Question

CASE: SUPPLY CHAIN MANAGEMENT

Pierre’s Kitchen

Pierre’s Kitchen manufactures utensils and gadgets for the cooking enthusiast. Pierre’s products are sold throughout North America, predominantly through kitchen and home specialty stores. Like most producers and suppliers of consumer specialty products, Pierre’s must cope with large seasonal variation in demand. This is easily seen to relate to seasonal variation at the retail stores,

One of Pierre’s top-selling product families is its line of 78 different gourmet kitchen knives. The knives have received praise for their comfort in the hand and their ability to hold an edge. Pierre’s credits the popularity of its knives to the steel used in their construction. Pierre’s has always utilized the finest Swedish steel for its blades. The steel used in those knives is the source for nearly all of purchasing manager Robin Benton’s aggravation.

Robin orders steel for knives at the beginning of each month. By the time it is transported to port, shipped to the US, and trucked to the Pierre’s Kitchen plant, it takes just over five weeks to get it. Robin determines order quantities by projecting retail demand for each knife model over the next month, translating those forecasts into steel requirements, and then summing the requirements across the 78 knife models. That forecast for each knife model is based on the sales that occurred the previous month. Pierre’s supplier of steel recently threatened to increase its prices during the next contract period to cover increasing expenses it claims are the result of the wide fluctuations in order quantities from Pierre’s.

Robin has examined her forecasts and orders for knife steel and admits that the orders fluctuate dramatically from month to month. This results from fluctuations in individual store demand, which in turn results from promotions and sales at the store level. When confronted with this information, sales manager Jaylen Cooper responded, “It’s true that sales at individual stores fluctuate, but when I look at month-to-month sales across an entire chain of retail stores, the demand only fluctuates about 10 percent. The only exception to this is the inventory build-up at Christmas time.” Robin’s examination of the actual sales data confirmed Jaylen’s report.

1. Explain all possible causes of the demand fluctuation at the supplier.

2. For each possible cause, identify a reduction strategy that is within Robin’s control.

3. Is this bullwhip effect? Explain.

4. What types of communications enhancements would help reduce the problem?

Answer 1

Answer1: Possible causes of the demand fluctuation at the supplier

• No minimum or maximum order quantities
• Poor customer service rates
• Safety stocks that depend on erratic demand variance
• Promotional activity
• Poor communication
• Product proliferation
• Volume/transport discounts

Ans2: Reduction strategy that is within Robin’s control-

• Vendor-managed inventory (VMI)
• Just in time replenishment (JIT)
• Demand-driven MRP
• Strategic partnership
• Information sharing
• Smooth the flow of products
  • Coordinate with retailers to spread deliveries evenly
  • Reduce minimum batch sizes
  • Smaller and more frequent replenishments
• Eliminate pathological incentives
  • Every day low price policy
• Restrict returns and order cancellations
• Order allocation based on past sales instead of current size in case of shortage

Answer3:
Yes,This is the bullwhip effect because forecasts and orders for knife steel fluctuate dramatically from month to month.The bullwhip effect is a distribution channel phenomenon in which forecasts yield supply chain inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one moves further up the supply chain.

Answer4:

One way to achieve this is to establish a demand-driven supply chain which reacts to actual customer orders. In manufacturing, this concept is called kanban. This model has been successfully implemented in Wal-Mart's distribution system. Individual Wal-Mart stores transmit point-of-sale (POS) data from the cash register back to corporate headquarters several times a day. This demand information is used to queue shipments from the Wal-Mart distribution center to the store and from the supplier to the Wal-Mart distribution center. The result is near-perfect visibility of customer demand and inventory movement throughout the supply chain. Better information leads to better inventory positioning and lower costs throughout the supply chain.

The concept of "cumulative quantities" is a method that can tackle and even avoid the bull-whip-effect. This method is developed and practised mainly in the German automotive industry, with its expanded supply chains and is established in several EDI-formats between OEMs and their suppliers.

Barriers to the implementation of a demand-driven supply chain include the necessary investment in information technology and the creation of a corporate culture of flexibility and focus on customer demand. Another prerequisite is that all members of a supply chain recognize that they can gain more if they act as a whole which requires trustful collaboration and information sharing.