Welcome back to the ninth part of the SAP S/4HANA Cloud use case series. Last week we had a look at the Integration of SAP JAM to the SAP S/4HANA Professional Services Cloud and this week, we will examine a very interesting use case in the manufacturing area concerning the information distortion in the supply chain: The Bullwhip Effect. We will also explain how SAP S/4HANA Cloud will enable manufacturers to decrease this effect. Please note that this process will only be available with future releases (see Roadmap).
What is the Bullwhip Effect?
First cited by Forrester in 1956, the Bullwhip effect is a typical phenomenon of logistic control in the supply chain and is one of the main reasons for inefficiencies in supply chains. The bullwhip effect describes the phenomenon that the variation of demand increases up the supply chain from customer to supplier. Considering a supply chain that consists of an OEM (original equipment manufacturer) and a 1st-, 2nd- and 3rd-tier supplier, the OEM faces the lowest and the 3rd-tier supplier the largest variation of demand (see figure 1).
Fig 1: variation of demand
It represents the uncertainty caused by a lack of communication between the various links in the supply chain. The distortion of information prevents companies from correctly predicting demand, resulting in significant costs for stakeholders.
What are the consequences?
The following two effects consequences of the Bullwhip Effect increases the cost for logistics and lowers its competitive ability:
- Too much stock resulting of the high level of safety stock necessary to ensure a sufficient service level.
- Variation in inventory level: The varying demand leads to variation in inventory levels at each tier of the supply chain. If a company delivers more than the next tier passes on, the inventory level increases. Vice versa, the inventory is reduced in case a company delivers less than the next tier passes on. A high level of inventory causes costs for capital employed while a low level of inventory puts the delivery reliability at risk.
How is it explained?
In addition to the lead time of information and material (not covered in this blog), the Bullwhip Effect is caused by:
- Poor demand forecasting systems in the different stages of the logistics chain: Demand forecast based on orders of the succeeding tier.
- Batch order processing: Companies subsume demand in batches to reduce set-up costs and order-fixed costs.
- Price fluctuations: Companies vary the prices of their products and offer temporary price reduction to end customers or retailers for marketing reasons. Therefore, customers start speculating with the products. They buy more in times of low prices and postpone demand in times of high prices.
- Rationing Game: The customer orders more than necessary because the supplier does not provide all his orders.
Solution Approach: Demand-driven Replenishment with SAP S/4HANA Cloud
The concept of Demand-driven Replenishment contains the following core components (among others),
- A focus on real customer demand (i.e. not plan against forecast)
- The concept of strategic buffer positioning at selected Decoupling Points (DP)
- A continuous buffer (re-)sizing based on real data analytics / feedback loops, to adjust the buffers to the ever-changing reality
pursuing the goals of
- Improved customer service levels
- Smooth and sustainable material flow
- Reduced inventory levels and bound capital
Decoupling points establish strategic stocks that are acting as a planned buffer between each side of the supply chain to protect the upstream parts from the fluctuating consumer demand. They reduce dependencies and complexity within in the end-to-end supply chain, and they also allow to compress overall lead times, relevant in particular in industries where customers expect responsiveness.
Fig 2: Material and Information flow decoupling point
Demand-Driven Replenishment, helps you, in addition to the classical processes:
- to achieve an improved and smooth material flow with less exceptions by keeping stock at the right spots within the supply chain and in the right quantity.
- in that way gaining responsiveness to react on real customer demand, covering it in a demand-driven way (and hence, also avoiding unnecessary production). In this case, we will have a new analytical app for monitoring and adjustment of buffer levels.
- the adaptiveness via feedback based on real data analytics, by which the solution’s settings / parameters are improved and amended to the “real life”.
Fig 3: Demand-Driven Stock Level Management
Mapping with the Value Lever and Key capabilities of SAP S/4HANA Cloud
Let us map this use case to the relevant value lever we outlined in the beginning of the cloud use case series. Out of the three dimensions “increase efficiency”, “increase effectiveness” and “increase agility”, this use case relates to:
- Increase agility (innovate and evolve quickly): we enable immediate production of individualized products, ensure high service levels at lowest possible inventory along all BoM levels and reach better quality and smoothen production flow by prevention of defects
- Increase effectiveness (act on that insight in real time): we provide full demand transparency and provide well-founded decision support and instant reaction and resolution of issues.
You want to simulate? – Beer Distribution Game!
If the blog was too theoretical, I propose to simulate this Bullwhip Effect by a game in order to understand more in detail the challenges that our development team is facing to allow SAP to propose to our customers very new processes with SAP S/4HANA.
The purpose of the game is to understand the distribution side dynamics of a multi-echelon supply chain used to distribute a single item,
The A.T. Kearney Beer Distribution Game (also known as the beer game) updates the classic supply chain game originally developed by a group of professors at MIT Sloan School of Management in early 1960s and brings it to your iPad. This game provides and interactive and enjoyable way to learn about a classic supply chain problem – the forester or bull-whip effect, and in this case, cases of beer!
You can download the game on the AppStore.
Next week we will round up this use case series and let you know what to look out for.
For more information on SAP S/4HANA Cloud, check out the following links:
- SAP S/4HANA Cloud release information: http://www.sap.com/s4-cloudrelease
- Product documentation and What’s new in SAP S/4HANA Cloud 1702 available here
- Best practices for all the cloud editions here
Follow us via @SAP and #S4HANA, or myself via @SDenecken