A modern day Supply Chain can at first glance seem like a simple thing. The supplier supplies the raw materials to the manufacturer who assembles the parts into converted products and ships it to wholesalers/distributors who then ship it to the retailer for them to finally sell it to the end user—the customer. What people fail to realize here, is how complex it becomes when each partner in that chain is for the most part working on their own. The customer may on one day order 10 cheeses which in turn makes the retailer order 20 from the wholesaler who in turn orders 40 from the distributor who in turns order ingredients for 80 cheeses from the raw materials supplier. Each member in the supply chain wants to be sure to have enough cheeses for when the partner ahead of them in the chain orders. Nobody wants to be stuck with not having enough cheeses which in turn makes them overstock. Every time that one member orders more cheeses in order to make sure they have enough, the partner behind them in the chain thinks that customers all of a sudden have a great urge for cheeses due to the extra amount being ordered which puts them in panic mode which makes them overstock in an exaggerated manner.
Now, these complications happen with only one type of cheese… Think of how hard it is to deal with all the options that customers expect these days. A typical grocery store typically has over 30 different types of cheeses. Modern day suppliers are expected to respond to retailer demands within a matter of days with lots of different options or else they will be replaced by a more efficient supplier.
Hau Lee, a professor at Stanford, talks about the “Bullwhip Theory” in which one demand from the customer sends a ripple effect down the supply chain. In the same way that it only takes a small flick of the wrist to make the rest of the whip move over 360 degrees one small customer demand can send huge fluctuations down the line.
The example is shown by a situation that Volvo got involved in. Volvo was stuck with extra green cars which made the sales department put special deals on them so that they could sell the extra vehicles. This allowed them to sell them quickly and get rid of a lot of them; however, the production department was not informed and when they saw that the green cars were selling at a fast rate they ordered large amounts of extra green cars.
The above example is simply showing how even one member in the supply chain can run into their own problems. What often happens is that for some reason, customers will order 2 more cheeses on Wednesday than they did on Tuesday which makes the retailer assume the sales of cheeses are on the rise. The retailer than goes and orders double the amount wanting to make sure they will have enough. The ripple effect is huge down the chain since everyone thinks the sales of cheeses are on an astronomical rise. However, the increase in cheese sales was probably only due to some small sale, shortage on another type of cheese, or another unknown factor.
Customer fluctuations in demand for product may increase only slightly; however, this allows for each partner in the supply chain to make their own decision as to how much inventory is needed which leads to confusion, shortages, backlogs, and over-stocks.
Because of these issues smart organizations are starting to implement modern IT systems that are helping them cope with the ever-changing customer demands. Furthermore, members in the supply chain are learning to work together as one unit increasingly since they are slowly becoming aware that when one member suffers, all members suffer to an extent.
In a future blog I will discuss in more detail different options as to how to deal with these problems.