Introduction and background information
This report provides an insight into the many stages and key factors that need to be considered in supply chain management. This includes effective communication channels between supplier, manufacturers, distributors and retailers, in supply and demand of consumer goods. There is often miscommunication within an organisation during the various stages that result in serious issues in the supply chain process. This common problem is known as The Bullwhip Effect (Adaptalift, 2012). The model can be explained as an occurrence detected in the supply chain. Where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer. This variance can interrupt the smoothness of the supply chain process as each link in the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations.
Studies from lecture reviews have identified the four major causes of the bullwhip effect:
- Demand forecast updating
- Order batching
- Price fluctuation
- Rationing and shortage gaming
Observations will be made using examples from the world’s leading manufacturer of consumer goods Procter & Gamble. How they transformed their business model by understanding the inefficiencies and costs the bullwhip effect has on their supply chain.
Operations and supply chain issue
The Bullwhip Effect can be explained as the phenomenon where orders that are sent to the manufacturer, distributor and then to the retailer creates large variance in the time it takes for the final product to get to the end consumers. Essentially, the time is takes for a product to be available once there is a demand for it. These irregular orders from consumers in the lower part of the supply chain develop to manufacturing of the product more distinctive higher up in the supply chain. Which leads to interruptions in the smoothness of the supply chain process at each stage. Resulting in the supply chain under or overestimate the product demand, which will cause exaggerated fluctuations in supplies.
The most frustrating example of the bullwhip effect in action, is when a product is out of stock when there is a high demand. Which will result in a decrease in profits if the product is not available when customers want it. However, the other extreme of the bullwhip effect is that there is too much stock and no demand for the product. Which takes up inventory and valuable space for other products. An example of the bullwhip effect in a real-life scenario starts from the consumers demand for a product.
In many instances the actual demand for a product gets distorted going down the supply chain. The original demand from customer is 8 units, but the retailer orders 10 units from the distributor; with the extra 2 units being used to ensure they do not run out of floor stock. The supplier then orders 20 units from the manufacturer; allowing them to buy in bulk, so they have enough stock to guarantee shipment of goods to the retailer in time. The manufacturer then receives the order, and then orders 40 units from their supplier in bulk; to ensure economy of scale in production to meet demand. Now 40 units have been produced for a demand of only 8 units; meaning the retailer will have to increase the sales of the product by dropping prices or finding more sales through advertising.
Performance and challenges
Procter and Gamble founded in 1837, are the world’s leading manufacturer of consumer goods, announcing a net sales reaching $65.1 billion in their annual report in 2017. P&G are the proud owner of 13 brands which include well-known brands such as Gillette, Vicks, Pantene, and Pringle potato chips. The company operates in North America, Europe, Africa, Asia and the Pacific, with products sold in over 140 countries.
As expected for a corporations of their size, they have an extremely complex supply chain, with over 70,000 suppliers worldwide. David Taylor the CEO of Procter & Gamble said “The more integrated and connected P&G and our supplier partners are, the better able we are to be more innovative and productive in meeting consumers’ needs and, as a result, deliver balanced and sustainable growth and value creation for our shareholders” during the External Business Partner Excellence Award in 2016.
For nearly two centuries P&G have managed to remain industry leaders by continuously re-evaluating and innovating. In 2015, they saved $1.2 billion by effectively overhaling their supply chain costs by redesigning their distribution network. They succeeded by making vast improvements to visibility throughout the supply chain and partnering closely with suppliers. Which included bringing suppliers in house and locating their own staff at supply sites to increase efficiency.
These transformations are largely due to advancements in digital technology. The new focus of the supply chain management role has developed to “advanced planning processes” based more on the actual demand from end consumers. Which has been made available by digital analytical forecasting and integrating operations planning. One of the key technological drivers is an “end to end model” that connects isolated steps from the suppliers to retailers to provide the most value to the end consumer. With a faster than ever response time. The concept of integrating the whole value chain allows every stakeholders of its eco chain to minimize the unnecessary inventory as well as to speed up the system.
The demand driven mode is about sensing and responding to demand as quickly as possible. This requires manufactures to rethink its production stage to shipment network design. In order to meet the high demand from consumers, P&G integrated their data driven production flow of operations that significantly improved responsiveness as well as transparency. This resulted in the digital aspects of the supply chain that used to be small individual steps, now become more holistic, managed in real time on the entire ecosystem.
The new global challenge P&G is facing and have put a lot of time and money is making big strides towards sustainability. On their website, they announce their aim to have ‘zero manufacturing waste to the landfill” which appears to be a bold and difficult task. However, this goal has already begun to take shape. In October 2017, P&G announced that in 2018 one of its most recognisable brands of dish washing liquid, would be packaged in bottles completely made out of recycled plastics and repurposed ocean plastics. The 320,000 bottles are set to go on sale as part of P&G’s goal to double the amount of recycled materials packaging their products by 2020.
We live in a world where consumers are demanding sustainability and transparency from their brands. A study found that 66% of respondents would pay more for a product or a service if the company was committed to positive social and environmental change. However, companies such as P&G need to be conscious of their efforts towards sustainability, that they are transparent and are not perceived to be green washing their products to make a profit. P&G have demonstrated their seriousness to committing to sustainable efforts by revamping their entire supply chain.
These new steps see them working with not for profit organisations in South East Asia to aid the collection process. P&G have also expanded their supply chain to form a partnership with recycling experts TerraCycle to work towards the most viable solutions for the collected plastics. Due to this research and partnership P&G have been able to use recycled plastics in a way that doesn’t negatively affect the packaging. With only a slight difference to the colour, transparency and shape of the packaging. While ensuring the product can be recycled again after use. These sustainable efforts are worth it in their own right. According to the Ellen MacArthur Foundation 95% of the value of plastic packaging materials, is lost to the economy and if current consumption trends continue, there could be more plastic than fish in the ocean by 2050.
Recommendations to managers
Procter & Gambler have been leaders in the industry for decade. However, they need to continue making improvements towards being sustainable and improving their supply chain to remain the best in the industry. For example, to truly accelerate the cycle of innovation, Procter & Gambler should consider the following. A direct to consumer approach. One way to shorten the lead time from manufacturing to consumers is to cut some phases of the supply chain. Rather than moving the products from factories to retailers, P&G should accelerate the development of direct to consumer supply chain from the manufacturing plants. Future research on the effectiveness and return on revenue needs to be done to weight up the benefits of Procter & Gambler having a direct to consumer approach.