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Supply Chain Synchronization
Part 2 of 6


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SELECTING THE SKUs TO BE SYNCHRONIZED

The supply chain community fulfills customer orders for a portfolio of product offerings identified by SKU numbers. The SKU number represents the combination of a part or product and its packaging. For example, the same beverage sold in six-pack or twelve-pack cans and in six-pack or twelve-pack bottles represent four differ­ent SKUs. There needs to be general agreement among the trading partners about the definitive set of SKUs that will be considered for synchronization. Only SKUs processed by every trading partner should be included in the master list. When one trading partner participates in multiple supply chains, there will be other SKUs that are not relevant.

The SKUs can now be ordered from the largest to the smallest in terms of either their revenue or their con­tribution margin. The revenue model is an easier dis­cussion with the other trading partners than the contribution margin model. However, the contribution margin model will lead to higher supply chain profits. In some cases, sets of SKUs should be grouped together in order to represent a complete product solution as it is purchased by the end customer. If the contribution

margin model is used, then prod­uct contribution margins must be related to the end-to-end supply chain and not just the contribution margin recognized by a single trad­ing partner.

Once the SKUs are ordered, there will be a distribution of their impact on revenue (or contribution margin). Break the distribution into A, B, and C groups as follows:

 

      A: About 20 percent of the SKUs account for 80 percent of the rev­
enue (or contribution margin).

      B: About 30 percent of the SKUs account for 15 percent of the rev­
enue (or contribution margin).

      C: About 50 percent of the SKUs account for 5 percent of the rev­
enue (or contribution margin).

 

Focus the synchronization effort on the A SKUs or SKU sets. Vendor managed inventory (VMI) is an ap­propriate strategy to manage the B SKUs. Traditional push forecasting with build-to-stock is an appropriate strategy to manage the C SKUs. For example, if the sup­ply chain community offers a portfolio of 500 SKUs, then the supply and demand of about 100 A SKUs should be synchronized daily. Daily synchronization can work well close to the customer and through the middle of the supply chain, but will dissipate into various lot sizing rules closer to the parts suppliers.

THE BULLWHIP EFFECT

In the 1960s the Sloan School of Management at MIT introduced graduate students to the "Beer Game." The Beer Game, as later described by Peter Senge in The Fifth Discipline, is a simulation constructed around a four-node supply chain and its system dynamics. The four nodes are a retailer, a wholesaler, a brewery, and a hops supplier. It tuns out that the ordering and delivery cycles of this supply chain form a closed-loop system. Unfor­tunately, delays in the system and the fact that the hops supplier and the retailer never really communicate with one another cause the system dynamics to oscillate. A very small change in the customer ordering pattern re­sults in the brewery seesawing between being out of stock and having excessive inventory. The result is always the same regardless of the particular people who play this simulation. The system delays are always stacked against the supply chain.

The same effect has been described by Hau Lee at Stanford as the "bullwhip effect." As information propa­gates from the retail point-of-use toward the raw mate­rial supplier, it becomes more and more distorted. The distortion takes the form of an amplification factor with some phase shift. A small action on the handle of the bullwhip causes a large excursion at the business end o

 he whip. In a poorly designed supply chain, a fairly con­stant end-customer ordering pattern will cause the fac­tory and its supplier base to whipsaw in and out of excessive inventory positions. The bullwhip effect can be prevented by properly designing a communications path for the raw demand signal. Serial delay is eliminated from the communication path by broadcasting the demand signal in parallel to each trading partner. And communi­cations are opened by ensuring that every trading part­ner has access to point-of-use demand data.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 11


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