Business Process Management: Dealing with the "Bullwhip" Effect

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Dr. Stonebraker is a Professor of Operations Management at Northeastern Illinois University. Co-presenting this talk are William Steinke of BP Chemicals and David Ross from Intentia Americas, a provider of software for the supply chain management. Steinke is in charge of all surface transportation of chemicals for BP.

Stonebraker defined the "bullwhip" effect, saying that it works like a snapping bullwhip, increasing in effect as it travels through its length. In the supply chain, this means that when orders to a customer are late or there is some other problem, the effect amplifies as it flows upstream. He pointed out that while supply chains have existed for over 200 years transforming raw materials to finished goods, the term "vertical integration" is no longer accurate. Vertical integration assumes that all the processes are owned and controlled by one company. Vertical integration is inherently inflexible and static. But technology has changed this model and "supply-chain integration" is the current model, where there are multiple owners and partners that require collaboration. Supply-chain management is inherently dynamic.

The question is when to integrate supply chains. Stonebraker said that integration is best done in environments that are stable, simple, certain, and not difficult. Supply chains are integrated through:

Formal hierarchies (chain of command)Standard policies, rules and procedures DepartmentalizationComputer networksCross-functional teams and committeesLiaison individuals and groupsTraining (often web-based)

Stonebraker said that from the academic perspective, it is not clear that all industries and businesses should spend their time on integration issues.

William Steinke from BP Chemicals then took over. BP Chemicals makes a wide variety of petro-chemicals and plastics. BP has 35 manufacturing sites around the world and makes 30 million tons of products a year. It makes 100 unique products, many with multiple grades and pack types and has thousands of customers. BP Chemicals earned $175 billion in gross annual revenues last year. The drivers for BP's supply-chain management solution were:

Product/demand forecast accuracyData and information visibilityCustomer responsiveness/availability (the right product in the right place)

BP implemented this solution across 17 businesses worldwide. The goal was to consistently complete monthly planning cycles within four weeks, eliminating the possibility of procuring against outdated forecasts. It also reduced the potential for excessive inventory throughout the system and helped to better utilize the manufacturing, storage and transportation capacities, thereby lowering supply-chain costs. BP wanted to understand customers' requirements better and react faster to customer order changes.

William said that the inhibitors to supply-chain coordination were the conflicting objectives at various stages and the distortion of information as it moved within the chain. The conflicting objectives were due to decisions to locally facilitate some process, at the expense of the overall goal.

The performance measures of the bullwhip effect are:

Manufacturing cost - increasesInventory cost - increasesReplenishment lead time - increasesTransportation cost - increasesShipping/receiving cost - increasesProduct availability - decreasesProfitability - decreases

The obstacles to coordination are:

Incentive (the local objectives mentioned above)Information processing Operational Pricing Behavior

William said there are significant hurdles to overcome when coordinating a large business like BP. The investment is large and there is a complicated, global infrastructure to deal with. There must be a global level of consistency and the data needs to be available and clean. One of the big hurdles is change management is culture. If you don't educate your people, the dollars spent on systems will be for naught. William added that in some countries, the culture makes it impossible to question senior management.

The benefits of supply-chain management models were:

Increased visibility across the chainSales data serves as input to the quantitative, statistical forecast Data for planning tool used to balance supply and demandGenerating accurate and timely production plansAllows ATP forecasting Providing consistent input to a scheduling tool for a "look ahead" Tightening integration across the business units

At this point, David Ross of Intentia Americas, the fifth largest ERP collaborative solution software provider, spoke of the software solutions to the bullwhip effect. He said that within any supply chain, the various participants work together in the form of "chained pairs," aware of each other and the next link in the chain, and usually ignorant of all the other links. The trick is to make the information for the whole chain more visible to all the participants.

The goal for today's supply chain is a fast, flexible system built around providing value for the customer and treating each customer as unique and individual regarding products and services. The bullwhip effect is minimized by capturing the customer's preferences in real-time and transmitting them to all the channel partners.

The values that Intentia thinks are important for collaboration software are:

Customer-aligned - customer commands the supply chainCollaborative and systemic - value creating relationshipsAgile and scalable - flexible production, distribution and information flow Fast flow - all cycles are fast, compressed, reliable, and convenient Technology-enabled - digital, rules-base, event-driven pathways linking customers and the supply chain

The main point is to have visibility up and down the channel so any problems in the channel are known to the whole channel. David ended his talk by stating that the bullwhip effect will always be a challenge.

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