Professional Documents
Culture Documents
By
Arun
Table of Contents
Introduction................................................................................................................3
Supply chain Management and Drivers of supply chain performance........................3
Retail Industry supply chain overview........................................................................4
Bullwhip Effect............................................................................................................5
Reducing the “Bullwhip Effect”...................................................................................6
Mitigating Bullwhip Effect by Improving Information Accuracy...................................7
Collaborative planning, forecasting and replenishment (CPFR)...............................8
Drawbacks of CPFR..................................................................................................9
Vendor Managed Inventory (VMI)............................................................................9
Drawbacks of VMI..................................................................................................10
Mitigating Bullwhip Effect by Improving Operational Performance...........................10
Vendor consolidation.............................................................................................11
Risk in using 3PL for vendor consolidation............................................................13
Reducing Replenishment Lead time using Cross docking.....................................14
Supplier selection for cross-docking......................................................................15
Benefits of Cross-docking......................................................................................16
Disadvantages of Cross-docking...........................................................................17
Conclusion................................................................................................................18
Appendix..................................................................................................................19
Appendix A............................................................................................................19
Products suitable for cross-docking.......................................................................19
Types of cross-docking..........................................................................................19
References...............................................................................................................21
References
Page 2 of 25
Introduction
A Supply chain consists of all the participants and processes which are involved in
satisfying the customer demand. The large amount of participants, variety of
processes, dynamics and uncertainty in materials and information flow prove that
the supply chain as a complex system in which coordination is considered as a key
element for success. The lack of supply chain coordination between the participants
results in a “Bullwhip Effect”. This report analyzes different techniques followed by
Wal-Mart to improve coordination for reducing the bullwhip effect. Wal-Mart’s use of
CPFR, VMI to mitigate the bullwhip effect by improving information accuracy is
explained and the drawbacks of those systems are discussed. Wal-Mart’s
revolutionary use of cross-docking and vendor consolidation programs to achieve
coordination by improving operational efficiency is analyzed. Based on these
analyses the requirement for efficient coordination and the important points to be
considered for reduction in bullwhip effect are emphasized.
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information infrastructure and transportation to facilitate effective flow of
information and goods.
Chopra and Meindl(2007) provided the framework of supply chain drivers which
determines the performance of the supply chain as shown in Figure.1. The drivers
include three cross-functional drivers (information, sourcing and pricing) and three
logistical drivers (facilities, inventory and transportation). Wal-Mart uses all these
drivers to achieve its supply chain performance. With inventory driver, Wal-mart
pioneered cross-docking which significantly reduces stored inventory. On
transportation front, Wal-Mart runs its own fleet to keep responsiveness high. For
facilities, Wal-Mart uses centrally located DCs within its network of stores to
decrease facilities. The company has invested more in information driver(like IT) to
decrease inventory investment and to improve responsiveness. With regard to
sourcing driver, Wal-Mart identifies efficient sources and makes huge orders
allowing the suppliers to be efficient by exploiting economics of scale. Finally for
pricing driver, Wal-Mart practices EDLP (“every day low pricing” for its products.
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Figure.1. Supply chain Decision-making Framework (Source: Chopra & Meindl, 2007)
In traditional retail supply chains, the risk of stock-outs are mitigated through
carrying buffer inventory but for the past few years the retailers have realized the
additional cost of holding inventory and moved on to deal with fast moving
inventory. The change in demand variability has helped the collaborative efforts
between suppliers and retailers to respond to the demand fluctuations.
Bullwhip Effect
The key feature of supply chain management is close collaboration between the
business partners. The lack of coordination within the supply chain will result in
“Bullwhip Effect”. Skjott-Larsen (et al, 2007) states Bullwhip effect as a “swing’ in
the supply chain which describes the fluctuations caused by demand distortion (i.e,
the variance between actual orders downstream and upstream members of supply
chain) and variance propagation (i.e variance of orders as they move upstream).
Dyckhoff(et al, 2004) states that bullwhip effect occurs when there is a gap between
order and demand and it can be suppressed by avoiding or reducing the gap.
Chopra (et al, 2007) describes that the lack of coordination in which the order
fluctuations increase as they move up from retailers to manufactures will result in a
bullwhip effect as shown in a figure.2.
Page 5 of 25
Figure.2. Demand fluctuations at different stages of supply chain (Source: Chopra
and Meindl, 2007)
The main obstacles to coordination of supply chain which results in bullwhip effect
include price fluctuations, long lead times, inflated orders due to lack of information
sharing and ordering/batching large lot size as shown in fugure.3.
Page 6 of 25
Figure.3. Main Causes for ‘Bullwhip Effect’
Page 7 of 25
Table.1. Mitigation of Bullwhip Effect. (Source: Goyal, 2003)
The model shows three stages in which the collaborative planning stage establishes
and updates the relationship; the collaborative forecasting and replenishment occur
more frequently. The accuracy in forecast can be improved by participating supplier
and customer in the forecast. The retailer can compare its demand forecast with the
suppliers order forecast and if there is any discrepancies the partners get together
to decide on the replenishment quantity which rectifies the discrepancies. This
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allows the supplier to build inventory well in advance of a promotional order and
carry only safety stock at the other times.
Drawbacks of CPFR
The survey conducted by Crum and Palmatier (2004) reveals that only 41% of the
consumer goods supplier and 25% of the retailers have positive indication on the
implementation of CPFR. The reason for this high level rejection is because the
suppliers found they incur more risk even when they have the demand information
from the retailers. This is due to the fact that the retailers at the time of order
placement do not place the orders in the same pattern as the indicated demand.
This difference between the actual orders from retailers and demand information
forces suppliers to fulfill the orders that are not expected. The CPFR to be
successful both suppliers and retailers should agree on the demand management
process and open communication. Crum and Palmatier(2004) suggest that the
coordination and trust between partners should be made to belief that what is
forecasted will be same as what will be ordered to fulfill demand. Chopra and
Meindl(2007) describes other risks including the risk of information misuse and if
one of the partner changes its technology or scale then the other party is forced to
follow the suit or end the partnership.
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in VMI suppliers don’t rely on the orders from retailers this helps in lessening the
bullwhip effect. Waller (et al 1999) states that VMI helps in cutting cost for both
retailers and suppliers and also increase the customer service level. For retailers
benefits include getting frequent replenishment due to supply chain flexibility to
respond to consumer demand and ensure on-shelf availability. For suppliers, they
know in advance the amount of products they need to replenishment which helps in
better planning that results in reduction to inventory levels and transportation cost.
Wal-Mart and P&G established successful VMI program by which P&G gets access to
Wal-Mart’s daily warehouse shipment data of ‘pampers’ in order to manage flow
into Wal-Mart’s DCs. The retailer went on to provide P&G with the Point-of-sale
(POS) data which enables P&G to reduce cost and make just-in-time deliveries. To
stabilize the demand and to make Just-in-time deliveries, the promotionally-induced
fluctuations are eliminated by adopting ‘Every day low pricing’ (EDLP) strategy
(Christopher et al 2003). This helps in mitigating bullwhip effect and the partners
are benefited by continuous replenishment of nappies with reduced cost and
increased on-shelf availability.
Drawbacks of VMI
The main disadvantage for the supplier arises due to the transfer of retailers cost
to the supplier. This includes the cost of carrying inventory and administration cost
as a result of increased inventory to meet retailer’s demand. Coyle(et al 2009)
describes another drawback of VMI is that the supplier may push excess inventory
to the retailer distribution center at end of month to meet their monthly sales
quotas. This will result in increase in inventory holding cost for the retailers. Other
risks involve sharing of sensitive information and this can be mitigated only through
high trust and communication present in the partnership.
Page 11 of 25
transport by purchaser to the point of delivery. Mangan(et al, 2008) states that in
addition to this FGP, the retailers are looking to increasing the back loading of store
delivery vehicles and using consolidation centers to consolidate smaller truck
loads(LTLs) into full truck loads(FTLs).
Bullwhip effect can also be reduced by improving the operational performance. This
includes reducing lot sizes and reducing replenishment lead time. Reduction in lot
size will help in decreasing the amount of fluctuations than can accumulate
between the suppliers and retailers thus decreasing distortion. Lot size reduction
can be done by combining multiple shipments from suppliers into on a single truck.
In 1990’s, consolidation centers(CCs) are added into the retail supply chain network
which are used to consolidate deliveries from multiple suppliers into full truck loads
which could be delivered to the Distribution centers(DCs).
Vendor consolidation
A consolidation by a third party logistics is also considered as an effective method
to suppress bullwhip effect (Dyckhoff et al, 2004). Most retailers focus on getting
new products at lowest price possible but they don’t focus much on how they can
help their suppliers by getting products faster and in a cost effective way. Retail
vendor consolidation helps both retailer and its suppliers by reducing high transport
costs associated with logistics to eliminate lost sales due to late deliveries
(Hubpages, 2010). According to Wal-Mart, the solution for suppliers is using a
consolidator to handle inbound logistics to the distribution centers. Wal-Mart has
partnered with DSC logistics for a multi-Vendor consolidation program (MOST) which
allows suppliers to maintain inventory at its consolidation centers. DSC consolidates
order from Wal-Mart’s suppliers and delivers full truck loads to Wal-Mart’s 39 DCs as
depicted in figure.5.
Page 12 of 25
Figure.5. Vendor consolidation using 3PL.
Wal-Mart’s report states that by packing the trucks efficiently reduces the food
miles and waste. The recent consolidation center in California replaces the LTL
shipments with full truckloads. This saves almost 5 million food miles per year and
reduces the number of trucks required. The decision to outsource the consolidation
to the 3PL makes sense to the retailer only when the third party increases the
supply chain surplus. According to Chopra and Meindl (2007), third party can
increase the surplus effectively if they are able to aggregate supply chain flows or
Page 13 of 25
assets to a level higher than the firm itself. By using the supplier consolidation
numerous benefits can be created for both retailer and supplier.
• Transportation Costs
• Fewer product touches
• Increased On-Time Performance
Normally consolidation programs are usually one of the three types, 1) hosted by
supplier, 2) run by a third party logistics provider at its facility or 3) run directly by
the retailer at its own facility.
Bill (2005) provides the advantages and disadvantages between the three
consolidation types as shown in the table.2. Even though consolidation using 3PL
seems to be providing more advantages over the others it heavily relies on the
shipments from different suppliers. If the suppliers provide full truck load then it is
better to send the goods to the DC of the retailer instead of sending it to the
consolidation hub. But incase if the demand for the products is fluctuating or
supplier sends goods in the LTL then the 3PL consolidation can provide added
advantages like consolidating the units into FTL based on the retailers demand.
Page 14 of 25
Table.2. Advantages and Disadvantage of different consolidation facility. (Source:
Bill, 2005)
Page 15 of 25
not be willing to participate in the consolidation program. Moreover, introduction of
3PL for small retailers who mainly depend on local suppliers will worsen the supply
chain surplus. Chopra and Meindl (et al 2007) lists additional risk in using a third
party as listed below,
• The already broken supply chain will further reduce surplus with introduction
of 3PL.
• Underestimation of the cost of coordination which includes the effort for
coordination.
• Reduced customer/supplier contact.
• Loss of internal capability and growth in third-party power.
• Leakage of sensitive date and information.
• Ineffective contracts.
Page 16 of 25
types and the products considered for cross-docking in retail industry are given in
Appendix A.
Benefits of Cross-docking
Walden (2006) states that greatest benefit of cross-docking is improving the
velocity of the supply chain by having fewer touches for the products as it move
through the supply chain. The main key for this cross-docking success relies on the
information transformation between the parties involved. This helps in reduction of
inventory within the DCs and to achieve the goal of velocity management (to get
products through the center and to the customer faster) as shown in figure.8.
Page 18 of 25
Figure.8. Increasing Delivery Frequency using Cross-docking.
Cross-docking also helps in decreasing the labor requirement and inventory damage
cost due to less material handling. It accelerates payments to suppliers which can
be used to convince suppliers to participative in cross-docking. Cross docking have
direct effects in reducing cost and indirect effects by helping the reduction in the
bullwhip effects by reducing replenishment lead times. Retailers have the ability to
streamline the supply chain from the point of origin to point of sale through the help
of cross-docking.
Disadvantages of Cross-docking
Cross-docking requires high commitment and continuous monitoring at all times by
the parties involved which requires good planning and effective communication.
Langevin(et al 2005) states that because of these requirements many retailers have
not been achieved anything close to the real cross-docking system. The major pre-
requisite for the successful cross-docking is timely and accurate flow of information
between the supply chain members. This requires huge investments in information
systems such as advanced shipment notice (ASN); electronic data interchange (EDI)
Page 19 of 25
and automatic identification (auto ID) such as radio-frequency tags and barcodes
(Langevin et al, 2005).
Automated material handling systems are crucial for a successful cross docking
facility. For retailers, suppliers involved in partnership may have to make significant
investment on the technology to achieve the benefits of cross-docking. Moreover,
the CDO would prefer that the outbound trucks can wait for long time so that the
flexibility is achieved in scheduling. If the 3PL is used for logistics then they will not
accept to absorb the cost related with the waiting time of the trucks. All these
should be considered while reaching an agreement and signing the contract with
supply chain partners. For a huge retailer like Wal-Mart the negotiating power is
high with their suppliers but for the small retailers with less negotiation power the
tradeoff should be made between the cost and efficiency which they get through
cross-docking.
Conclusion
Supply Chain Collaboration has been hailed by many as the way to improve the
supply chain performance but more often the supply chain partnerships fail due to
the required pre-requisite that are not being met by the partners involved. In VMI
suppliers don’t rely on orders from retailers and in CPFR, the data from both sides
are used to make a perfect forecasting, planning and replenishment. These features
help in reducing the bullwhip effect but in both these methods there is high risk of
information misuse and hence trust should be ensured between the partners
involved in it. Since CPFR and VMI highly rely on technology requirements then the
change in technology by one partner will force the other member to do so which
affects the collaborative partnership.
Page 20 of 25
products and suppliers. Moreover, the huge investment, high commitment,
continuous monitoring from all parties are prerequisite for a successful operational
performance.
Appendix
Appendix A
Types of cross-docking
Walden(2006) explains three basic types of cross docking as mentioned below,
Page 21 of 25
Figure.9. Pre-allocated Supplier consolidation.
Page 22 of 25
Figure.10. Pre-allocated cross docking operator (CDO) consolidation
• Post-allocated CDO consolidation - This form of cross-docking also requires
ASN and is normally reserved for shipments to fill the back orders or past-due
orders. This method is used to expedite shipments to catch up on the back
orders. Figure.11.
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