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1 This is an Open Access documen downloaded from ORCA, Cardiff Universiy's insiuional reposiory: hp://orca.cf.ac.uk/38772/ This is he auhor s version of a work ha was submied o / acceped for publicaion. Ciaion for final published version: Disney, Sephen Michael and Towill, Denis Royson Vendor-managed invenory and bullwhip reducion in a wo-level supply chain. Inernaional Journal of Operaions & Producion Managemen 23 (6), pp / file Publishers page: hp://dx.doi.org/ / <hp://dx.doi.org/ / > Please noe: Changes made as a resul of publishing processes such as copy-ediing, formaing and page numbers may no be refleced in his version. For he definiive version of his publicaion, please refer o he published source. You are advised o consul he publisher s version if you wish o cie his paper. This version is being made available in accordance wih publisher policies. See hp://orca.cf.ac.uk/policies.hml for usage policies. Copyrigh and moral righs for publicaions made available in ORCA are reained by he copyrigh holders.

2 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / Vendor Managed Invenory and bullwhip reducion in a wo level supply chain S.M. Disney and D.R. Towill Logisics Sysems Dynamics Group, Cardiff Business School, Cardiff Universiy, Aberconway Building, Colum Drive, Cardiff, CF10 3EU, UK. DisneySM@Cadiff.a.cuk, Tel: +44(0) , Fax: +44(0) Absrac This paper compares he bullwhip properies of a Vendor Managed Invenory (VMI) supply chain wih hose of a radiional serially-linked supply chain. The emphasis of his invesigaion is he comparaive impac he wo srucures have on he Bullwhip Effec generaed. Paricular aenion is paid o he manufacurer s producion ordering aciviies as demonsraed using a simulaion model based on difference equaions. Each of he four imporan sources of he Bullwhip Effec is documened and considered in urn. The analysis shows ha wih VMI implemenaion wo sources of he Bullwhip Effec may be compleely eliminaed, i.e. raioning and gaming or he Houlihan Effec, and he order baching effec or he Burbidge Effec. VMI is also significanly beer a responding o rogue changes in demand due o he Promoion Effec or o price induced variaions. However he effec of VMI on demand signal processing induced bullwhip or he Forreser Effec is less clear cu. The paper concludes ha on balance VMI offers a significan opporuniy o reduce he Bullwhip Effec in real-world supply chains. Key Words Bullwhip Effec, Vendor Managed Invenory, Supply Chain Dynamics, Producion and Invenory Conrol. 1. Inroducion I is well esablished ha removing an echelon in a supply chain can be of grea benefi in improving dynamic performance (Wikner, Towill and Naim, 1992). This is because here is poenial for a wo-fold improvemen. This is firsly due o eliminaion of delays in boh informaion and maerial flow. Secondly a decision-

3 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / making aciviy ha cusomarily increases disorion in he order waveform as i is flows upsream is eliminaed (Towill and del Vecchio, 1994). VMI is one pracical way of seeking o obain he benefis of echelon eliminaion. Hence he need for a deailed invesigaion using he radiional supply chain as a benchmark o be beered via a suiable design. As Maloni and Benon (1997) have indicaed, here exiss a large amoun of lieraure on he conceps of supply chain parnerships projecing exremely opimisic views abou heir promise as win-win parnerships wihou any rigorous analysis o suppor he cause of opimism. This paper is a response o he shorfall in research ha adops a more rigorous analyical approach o examine supply chain parnership issues. Performance Meric Order lead ime (days) (from cusomer s order enry o delivery) On Time Deliveries (% of orders delivered on ime) Invenory Turnover Rae Toal Overhead Cos (index) Tradiional Supply Chain (1996) New Supply Chain Sraegy (NMS) (1998) Supply Chain Nework wih PipeChain (2000) % 98% 99.8% Table 1. Impac of he Change Supply Chain Sraegy and Implemenaion of NMS PipeChain Version of VMI a Ericsson Radio Sysems (Source: Gusafsson and Norrman, 2001) I is already known ha when properly implemened, VMI healhily impacs he boom line, for example, as shown in Table 1 (Gusafsson and Norrman, 2001). Noe ha here has been a wo-sage programme of supply chain re-engineering supporing he inroducion of VMI. This is via changed responsibiliy for orders (NMS phase) followed by oal pipeline conrol (Pipechain phase). However here are boh posiive and negaive aspecs of implemening he NMS/Pipechain mode of VMI. These are lised in Table 2, and he downside is a warning o poenial users falsely hinking ha implemenaion is sraighforward and rivial. I is good o see ha benefis are visible

4 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / wihin monhs. Bu in a global BPR Programme, Towill and McCullen (1999) have observed significan improvemens in supply chain performance occurring on a yearby-year basis for some ime afer changeover. Hence o maximise impac i is essenial o ensure ha adequae monioring sysems are in place. These will firsly ensure ha regeneraion o previous working pracices is avoided, and secondly o help ensure ha beneficial learning curve effecs are forhcoming. A. The Upside Main benefis visible shorly afer an implemenaion (monhs) The invesmen pays off shorly (monhs) The cusomers and suppliers in he nework have gained a greaer knowledge and undersanding of each ohers working processes and businesses The sofware ool is fas o implemen (weeks-monh) The users of he sofware ool rely on he sysem and find i logical and process oriened The work load for he people working wih operaive logisics has been less flucuaing B. The Downside Alhough he concep is easy o undersand, acceping he change of working procedures and shif of responsibiliy akes ime Even hough a sandard inerface is used o inegrae he ERP sysems i mus be adaped o he process. This should no be underesimaed, i creaes work and akes ime The sofware ool does no fi cerain businesses (e.g. shor erm relaionships wih suppliers and seldom supply) Table 2. Posiive and Negaive Experiences of Implemening NMS/PipeChain Version of VMI a Ericsson Radio Sysems (Source: Gusafsson and Norrman, 2001) The paricular emphasis of his paper is he relaive impac hese wo supply chain srucures have on he Bullwhip Effec, (Lee, Padmanabhan and Whang, 1997a and b) generaed in he supply chain, which is invesigaed using a simulaion model. Focussing on a one supplier, one cusomer relaionship paricular aenion is given o he manufacurer s producion scheduling aciviies. To achieve his aim, an overview of a radiional supply chain and a VMI supply chain is given. The Bullwhip Effec is hen oulined and he various causes are highlighed. Nex, he wo supply chain

5 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / srucures are compared wih respec o he Bullwhip Effec, wih each source being invesigaed in urn in order o verify he research findings. This gives confidence o he poenial VMI sysem performance benefis via ime-series displays readily idenified by managers as comparaors wih presen day dynamic behaviour. 2. Using Bullwhip o Assess VMI Capabiliy The magniude of he Enerprise Resource Planning (ERP) inerface problem currenly facing he manufacuring indusry is well known in he lieraure (Thaler, 1999). Table 3 liss some of he snags already noed by Lee and Whang (2000). I is clear ha subsanial financial invesmen is required o move forward in his respec. Bu who pays for he new communicaion sysem? Whereas he UK DTI/CBI expecancy of parnering arrangemens was of benefis o be equally shared (Towill and Naim, 1993), presen-day cusomer pressures have ended o negae his aim. For example, Clark and Hammond (1997) infer ha in much VMI experience o dae, cos-benefi analysis is arguably ha he supplier bears he cos of implemenaion, bu he cusomer reaps he benefi. Similar conclusions may be drawn from he sudy by Lamming (2001) on he Japanese supply chain relaionships in recession. He saes ha suppliers canno now rely on reaining business in his new environmen. Insead hey mus work in innovaive ways so as o enable heir cusomers o concenrae on real-ime, marke driven configuraion of producs coupled wih minimum socks in heir supply chains (Lamming, 2001). When implemened properly VMI is clearly a sep in he righ direcion. In a recen seminal paper, Buxey (2001) has argued ha producion sraegy drives he planning process. By having a clear view of wha ha sraegy should be, managemen decisions regarding order fulfilmen, capaciy requiremens, workforcemanning levels (and skills) become simpler and more ransparen. The whole business is hen much more readily aligned wih he producion sraegy. As Buxey poins ou, he sraegy is decided in he knowledge of cusomer requiremens aking boh shor erm and medium erm horizons ino accoun. A careful review of he Case Sudies repored in Buxey (2001) suggess ha generally he producion sraegy seleced is he simples and mos robus capable of saisfying requiremens. I is clear ha VMI has much o offer in his scenario. Working closely wih he end cusomer reduces uncerainy ha in urn enables simpliciy and reliabiliy of operaions.

6 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / POTENTIAL SNAGS MULTIPLE STANDARDS INFLEXIBILITY LIMITED FUNCTION FIXED OPERATING MODE COST DESCRIPTION There are muliple indusry-specific sandards. So a company wih muliple business ineress has o face dealing wih muliple sandards. EDI is designed on a one-size-fis-all basis. I may no mee he exac needs of any paricular supply chain. EDI is primarily designed around ransacion processing. I may no cope wih oher kinds of informaion sharing such as daabases, bar codes, images ec. EDI is bach operaed. I works only in operaional windows. There is a high financial cos and high resource cos o insalling EDI. This discourages small and medium size companies. Table 3. Poenial EDI Implemenaion Snags or Why VMI May No Happen Overnigh (Source: Auhors Based on Lee & Whang, 2000) We have seleced Bullwhip as a measure of performance because i is a ransparen and readily idenifiable meric ha can be used o esablish if a course of acion has been beneficial o he sysem. In ha sense i is analogous o he use of elapsed ime as an independen and unambiguous meric used for assessing process re-engineering programmes (Thomas, 1990; Salk and Hou, 1990). Recen advances in cosing he bullwhip effec include predicions from an OR model developed by Meers (1997). He concludes ha avoidable on-coss range from 10% o 30% (depending on bullwhip source) calculaed a he manufacuring sage alone. As Fisher, Hammond, Obermeyer and Raman (1997) poin ou, he on-coss hroughou he chain can be very subsanial, especially where an arificially high load is placed on sysem capaciy. So in ha sense he Meers (1997) figures can be regarded as underesimaes. However, in our search herein for generic soluions we concenrae on bullwhip reducion alone. We believe i is a valid meric for VMI insigh and exploiaion in cusomer/vendor negoiaions and in subsequen sysem re-design. I is simple enough o saisfy he Buxey (2001) need for basing producion sraegy around rules-of-humb. A he same ime i is a meaningful driver owards cos reducion (Meers, 1997).

7 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / Overview of a Tradiional Supply Chain A supply chain is a sysem consising of maerial suppliers, producion faciliies, disribuion services, and cusomers who are all linked ogeher via he downsream feed-forward flow of maerials (deliveries) and he upsream feedback flow of informaion (orders), (Sevens, 1989). As shown in Figure 1, in a radiional supply chain each player is responsible for his own invenory conrol and producion or disribuion ordering aciviies. One fundamenal characerisic and problem ha all players in a radiional supply chain (such as reailers, disribuors, manufacurers, raw maerial suppliers) mus solve is jus how much o order he producion sysem o make (or he suppliers o supply) so as o enable a supply chain echelon o saisfy is cusomers demands. This is he producion/invenory conrol problem. Yarn maker Order flucuaions are ypically +/-40% (hence amplificaion here+2x2x2=8 imes greaer hen markeplace variabiliy) Direcion of demand amplificaion and increasing variabiliy and uncerainy as he waveform moves upsream Fabric maker Order flucuaions are ypically +/-20% Garmen maker Order flucuaions are ypically +/-10% High sree reailer Flow of orders upsream Order flucuaions are ypically +/-5% Flow of maerials downsream Figure 1. Sequenial Informaion Flow Causing Bullwhip in a Tradiional Clohing Supply Chain (Source: Towill and McCullen, 1999, based on he descripion by Salk and Hou, 1990) Cusomers According o Axsäer (1985), he purpose of a producion/invenory conrol sysem (he mehod used o conrol invenory levels and producion raes) is o ransform incomplee informaion abou he marke place ino co-ordinaed plans for producion and replenishmen of raw maerials. The producion/invenory conrol problem is

8 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / ackled by praciioners inspecing daa relaing o demands, invenory levels and orders in he pipeline. Then, eiher in a srucured, mahemaical way (for example, by using a decision suppor sysem wih properly engineered, well designed replenishmen rules), or in a less formal way (by using heir own experience and judgemen), hey place orders up he supply chain. The srucure of he radiional supply chain shown in Figure 1 has developed parly as a resul of he need for a company o be in conrol of is own asses and parly because, unil recenly, i has been uneconomic o pass vas amouns of informaion around he sysem. The radiional supply chain is characerised by each player in he supply chain basing his producion orders or delivery orders solely on his sales o his cusomer, on his own invenory levels and, someimes, on WIP (pipeline) arges. Each echelon in he supply chain only has informaion abou wha heir cusomers wan and no on which producs he end cusomer is acually buying oday. The clohing supply chain shown in Figure 1 ypifies his sae of affairs. I especially does no allow suppliers o gain any insigh ino wha heir cusomers are ordering o cover heir own Cusomer Service Level (CSL) and cos requiremens and wha he cusomers are ordering o saisfy immediae cusomer demand (Kaipia, Holmsröm and Tanskanen, 2002). This lack of visibiliy of real demand leads o a double-guessing culure. I can and does cause a number of problems in a supply chain if i is no properly designed and even hen flucuaions in he supply chain canno be compleely eliminaed. Such a sae of affairs cerainly causes he Forreser Effec, as a paricular player over-orders in response o genuine changes in demand o accoun for his invenory deviaions ha resul from he producion/disribuion lead-ime. This over-ordering is hen amplified up he supply chain, creaing wide (and wild) flucuaions in he demand signal as i passes hrough he supply chain. Those shown in Fig. 1 are ypical of real-world supply chains (Olsmas, Edghill and Towill, 1988). As we shall see laer, an amplificaion of demand of 2:1 is ypical as orders pass hrough a single supply chain echelon. Our purpose herein is o look furher ino he causes of his phenomenon, and o see how VMI helps o reduce his amplificaion on a source-by-source basis. 4. The Bullwhip Effec The Bullwhip Effec is a new erm (bu no a new phenomenon since i has been debaed in he lieraure for over four decades) coined by Lee, Padmanabhan and

9 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / Whang (1997a, b). I refers o he scenario where he orders o he supplier end o have larger flucuaions han sales o he buyer. This disorion subsequenly propagaes upsream in an amplified form. Generally speaking, he furher upsream he echelon, he more disored and amplified is he waveform. Lee e al (1997a and b) sae ha here are five fundamenal causes of Bullwhip; non-zero lead-imes, demand signalling processing, price variaions, raioning and gaming, and order baching. In any pracical supply chain hese may all be presen and inerac as shown in Fig. 2. Noe ha we consider boh zero lead-ime and demand signal processing o be he essence of he well-known Forreser effec (Forreser, 1961). I is our inenion in his paper o show how each of hese bullwhip sources is affeced by he inroducion of VMI. This will be done using a dynamic model of a paricular VMI sysem capable of represening curren indusrial pracice. The Bullwhip Effec Price flucuaions or he Promoion Effec Demand signal processing and non-zero lead-imes or he Forreser Effec Raioning and gaming or he Houlihan Effec Order baching or he Burbidge Effec Figure 2. Four Major Causes of he Bullwhip Effec (Source: Disney and Towill, 2001) Demand signal processing has in he pas been called he Demand Amplificaion or he Forreser Effec afer Jay Forreser (1961) who encounered he problem and subsequenly demonsraed i via DYNAMO simulaion. The Forreser Effec is also encompassed by Serman s bounded raionaliy, (Serman, 1989), erminology ha is common in he field of psychology as used o describe players sub-opimal bu

10 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / seemingly raional decision making behaviour. This paricular source of bullwhip was fully undersood and he phenomenon well described and publicised by Salk and Hou (1990). I is hus clear ha he Boson Consulancy Group were fully conversan wih he exisence of bullwhip problems, which hey hen sudied furher and proposed soluions specific via a dynamic simulaion. Order baching is also known as he Burbidge Effec (Burbidge, 1991). I refers o he pracise of placing orders up he supply chain (or on he various manufacuring processes) in baches. The philosophy behind his acion is o gain economies of scale in se-up aciviies (such as seing up a specific machine or placing and receiving an order). I is ofen he resul of he applicaion of an Economic Order Quaniy calculaion or similar echnique. Burbidge discusses he problems his causes on he shop floor in considerable deail. To deal wih hese problems Towill (1997) oulined he conribuions of Forreser and Burbidge for avoiding he Bullwhip Effec brough ogeher in an inegraed approach ermed Forridge. The Inpu-Oupu diagram in Figure 3 highlighs he roo causes of demand amplificaion ha can be aribued o eiher he Forreser Effec or he Burbidge Effec and in some cases boh. Burbidge Effec Forreser Effec Supply chain Avoidable demand amplificaion Figure 3. FORRIDGE Inpu-oupu diagram of demand amplificaion resuling from evidence provided by Jay Forreser and Jack Burbidge (Source: Towill, 1997) Wihin he producion conex, raioning and gaming, or he Houlihan Effec was highlighed by Houlihan (1987) who recognised ha as shorages or missed deliveries occur in radiional supply chains, cusomers overload heir schedules or orders. This in urn places more demands on he producion sysem ha ineviably leads o more unreliable deliveries. Cusomers hen increase heir safey sock arge in a vicious

11 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / circle ha furher disors he demand signal, giving rise o he Bullwhip Effec. Houlihan has summarised his phenomenon as he Flywheel effec as shown in Fig. 4. This simple diagram conveys, in erms readily recognised by op managemen, he dilemma facing producion schedulers in radiional supply chains, such as previously repored in an auomoive secor Case Sudy (Edghill, Olsmas and Towill, 1988). I deserves o be much more widely known and used. Capaciy overload Shorages Demand disorion Over-ordering Safey sock increase Unreliable delivery Fig. 4. The Houlihan Flywheel Describing One Aspec of Bullwhip (Houlihan, 1988) Price variaions or he Promoion Effec refers o he pracise of offering producs a reduced prices so as o simulae demand. Assuming an elasic demand, his creaes emporary increases in orders where cusomers ake advanage of his opporuniy and forward buy or sock up. However his has serious impacs on he dynamics of he supply chain, as when he price is released from he discouned level, demand slumps, creaing a perceived need for furher discouning in order o simulae demand. A famous real-world example is due o Fisher e al (1997), wih he resuling ime-series being shown in Fig. 5. As can be seen, he enicemen of a discoun offered by Campbells Soups o he reailer caused an unpredicable change in behaviour o which all suppliers have o

12 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / respond. This produces a ypical bullwhip profile wih demand being amplified as i is passed upsream. As can be seen from Fig. 5, his self-induced bullwhip requires a peak capaciy well over wice he average demand. The resulan on-coss are considerable for all players in he chain, including overime, shif premiums, qualiy variances, and addiional disribuion, handling and sorage charges. Furhermore, acual poin-of-sales daa suggess ha adapive level scheduling would be sufficien o mee real demand. CASES OF CHICKEN NOODLE 5 SOUP (X10 ) FALSE DEMAND PEAK INDUCED BY SUPPLIER DISCOUNT! SHIPMENTS ACTUAL CONSUMPTION July 1s June 30h WEEKS Fig. 5. Example of a Price Discoun Induced Bullwhip Recorded in Campbell s Soups Supply Chain (Source: Fisher, Hammond, Obermeyer and Raman, 1997) 5. Measuring The Bullwhip Effec in Real Supply Chains Many auhors have recenly suppored using saisical measures of he Bullwhip Effec, for example, Chen, Ryan and Simchi-Levi (2000). Herein ORATE refers o he orders placed on our supplier and CONS represens sales or consumpion by our cusomer. The bullwhip effec meric of choice is hen:

13 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / Bullwhip 2 ORATE 2 CONS / / ORATE CONS 2 2 ORATE CONS Eq 1 Where; 2 is he uncondiional variance of he orders (subscrip ORATE) and consumpion (CONS). is he uncondiional mean of he orders (subscrip ORATE) and consumpion (CONS). We may expec, as we are considering a single cusomer and supplier ha he uncondiional means are idenical and hus hey cancel. There is already a considerable amoun of evidence in he lieraure ha bullwhip exiss in real-world supply chains (as disinc from simulaion model resuls). Fransoo and Wouers (2000) used saisical echniques o measure he Bullwhip Effec experienced in a grocery supply chain. They considered he pracical aspecs of using he sandard deviaion raios (raher hen he variance) as a bullwhip measure and concluded ha four Bullwhip merics should be used. These focus on: a specific produc for a specific oule; a specific produc demand aggregaed across all oules; aggregaed producs for individual oules; aggregaed oules agains aggregae producs. Fransoo and Wouers (2000) highligh he fac ha each bullwhip measure is useful for invesigaing somewha differen circumsances. For example, Table 4 summarises he Bullwhip merics esimaed in heir paricular grocery supply chain. The four mehods of calculaion clearly enables bullwhip o be associaed in urn wih specific producs and/or specific oules as required by he sysems designer.

14 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / Coefficien of Variaion Esimaed for Individual Producs and Aggregaed Oules Aggregae Producs and Aggregae Oules Aggregae producs and Individual Oules Aggregae Producs and Aggregae Orders Produc Oule Bullwhip Weighed Average Bullwhip 1 A A B B (A+B) (A+B) (1+2) A (1+2) (B) (1+2) (A+B) Table 4. Bullwhip Found in a Grocery Supply Chain (Fransoo and Wouers 2000) Noe ha Bullwhip Facors yield imporan insighs ino he real-world behaviour of he differen players in he chain. This is shown in Table 5, based on a European reail supply chain (Holmsröm, 1997). He analysed he orders flowing upsream from he reail oules righ hrough he various echelons and ulimaely back o he facory. Using he bullwhip measure (Eq 1) Holmsröm sudied in deph a raffic building (high volume, low margin) produc and a low raffic (low volume, high margin) produc. This esablished ha he downsream players (shops and wholesalers) are he bigges culpris in he paricular sense of bullwhip generaion. Furhermore he decision-makers exhibi lile difference in heir aiude o ordering policies for eiher he low margin or he high margin producs, wih Bullwhip Facors a around 3 o 1 a each sage. No so he facory scheduler who clearly maches he ordering policy o SKU. He visibly reas he wo producs differenly, and significanly dampens down he demand volailiy in he facory orders placed for he high volume produc. This is mos likely o have been achieved via some version of level scheduling (Suzaki, 1987). In conras, he same scheduler is quie prepared o induce furher subsanial bullwhip ino he sysem when considering he low volume produc. Finally, deliveries from he facory also exhibi some bullwhip bu i is of a smaller order of magniude han ha generaed by he downsream players

15 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / High Volume Low Margin Supply Chain Produc Echelon Coefficien of Commens on Variaion Waveforms Reailer 2.60 Primarily Forreser Effec Wholesaler 2.88 Forreser and Burbidge Effecs Facory 0.72 Levelled Planner Scheduling Facory 1.67 Forreser and Producion/ Burbidge Disribuion Effecs Low Volume High Margin Produc Coefficien of Commens on Variaion Waveforms 3.14 Primarily Forreser Effec 3.05 Forreser and Burbidge Effecs 2.39 Pronounced Burbidge Effec 1.25 Pronounced Burbidge Effec Table 5. Acual Demand Amplificaion Recorded wihin a Real-World Supply Chain (McCullen and Towill, 2001, based on resuls by Holmsröm, 1997) The composie Bullwhip Facor over he enire reail chain is obained here by muliplying ogeher he bullwhip a each sage. The resul is 9:1 for he high volume produc, bu nearly 29:1 for he low volume produc. These resuls show ha demonsraor bullwhip values of 2 or 3 o 1 per sage as recorded by Serman (1989) during he playing of he MIT Beer Game are realisic benchmarks. This is good o verify, as criics of he game have doubed is real-world relevance. In erms of generaion of insigh he reail supply chain resuls pus he value of he game ino a new and enhanced perspecive. Inspecion of he ime series presened by Holmsröm (1997) also enables some commen o be made on likely causes of he bullwhip in his reail supply chain. Those in Table 5 follow from he observaions by McCullen and Towill (2001). They argue ha Forreser Effecs appear o dominae downsream ordering, wih Burbidge Effecs becoming much more eviden as he waveform propagaes upsream. 6. Overview of a VMI Supply Chain In recen years, many companies have been compelled o improve heir supply chain operaions by sharing demand and invenory informaion wih heir suppliers and cusomers. Differen indusries have coined differen erms for VMI, bu all are based essenially on he same idea. VMI is a supply chain sraegy whereby he vendor or supplier is given he responsibiliy of managing he cusomer s sock. For clariy he erm disribuor for he cusomer in he VMI relaionship and manufacurer for

16 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / he supplier or vendor is he VMI relaionship will be used. VMI has become more popular in he grocery secor in he las 15 years due o he success of reailers such as Wal-Mar. Addiionally, i is only relaively recenly ha he necessary informaion and communicaion echnology has become economically available o enable he sraegy, alhough Holmsröm (1998) has shown ha i can be readily enabled via fax or s and spreadshees. As proof, Disney, Holmsröm, Kaipia and Towill (2001) have implemened VMI in a real-world supply chain using daa available from a popular ERP sysem and a spreadshee based decision suppor sysem. Moreover, VMI is no a new philosophy. I was iniially discussed by Magee (1958, pp 298) in a presenaion of a concepual framework for designing a producion conrol sysem. Quoing direcly from he ex (as i propheically and very concisely porrays wha we believe VMI acually is): Frequenly here is argumen as o who should conrol invenories. For example, should i be he sales organisaion or (some) oher uni ha draws on he socks and wans o be sure hey are here, or he operaion ha supplies he sock poin and wans o feed i economically? There is probably no resoluion o his quesion as saed; he difficuly is ha boh have a legiimae ineres. I is possible o resae he quesion slighly and reach a soluion. The user has o be sure he maerial he needs is here. He has corresponding responsibiliy o sae wha his maximum and minimum requiremens will be. Once hese limis are acceped as reasonable, he supplier has he responsibiliy of meeing demand wihin hese limis, making whaever use he can of he flexibiliy he invenory provides. Thus boh have a share in he responsibiliy for and conrol over a sock uni. One specifies wha he maximum and minimum demands on he sock uni will be; he oher has he responsibiliy of keeping he sock uni replenished bu no overloaded as long as demand says wihin he specified limis, Magee (1958, pp298). VMI comes in many differen forms. Familiar names are Quick Response (QR), (Lee, So and Tang, 2000), Synchronised Consumer Response (SCR), Coninuous Replenishmen (CR), Efficien Consumer Response (ECR), (Cachon and Fisher, 1997), Rapid Replenishmen (RR), Collaboraive Planning, Forecasing and

17 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / Replenishmen (CPFR), Holmsröm e al, (2000) and Cenralised Invenory Managemen (Lee, Padmanabhan and Whang, 1997a), he erminology depending on secor applicaion, ownership issues and scope of implemenaion. However, in essence, hey are all specific applicaions of VMI ha is summarised concepually in Figure 6. This is he sysem o be used o benchmark bullwhip reducion. Business Targes VMI Conrols Service Levels Sales (CONS) Infinie Maerial Socks Producion Orders Facory Order Rae (ORATE) Facory (COMRATE) Facory Compleions Despach This Number Compleions Se Targe Sock (TINV) Finished Goods Socks (FINV) Despaches Se GIT Sock GIT Se Targe Sock, R Deliveries Toal Sysem Sock (SINV) Vending Socks(DINV) Producion lead-ime Disribuion lead-ime Figure 6. Overview of he VMI Scenario Noe ha we do no consider hose supply chain scenarios ha exploi only he daa abou end consumer demand in he ordering decisions o be rue VMI. We erm his kind of supply chain as possessing informaion sharing and i is a disinc (bu equally valid) sraegy. However, he lack of cusomer invenory informaion in he suppliers ordering decision makes i a fundamenally differen sysem. Examples of informaion sharing can be found in Yu, Yan and Cheng (2001), Chen, Drezner, Ryan and Simchi-Levi (2000), Lee, So and Tang (2000) and Mason-Jones and Towill (1997). 7. Descripion of he VMI Supply Chain Simulaion Model The difference equaions required o model our version of he VMI scenario are shown in Appendix 1. These difference equaions can quickly be urned ino a mahemaical model of he VMI supply chain by using z-ransforms. The formulaion and exploiaion of such a mahemaical model is no presened in his conribuion due o space resricions bu can be found in Disney (2001) and Disney and Towill

18 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / (2001 and 2002). Herein, he difference equaion represenaion will be exploied. The difference equaions may be quickly realised by ineresed readers in spreadshee applicaions such as Microsof Excel. Difference equaions can also be implemened in sandard compuer languages wih relaive ease, as shown in Disney and Towill, (2001). The specific flavour of VMI ha he difference equaions represen in Appendix 1 is ermed VMI-APIOBPCS, or Vendor Managed Invenory, Auomaic Pipeline, Invenory and Order Based Producion Conrol Sysem. The VMI erm in VMI-APIOBPCS reflecs he mos significan fac abou a VMI supply chain, i.e. ha he disribuor (he cusomer in he VMI relaionship) passes invenory informaion and Poin of Sales (POS) daa o heir suppliers raher han orders, (Kaipia e al (2002), Corill (1997)). The acual invenory a he cusomer is hen compared o a re-order poin ha has been agreed on by boh paries. This reorder poin is se o ensure adequae availabiliy wihou building up excessive socks. I riggers a replenishmen order ha is delivered o he cusomer if he acual invenory is below he re-order poin in each planning period. Each pary also agrees he order-up-o poin, O. The dispaches beween he wo echelons are equal o he order-up o level, O, minus he re-order poin, R, and he dispaches can be of a consan or varying size wihin his framework. The re-order poin is se dynamically so as o reflec perceived changes in demand. This is done by exponenially smoohing (over Tq ime unis) he sales signal and muliplying i by a consan (G) ha ensures appropriae cusomer service levels a he disribuor, aking ino accoun he ransporaion lead-ime beween he wo paries in he supply chain. Exponenial smoohing was chosen as he forecasing mechanism because i is; simple o implemen in compuer sysems (requiring less daa sorage), readily undersood and he mos favoured echnique by boh indusrialiss and academics. I should be noed ha he ne change in he re-order poin from one ime period o anoher is added o he sales signal and he vendor reas his a demand. So, when demand is increasing and he disribuors re-order poin grows, he supplier or vendor reas he sock (re-order poin) requiremens a he disribuor as demand and incorporaes ha ino his forecass and sock levels, as he clearly should do. Obviously, he negaive argumen also applies, i.e. when he re-order poin is reducing in size over ime, demand signals o he manufacure reflec his.

19 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / The APIOBPCS erm reflecs he componens of he srucure of he ordering decision a he VMI supplier. In words i is le our producion orders be equal o he sum of hree componens; he forecased demand, (exponenial smoohed over Ta ime unis), a fracion (1/Ti) of he difference beween arge sock and acual sock and a fracion (1/Tw) of he difference beween arge WIP and acual WIP. 8. Descripion of he Tradiional Supply Chain Simulaion Model The APIOBPCS model, John, Naim and Towill (1994), was chosen o represen a radiional supply chain. This was due o a number of reasons. Firsly i was fel imporan ha i is desirable ha like (APIOBPCS) is compared o like as much as possible (VMI-APIOBPCS) in order o gain as much undersanding as possible on he fundamenal srucure of VMI. Secondly APIOBPCS was chosen for VMI and he radiional supply chain, as i is recognised as good pracice, incorporaes all commonly available forms of informaion, represens human behaviour (Serman, 1989 and Naim and Towill, 1995) and is a well-undersood member of he IOBPCS (Towill, 1982) family. The APIOBPCS model can be expressed in words as oulined in he previous secion. I incorporaes hree variables; Ta, a parameer ha describes how quickly demand is racked in he forecasing mechanism, Ti, a parameer ha describes of much of he discrepancy beween acual invenory and arge invenory levels should be added o he producion/ disribuion order rae and Tw, a parameer ha describes how much of he discrepancy beween acual WIP and arge WIP levels should be added o he producion/ disribuion order rae. Individual echelons, or APIOBPCS models, can be linked ogeher o form a supply chain, by coupling he ORATE signal of he consuming echelon o he CONS signal of he supplying echelon, as recognised by Burns and Sivazlian (1978) and furher exploied by Towill and del Vecchio (1994). The difference equaions required o model a wo-level APIOBPCS supply chain (for example in a spreadshee) are shown

20 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / in Appendix 2. Like he VMI model he producion and disribuion delays are arbirarily assumed o be of four ime unis. 9. Impac of VMI on he Promoions Induced Bullwhip To invesigae he impac of VMI on he promoions induced Bullwhip Effec, he Facory Order Rae response of he wo supply chain srucures o a sep inpu will be used. This produces a very rich picure of he associaed sysem dynamics. Undersanding he dynamic response o a sep inpu will hereby yield insigh ino how he sysem will be affeced by various promoions. As here are an infinie number of designs for VMI and radiional supply chains ha migh be compared, previous bes pracise designs will be used o compare he wo supply chains via he sep response. The following designs were chosen o represen good designs of a radiional supply chain wih a producion lead-ime of 4 ime periods; John e al (1994) recommended seings (Ta=8, Ti=4, Tw=8). This was derived using classical conrol heory and simulaion and may be considered o a fairly conservaive deign. Disney e al (1997) recommended seings (Ta=8, Ti=4, Tw=15). This was based on a Geneic Algorihms search, using Laplace ransforms, simulaion wih he aim of minimising he Forreser Effec, invenory holding, seleciviy, whils maximising robusness o errors in esimaion of WIP levels and producion leadimes. Naim and Towill (1995) values of (Ta=8, Ti=4, Tw=4). These were derived from inspecing Serman s (1989) Beer Game derived opimum seings. This may be considered o a reacive version of he John e al (1994) seings. Disney (2001) recommended seings (Ta=4, Ti=7, Tw=28). This was based on he full soluion based search using z-ransforms and simulaion aimed a balancing he Forreser Effec and invenory holding requiremens.

21 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / Operaional Seing Parameers of Opimum VMI Sysem G ~ W # Ta Ti Tq Tw ~ G =Re-order poin level # W=Weighing funcion used in opimisaion rouine o rade-off producion capaciy requiremens agains sock requiremens Table 6. Sample Opimum Parameer Values for VMI Sysem Simulaion As oulined earlier, he VMI sraegy has 5 key parameers Tq - he forecasing parameer used o generae he re-order poin, G - he gain on he forecas generaed by Tq use o calculae he re-order poin, Ta - he forecasing parameer used o forecas demand by he manufacurer, Ti he fracion of invenory error accouned for in a single order and Tw he fracion of he WIP error accouned for in a single order ha deermine he dynamic response of he sysem. The erms Ta, Ti, Tq and Tw depend on he parameer G ha is independenly se o reflec he desired CSL given he ransporaion lead-ime beween he manufacurer and he disribuor, via he reorder poin equaion. A full-scale opimisaion procedure (Disney (2001) and Disney and Towill (2002)) has been applied o hese parameers for a range of raios of producion adapaion coss (due o he Forreser Effec) o he associaed invenory holding coss and for differen values of he re-order poin G. The resuling opimal parameer seings for Ta, Ti, Tq and Tw for he case when G= 1 and 4 are shown in Table 6. There is a complex relaionship beween hese parameers for example; higher values of G generally induce more bullwhip ino he manufacurer s orders. Furhermore, higher values of Tq help o reduce he bullwhip experienced by he manufacurer bu a he expense of longer invenory seling ime. I is no our inenion o explore his here. In his Secion i is sufficien o illusrae he VMI sysem sep response for he case where producion adapaion and invenory holding coss were given equal imporance, for he wo designs chosen o represen good

22 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / soluions for a VMI supply chain. Hence he bes pracice seings for he VMI supply chain used were; The opimum parameer seing when he disribuor has a re-order poin level se a 1 planning periods average demand, (i.e. G=1, Ta=6, Ti=7, Tq=6, Tw=42) The opimum parameer seing when he disribuor has a re-order poin level se a 4 planning periods average demand, (i.e. G=4, Ta=4, Ti =14, Tq=4, Tw=63) I can be seen from inspecion of Figure 7 ha he VMI design ouperforms he radiional supply chain, wih less peak overshoo, faser seling ime and a generally quicker response. ORATE VMI, Ta=6, Ti=7, Tq=6, Tw=42, G=1 VMI, Ta=4, Ti=14, Tq=4, Tw=63, G=4 APIOBPCS, Ta=8, Ti=4, Tw=8 APIOBPCS, Ta=8, Ti=4, Tw=15 APIOBPCS, Ta=8, Ti=4, Tw=4 APIOBPCS, Ta=4, Ti=7, Tw= Time Figure 7. Impac of VMI on he Promoions Bullwhip Effec 10. Impac of VMI on Sysem Induced Bullwhip Effec We now esimae he impac of VMI on Forreser source induced bullwhip. In Table 7 we have compared VMI and radiional supply chains across a range of performance merics. The peak ORATE overshoo is he simple measure of bullwhip already me in Fig. 7. Noe ha for compleeness Table 7 includes hree opimal soluions for each of he wo values of G (1 and 4). These are for raios of producion

23 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / adapaion/invenory holding coss W = 0.01; W = 1.0; and W = 100. The reason for his is ha W = 0.01 approximaes an agile sysem; W = 100 approximaes a lean (level scheduling) sysem; whils W = 1.0 is a compromise soluion. As noed by Chrisopher and Towill (2000) here are occasions where agile is he bes business soluion, and where lean is he bes business soluion, and where some mix is required. For he opimal VMI supply chains, he bullwhip is reasonably unaffeced by varying W for a given value of G. This is because he opimisaion programme (Disney, 2001) drives he VMI parameers o yield he bes possible response. (As we have seen in Table 6, he parameer seings o achieve his goal are subsanially differen.) If he peak ORATE overshoo is 2.5, hen X is a bullwhip effec of 150% and so on. So comparing he opimal VMI sysem wih he neares equivalen radiional supply chain i.e. G = 1, W = 1.0, and wih VMI opimal parameer seing, we see VMI reduces he bullwhip effec from 144% o 69%. Some auhors (for example Chen, Ryan and Simchi-Levi [2000]) use he raio of order and sales variance as a bullwhip measure, ohers (for example Fransoo and Wouers (2000) have been using raios involving he sandard deviaion. Whils boh concepually similar, he variance raio is preferred as his can be calculaed direcly from a sysem s ransfer funcion, Disney and Towill (2001) or efficienly enumeraed wih difference equaions. Hence in Table 6 we have included an esimae of variance obained via evaluaion of sysem noise bandwidh (Towill, 1982). This bullwhip measure has been reduced from 0.93 (Tradiional supply chain) o 0.46 (VMI sysem), a facor of 2 o 1. So on boh bullwhip measures using VMI is a grea improvemen in coping wih Forreser sourced bullwhip. 11. The Impac of VMI on he Houlihan Effec In he VMI supply chain he responsibiliy for managing he sock a he cusomer s premises clearly lies wih he manufacurer. Therefore, he Houlihan Effec is compleely eliminaed as he manufacurer is generaing he despaches in he supply chain raher han he disribuor. Wih his configuraion i is no possible o game agains yourself. VMI has he advanage ha on-ime delivery does no need o be moniored, because for as long as here is sock availabiliy a he disribuor, no one cares (including he end cusomer) if a delivery is missed. In fac, i is unlikely ha

24 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / Bullwhip Measures Sysem Performance Peak ORATE overshoo Noise Bandwidh/ 2 (calculaed from real ime series) Opimal VMI supply chain G=0 G=1 G=4 Design 1 G=0, W=1 equivalen Tradiional supply chain Design 2 John e al (1994) Design 3 Disney e al (1997) Ta Ti Tw Ta Ti Tw Ta Ti Tw W=1 W=0.01 W=1 W=100 W=0.01 W=1 W= Table 7. Impac of VMI on Forreser Sourced Bullwhip Effec

25 Disney, S.M. and Towill, D.R., (2003) Vendor-managed invenory and bullwhip reducion in a wo-level supply chain, Inernaional Journal of Producion and Operaions Managemen. Vol. 23, No. 6, pp ISSN: DOI: / he disribuor would even know if a delivery is on ime, as he does no even generae orders o compare agains shipmens. VMI has anoher unique advanage over he radiional supply chain; i aligns he necessary measures of performance required in he VMI supply chain o he cusomer expecaions, which has also been noiced by Kaipia, Holmsröm and Tanskanen (2002). This comes from he fac ha he only wo measures ha are imporan in he VMI supply chain (a leas in a logisical sense), are wheher here is a los sale due o a sock-ou a he disribuor and how much invenory here is in he supply chain, as his influences he coss o he end consumer. So clearly VMI eliminaes one very common source of bullwhip. I is also arguably he mos enuous and irriaing source of bullwhip. More ofen han no i is enflamed by secrecy, lack of rus, and he general adversarial naure of radiional supply chains. 12. The Impac of VMI on he Burbidge Effec The Burbidge Effec in a radiional supply chain can be avoided by despaching every ime period only he requiremens for ha ime period. However, i is ofen he case ha under such condiions he ransporaion (or receiving faciliies) cos is hugely inflaed. Thus, companies ofen resor o a baching menaliy, hereby inroducing a huge source of Bullwhip Effec ino he supply chain. If only he curren ime period s requiremens are despached hen, as shown in Fig. 8, he amoun ranspored will need o change every ime period. So here is an apparen conflic beween reducing bullwhip and obaining economies of scale on ransporaion coss. However, he way a VMI supply chain copes wih he Burbidge Effec in an innovaive manner, is also shown in Figure 8. This is because VMI allows baching o occur in he ransporaion aciviy beween he manufacurer and he disribuor, wihou inroducing he order baching effec ino he producion order rae. This is enabled by VMI because of he way he informaion flow is srucured. Recall ha in a VMI supply chain he sock posiion a he disribuor is compared o a re-order poin and if he sock posiion is below he re-order poin hen a despach quaniy is ranspored o he disribuor. This is one side of an IF. THEN rule. Capuring he oher side of he IF. THEN rule is done by adding o he disribuor s sock he