Before knowing how SCPM helps in cracking Bullwhip effect, let us first know the meaning and causes of Bullwhip effect.
Let’s take an example of a fictitious shoe manufacturing company – Edidos. Edidos forecasts a huge demand for its shoes during the New Year in Asia Pacific, a demand amounting to around 10,00,000. Accordingly, it instructs the manufacturing division to produce this number. The manufacturing division keeps a safety stock/buffer stock and targets to produce 10,25,000 shoes to cater to this demand. The procurement division in turn targets to get raw materials to cater to 10,50,000 shoes. This buffering has resulted in huge pile-up up the supply chain, from customer to supplier. Now let’s assume 5,000 shoes turned out to be defective. So now, the finished goods has come to 10,70,000. Now, during the New Year, Edidos’ competitor company Embok, gives a huge discount of more than 60% and hence Edidos loses many orders, leaving 4,00,000 shoes in the warehouse. This has resulted in a huge loss in the shoe sale.
Now, let us understand the Bullwhip effect. The pile-up that we observed due to buffering is nothing but Bullwhip effect, a phenomenon where the variation of demand increases up the supply chain from customer to supplier. The further away a company from the end customer(in terms of lead time), the larger is this variation.
Any factor that leads to either local optimization by different stages of the supply chain or an increase in information distortion and variability within the supply chain is an obstacle to coordination and results in Bullwhip effect.
It has been proven that, with adequate and timely information, one can minimize or nullify this Bullwhip effect. In the context of a survey among 200 European companies, operations managers were asked, how valuable certain information from customers is for their production planning and how often they receive it from customers. Their answers are represented by grey dots in the figure below. Generally speaking, the more important information from customers is, the more often it is valuable to a company. Accordingly, the dots representing information lie on a diagonal line in the diagram.
Operations managers were also asked to estimate the value of the same information for the production planning of their suppliers. It was found, that they consider information to be less valuable to their suppliers than this information is to them. As a consequence they pass on this information less frequently than they receive it from customers (see black dots in the figure below). The same applies to information, like capacity available, which a company receives from customers and which it should pass on to suppliers. Thus, each co-maker acts as an obstacle for information flow up as well as down the supply chain.
This information coming raw from customers or anywhere up in the supply chain, represented in a well-structured form, helps the decision-makers to align their supply chain strategy. Analysis using Scorecards is one of the ways which is well-structured and has the ability to display information accurately and drill down to problem areas so that measures can be taken to counter them.
SAP, having worked with various customers across a wide spectrum of industries, is offering SAP Supply Chain Performance Management(SCPM), with which, Analytics and Scorecards aggregate valuable information like cycle times, forecast accuracy and many others and represent them in an understandable manner. For example, if cycle times is abnormal, the Scorecard turns the objective red and drilling into the objective will help the decision-makers to pin point what made the cycle time abnormal by drilling down the KPI.