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The report then explains that problem facing the company is bullwhip effect which is proven by the lack of communication when information is passed from the customer up the supply chain back to the manufacturer. And due to this miscommunication and loop holes the demand forecasted cannot be confirmed nor corrected for any errors, thus inflating the demand of the customer. This problem is further increased when the customer request higher products than it already need due to the increase in lead time every time there is a new product introduced in hopes of receiving their actual requirements even if the distributor fulfils some of the demand.
The recommendation will provide a further examination of the communication between the customer, distributor and the manufacturer to have a collaborative supply chain which correctly forecasts the demand makes the lead time as minimal as possible. Furthermore other than the collaboration, collection of the sales data from the distributor will be collected to build up a database that can be referred too whenever a change in the product is being introduced and also train the sales agent that can adequately point out when there is a possibility of an inflated demand by a customer.
Table of Contents
Jones and Cousins approach to introducing a new product is to market it as quickly as it can and ship the new products within weeks of its introduction. The issue with this strategy is that the demand forecast for the new product has not enough time to be accurately predicted. The amount it takes to manufacture a product and delivery can take more than 6 weeks, ideally it should take 6 weeks but because of uncertainty in demand forecasting and late delivery (because of lag and delays) they receive it much later. It is a common phenomenon with the introduction of new products there is a lot of phantom ordering (Gonçalves, 2003) that results in over estimation of demand and that translate into a ripple effect that increasing in intensity as it goes up the supply chain. This effect is called bull whip effect which is what is happening with the Jones & Cousins. The effect is when the clients demand more than what they need and the main reason behind it is that because it is the health care industry the need for new and improved equipment which can be quickly available for use is what gives medical institutions its competitive advantage. So to compensate for the few suppliers like J&C and NMC the medical institution order more than what they need in hopes that even if they receive part of the order it is enough to fulfil their actual demand.
According to the data provided it can be estimated that the time when the order is received from the client till it the final product is delivered takes more somewhere around 6 – 21 weeks. As per the data it takes 2-16 weeks for the product to be procured by the supplies, 2-3 weeks in the assembly line, 1 week in the packaging and sterilisation and 1 week of delivery to clients. According to the data when a new product is introduced the suppliers lead time is increased from 2 weeks to almost 16 weeks depending on the scarcity and complexity of the order. And furthermore the change in production schedules can take effect in 1 weeks’ time thus increasing the assembly from 2 weeks to 3 weeks and thus increasing the overall lead time when the client first registers the order. The calculation of the assumption provided is presented in the Appendix. The whole process and the extent at which the lead time increase with every new introduction or change in schedule is evident that there are certain forces at play in the supply chain that the company is overlooking which is elongating the lead time exponentially. The whole process of manufacturing is not lengthy but the lead time of receiving the component and then the delivery time to clients takes a lot of time.
J&C is keeping high level of buffer inventory that may be a good idea if the company was not introducing new product with high frequency, and because they introduced new products quickly, the finished goods inventory with 2weeks of supply worth becomes obsolete and needs to be disposed of before the new batch is finished. Thus keeping a high buffer stock as mentioned in the case was correctly deemed as unnecessary and recommended to be decreased by 40%.
Observation of the whole supply chain process it is obvious that the manufacturing is a push strategy that the manufacturer based on the demand forecast provided by the sales agent working with the sales teams and then the sales team then communicates with the J&C and not the distributors. The problem is that because there is another level between the clients and the manufacturer, the distributor, it results in an overestimate demand projection. In the whole decision making process of manufacturing and sales the distributor’s input is not considered. The diagram below shows the process when the client makes an order to the sales agents and the agents then communicates with J&C directly telling them the demand, the demand of the customer which is inflated is then predicted by J&C as accurate and thus pushes the supply of the finished goods onto the distributor. The feedback loop ignores the distributor who has a much direct link with fulfilling customer requirements and demand patterns.
Supply Chain of J&C, Agents communications flow with the company.
The problems that the company is facing is of varying nature; systematic and organizational, and they together hinder the effectiveness of the supply chain to deliver products on time.
There is an overestimation of the actual demand and that creates a strain on the whole supply chain which leads to delayed deliveries and increased lead time to procure the materials in the large amounts from fewer suppliers to keep costs low. The company has 200 products that needs to be produced and when a high demand is received it becomes harder to keep costs and lead time low. There is no historical record keeping in the company but it does face the same issue every time a new product is introduced. However the sales agent in the field should be aware of what the actual demand is as they are the ones closely in contact with the clients. Whatever the case may be the company is dire need of keeping records to be better prepared for the uncertain times whenever they are introducing the new product. One of the reasons behind the highly inflated demand pattern is because the customer do it on purpose as to compensate for the frustratingly high lead time of receiving the product. The premise behind this move is that even if the supplier fulfil part of the intended order, the hospital will in theory receive most of the amount of its original requirement. From the point of view of the client it is a good manoeuvre in order to compensate for high lead times but it becomes a night mare for the manufacturer that has to produce and store high levels of inventory before it can be shipped off to the customer. This high buffer stock used in the finished goods inventory is the result of the high demand by clients.
The phenomena that we are observing is known as the bullwhip effect (AALHYSTER Forklifts , 2012), it is when there is uncertainty in the demand forecasting and a compensation is made to include safety stock. The following diagram shows a simple representation of how the demand increases as the information is moved up the supply chain from the customer to the manufacturer. In the example provided in Figure 2 of Appendix we see that the actual demand by customers is 8 units of product and the retailer orders 2 more units as safety stock in case the demand increases. So the order given to the distributor is of 10 units. The distributor then interprets the order and forecasts that the actual demand may be more than what it is and orders twice as much as safety stock and orders 20 units from the manufacturer. As the trend continues the manufacturer without knowing the actual demand of 8 units if provided with wrong assumption on demand and is given an inflated demand figure. This inflated demand figure is further increased to make room for safety stock in case there is a sudden increase in demand. This constant addition of safety stock is a result of uncertainty and lack of accurately measuring demand. This cause a distortion in the information being passed along the supply chain back to the manufacturer. The reasons for bullwhip effect are many but in the case of Jones & Cousin the major contributors to this fiasco is the lack of communication between the different levels of the supply chain and lack of measures to forecast demand of the customer correctly.
As evident in diagram provided above in the supply chain process of J&C, the retailer who interacts with the customer directly is kept out of the feedback loop from the sales agents who communicate the upcoming demand forecast. The retailer how has a stock pile of the inventory already being is not informed of the impending change. And hence there is a backlash of inventory being kept with the manufacturer until the distributor has made sufficient space for the incoming new inventory. There is no integration of all the players within the supply chain and hence there are errors in demand forecast and the overall performance of the supply chain.
The production schedule within the manufacturing takes 1 week to change when a new product is introduced, even though the changeover time for producing new products does not take much time and has little or no effect on production. However it is decision making and the implementation that takes a while to take in to effect; the decision making levels can cause hindrance. The extra time in decision making translate into an extra week being added into the lead time for the customer receiving the product late. The ripple effect of the addition of one more week deteriorates the value of the supply chain and hence causing customer dissatisfaction. The one week extra lag is unnecessary and can be rectified by being more proactive decision making than reacting to the upcoming change in production. There is an obvious communication distance within the organization that the production managers are not able to change the production schedule fast enough to accommodate the production of new product.
The problems are circular in nature, the demand forecasts problems causes’ increased lead time and the customer to compensate for the increase lead time and frequent small deliveries inflate the demand quantity so that the frequent deliveries are enough to fulfil their requirements. Even if the final delivery takes more time, the partial order fulfilment is able to cover up the requirement of the client. One events reinforces the other and the circle continues on and the resultant is an excess of inventory, forecasting problem which leads to increased lead times and hence cause customer dissatisfaction. As mentioned before this is all due to the fact that the distributor is not considered in the decision making process of production scheduling by the finance and marketing department of Jones & Cousin. This along with the lack of historical data to predict future movements in the demand pattern causes mix-up all over the supply chain
The first people to notice the complaints are the Customer Service Managers because they are the ones responsible for customer complaints and feedbacks. The customer service manager are aware of the problems the customer face because of the excessive lead time for their product. It is the Customer Support Representative operatives that are at the forefront of the complaints that make them first to recognize the problem even before it shows up as on the agendas of the managers making the decisions that affect customer satisfaction. It is because the communication channel provided to the customers is directly to the manufacturer and not through the distributor so the Customer service managers are the first one to notice the issue. Although the CSM is the first one to recognize that there is a problem but the CSM are not able to understand and identify the problem on time is not a farfetched assumption. It is all due to the fact that CSM get unfiltered and unorganized complaints that the distributor could likely be better to equip and rectify than the manufacturer and filter the issues that are more likely to be solved by the manufacturer.
There are several course of action the company can take to rectify the problem but for now the report will focus on the two main issues the company is facing: demand forecasting that cause excess inventory and manufacturing complexities with new products and better communication up and down the supply the chain for a collaborative approach to fulfilling customer demand. The following are the recommendation with no specific importance in ordering are
Along with the responsiveness, the customer can be given the option of part of the new products to be delivered directly from the manufacturer to the customer by the distributor providing logistical services. Thus eliminating the extra lay over at the distributor’s warehouse. This is an option the manufacturer and the distributor can consider in regards to making the supply chain more responsive to ensure the customer does not have same issue of increased lead time and discourage the customers from making inflated demands.
Furthermore more suppliers are to be kept in a database so that whenever there is a situation where the demand for specific material is needed and cannot be fulfilled by the current supplier, there is a list of other suppliers that can fulfil the order without the expense of lead-time. It makes the supply accommodate for more supplies and not compromise on the lead time (Monczka, Handfield, Giunipero, & Patterson, 2011).
AAL Admin (Admin of Blog). (2012). What is the Bullwhip Effect? Understanding the concept & definition [Blog],retrievedNov 12, 2014,from:URL (http://www.aalhysterforklifts.com.au/index.php/about/blog-post/what_is_the_bullwhip_effect_understanding_the_concept_definition)
The recommended channels of communication and the delivery of product through the supply chain
AALHYSTER Forklifts . (2012, April 2). What is the Bullwhip Effect? Understanding the concept & definition. Retrieved from Adaptalift Website: http://www.aalhysterforklifts.com.au/index.php/about/blog-post/what_is_the_bullwhip_effect_understanding_the_concept_definition
Gonçalves, P. M. (2003, June). Demand Bubbles and Phantom Orders in Supply Chains. Massachusetts. Retrieved November 11, 2014, from http://web.mit.edu/~paulopg/www/PhD Thesis Goncalves.PDF
Lyonnet, B., Pralus, M., & Pillet, M. (2010). A Push-Pull Manufacturing Strategy: Analytical Model in the screw cutting sector. World Congress on Engineering 2010. III. London: International Association of Engineers Publications. Retrieved November 12, 2014, from http://www.iaeng.org/publication/WCE2010/WCE2010_pp2306-2312.pdf
Monczka, R., Handfield, R., Giunipero, L., & Patterson, J. (2011). Purchasing and Supply Chain Management. Mason: Cengage Learning.