it relies on understanding demand and capacity, and bringing about change

A t the Carlisle plant of United Biscuits, an experiment is underway. Aided by The Manufacturing Institute, a single production line is being planned in a different manner. The goal? Bringing an end to the disruption caused by the notorious ‘bullwhip’ effect, where small changes in end customer demand become amplified as they travel down the supply chain, from MRP-based forecasting process to MRPbased forecasting process.
Inventory levels have been reduced by 15 per cent between September 2007 and early February 2008 – which is short of the targeted 24 per cent reduction, but still declining. In addition, explains Peter Scott, head of manufacturing change at the plant, the performance of the line had improved, too: as anticipated, the new planning method was seeing less disruption and fewer changeovers caused by breaking into the schedule in order to manufacture rush orders.
From an operational perspective, the benefit is twofold. “Productivity has improved, which lowers costs, and the additional capacity that has resulted has generated extra output that we’re able to sell,” says Scott. Translated right across the plant – one of the company’s largest, with over a thousand employees – the gains would be significant. Over the company’s other 10 plants, even more so.
Yet the alternative planning approach is hardly rocket science. Strip away the bullwhip effect, says Carl Tomlinson, business improvement consultant at the Institute, and the reality is that most weeks, most customers order roughly the same products. The new production plan simply involves manufacturing this core level of demand each week, adjusted for sales promotions and inventory fluctuations.
The logic is clear, says Tomlinson. “If you can get the heartbeat and drumbeat of the factory right, then that heartbeat and drumbeat drive the supply chain.” And in both directions too: while the downstream supply chain to the customer has improved, so too has the upstream chain – the demands placed on packaging suppliers, for example, have become far more predictable.
United Biscuits’ success amply illustrates why manufacturers are taking an interest in supply chain optimisation. For by exploiting relatively simple techniques, they’re finding that getting the best performance from their supply chains has a direct impact on profits – and also on the ability to satisfy the customer.
To some, the phrase ‘supply chain optimisation’ equates to complex algorithms and specialist supply chain applications. In fact, it’s an interpretation that misses the real point of supply chain optimisation: the algorithms and applications analyse and make suggestions for change – but those changes can be made anyway, provided that managements can see what to change and where. And the simpler the supply chains in question, the easier it is to make those assessments. IT can help, in other words, but it isn’t essential in every case.
Among IT vendors offering supply chain optimisation technology, i2 is one of the best known, and something of a market leader. When designing supply chains for an optimised performance, notes Harjot Sachdeva, i2 director of hi-tech solutions, businesses have traditionally looked at reducing product cost and logistics costs, and examined the trade-offs between them. Sourcing from further away may offer a lower product cost, for example, but incur higher transport costs, as well as more inventory.
“Such analyses have been heavily influenced by how people within industry have been measured, though – and were in any case an incomplete analysis,” he warns. “They were ‘optimising’, but only around a subset of the total range of the factors involved in the supply chain: supply chain risk was ignored, as was the corporate and social responsibility ‘ethical sourcing’ dimension, as were the costs and time delays of the supply chain processes themselves – something that is particularly important in the case of new product introduction.”
Accordingly, he adds, while i2 provides a full range of analytical tools to bring to bear on supply chain optimisation projects, these days the company stresses the importance of taking a team-based, multi-disciplinary approach to supply chain optimisation – pulling in relevant insights and experiences not just from the manufacturing and supply chain functions, but also quality, logistics, inventory management and marketing functions. “It’s about putting people together, and collectively coming up with a result,” he says.
And those people, don’t forget, can also include suppliers and customers. Newport, Wales-based international contract electronics manufacturer CEM Axiom Manufacturing Services, for example, has found that the experience of sitting down with its customers to look at their demand profiles turned out to be very productive, explains supplies director Jim Thomas.
“It’s quite often a surprise to them when we show them their demand pattern over the last 12 months – it’s actually not something that they would necessarily look at themselves,” he says. “Their usual reaction is that the demand is much ‘lumpier’ then they thought it was – and we can then work with them to smooth it out.”
And sometimes, he explains, this smoothing can be achieved through the use of strategic buffers of either finished products or components, or even making the decision to hold inventory at different points in the supply chain. Just as frequently, though, it is achieved through the deployment of joint continuous improvement teams – from Axiom and the customer in question – looking at factors like forecast variability, and trying to figure out why it is so high, and what can be done about it.
Indeed, careful attention to the underpinning supply chain processes – as at United Biscuits and Axiom – can pay significant dividends, stresses Rowland Hayler, senior vice-president of global change leadership consulting firm Pivotal Resources, and a seasoned executive of a number of process improvement and lean six sigma initiatives.
And rarely is this more evident than in extended supply chains involving outsourcing, he argues. Very much in fashion these days, long international supply chains can bring with them significant amounts of variability and risk that are best eliminated at source, rather than attempting to optimise them away later.
“When organisations outsource manufacture to a supplier halfway around the world, a lot of maturity is required when dealing with all the challenges that this places on the supply chains,” observes Hayler. “Different cultures, different management styles, different time zones and different systems: there’s a lot of stress and strain placed on the supply chain, and simple service level agreement metrics just won’t suffice. What’s called for is end-to-end process management: get the process right, and then outsource it.”
At Bracknell-based specialist computer data input peripheral manufacturer Electrone Group, for example, precisely this strategy underpins the company’s approach to sourcing from theFar East. Volume products are outsourced in their entirety, through a supply chain honed and used to dealing with volume shipments of essentially identical products, explains Mike Buchanan, Electrone’s head of marketing. But for small volumes, and specialist assembly requirements, manufacture in the west is the norm, usually in Electrone’s own facilities.
The combination, says Buchanan, is a powerful one. “It gives us the flexibility to give customers standard products at highly competitive prices, but also provide them with standard products that have been customised to suit particular operating requirements or language sets,” he explains. “It’s a combination of economies of scale, and flexibility.”
Indeed, adds Patrick Lee, Hook-based senior manufacturing specialist with the Manufacturing Advisory Service South East, the advantages of such simple segmentation can outweigh the merits of more complex IT-based approaches to supply chain optimisation.
“For small- and medium-sized manufacturers, complex IT systems can bog them down, rather than help them to optimise,” he warns. “Simple manual systems and controls can be far more powerful, have a lower administrative overhead, and are generally far easier to work with.”
An approach he particularly favours, he adds, is to first segment the product line into the well-known ‘runners, repeaters and strangers’ categories, and then create simple easily-managed supply chains to meet the needs of each category. It’s duplication, yes – but duplication to serve a purpose, with each supply chain now manageable with simple tools.
Indeed, part of the reason for supply chain complexity in the first place, he notes, is that ‘one size fits all’ supply chains are unnaturally constrained in having to cope with runners, repeaters and strangers – leading to the very conflicts and trade-offs that supply chain optimisation seeks to address. “Using the same systems and procedures to deal with every order and every customer has an intuitive appeal, but it’s a misleading one,” he argues.
That said, as with most things to do with supply chain optimisation, pragmatism is the final arbiter. Scarborough-headquartered chip and potato products manufacturer McCain Foods, for instance, is in the process of instigating just such a ‘one size fits all’ policy on the farmers who grow its potatoes, explains corporate affairs director Bill Bartlett.
McCain has always worked closely with the 300 or so farmers across the UK who grow its potatoes – in some cases, in relationships that stretch back over three generations. Now though, rather than farmers delivering their crop directly to the factory, as they have always done, a policy of consolidation is in place. All inbound potatoes are now collected from the farm by a haulier, who then transports them to the McCain factory.
“It’s not quite consolidation in the classic sense,” says Bartlett. “We’re not adding a handling or unloading operation, for example. What we are trying to do, is smooth the inbound flow of potatoes to the plant, speeding unloading and handling processes: essentially, it’s an issue of scheduling and smoothing the flow.” Writ large, supply chain optimisation is little else, of course.