Category Archives: Supply Chain Upstream and Downstream

Seasonal Supply Chain Disruptions

The traditional Christmas wind-down often allows time and opportunity to observe businesses which have prepared their supply chain properly to deal with the demands of their customers. One of the easiest places to see successes and failures is at your nearest restaurant.

Seasonal Supply Chain Disruptions

A recent family trip to an Italian restaurant, one of a major UK-chain, quickly became a catalogue of embarrassing failures. Our party of nine had booked a table in advance and informed the manager that we would be ordering from their highly publicised festive menu on the day.

Upon our arrival however the waiting staff informed us that the Festive Menu had been cancelled. Permanently. Worse still the ingredients required for the advertised dishes were unavailable and we would therefore have to order from the a la carte menu instead. The issue was really brought to a head when the waitress admitted that the dessert chosen by half our group was also out of stock.

Apart from immediately creating nine dissatisfied customers, the restaurant demonstrated a definite supply chain management failure by not having the ingredients required for their most popular recipes as advertised. Although Christmas closures at suppliers can cause severe knock-on effects, careful supply chain management and stock level forecasting can easily prevent such problems, particularly when customer orders are placed in advance. The restaurant had 9 orders on their books before the Christmas shutdown, making an ingredient shortage inexcusable. The fact that Christmas comes around on the 25th of December every year should also make long term planning all the easier.

Whether the issues at this particular restaurant were caused by human error or a computer system failure is unclear but the underlying supply chain failures are totally transparent. We would hope that the restaurant described learns their lesson in time for this coming December. This tale of woe should also serve as a cautionary tale for other businesses, in all sectors, next Christmas.

What is the ‘Bullwhip Effect’?

First coined by J Forrester in his seminal paper Industrial Dynamics back in 1961, the phrase ‘bullwhip effect’ is used to describe the knock on effects of a single product and its demand on the wider supply chain. Forrester found that in forecast-driven distribution channels, a change in demand had an ever increasing effect the further back into  the supply chain he went. When graphed, these oscillating changes in demand appear as a series of waves which get greater in size, reminiscent in appearance of a cracking whip. Because Forrester is credited with documenting the bullwhip phenomenon, it is also known as the Forrester effect by some.

Bullwhip Effect and the Supply Chain

Source: Wikipedia

The effect is created by statistical demand by suppliers attempting to forecast customer demand to properly position stock and raw materials at the correct points for timely delivery. Forecasting provides some degree of statistical accuracy, but the vendor must carry an inventory buffer to cover unforeseen fluctuations. Moving further up the supply chain, manufacturers and suppliers of raw materials must also maintain an inventory buffer to satisfy the demands of their own customers; because these demands can shift to even greater degrees, the “safety stock” levels must also be greater. Should downstream demand fall, the supplier is left carrying inventory which they are unable to shift, creating the “bullwhip effect”.

Forrester also observed that the bullwhip effect can be caused by a number of factors relating to human error or operational problems. Misapplication of statistical forecasting techniques or internal and external communication issues all play a part in oversized inventory buffers. So too do perceptions regarding supplier’s ability to meet demand and fulfil orders for a variety of reasons.

The bullwhip effect has an effect on an organisation’s bottom line, through inefficient production or stock short falls. The obvious knock-on effect is a reduction in customer service and satisfaction levels which has a definite negative, and therefore costly, impact on a brand’s reputation.


Upstream and Downstream – Navigating the Supply Chain

Upstream and Downstream in Kanuti River, Alaska.In terms of metaphors, the river is a perfect picture of a general supply chain. At the river’s source lies the producer of the raw materials. He loads his wares onto a boat and sails downstream until he reaches his buyer whereupon he offloads his goods, takes his payment and sails back upstream to his home. The buyer then assembles the raw materials into a product and ships them further downstream to his buyer. The goods travel downstream and a payment is returned upstream. This process continues down the length of the river until the finished goods are sold to the consumer.

In terms of the river, two things always happen. Goods travel downstream and money travels upstream. And so it is with the supply chain.

In the event that the supplier at the start of the river delivers directly to the end customer, the supply chain is a simple two stage process. Once there are multiple buyers and suppliers involved however, the supply chain becomes more complicated.

Also worthy of consideration is the fact that the cost of the intermediate goods rises with each stop. Value is added to the product at each intermediate stage and prices must also rise to cover mounting costs.

At this level, everything is still quite simple without any obvious room for efficiency savings. However, add an accounts department at each stop and the process immediately becomes more complex. The buyer has to send a purchase order to the supplier upstream before the goods can be sent downstream adding another journey to the supply chain. An invoice can be sent along with the goods, but payment and remittance advice will not be available immediately upon presentation, so that means another trip upstream to clear the account. Suddenly the supply chain is slowed considerably. Instead of a simple there-and-back trip, the are now three or four journeys required for one hop in the overall supply chain.

At this point, only the introduction of a system which links both up and downstream but which exists outside both can make the efficiency savings required to maximise profit and ensure value added is retained as profit. Adding an electronic supply chain integration platform such as Celtrino’s Smart Admin system obviates all the journeys back and forth with bits of paper between suppliers and buyers – almost like sending a carrier pigeon between both parties and saving the ship’s captain a number of trips.

Less trips, means lower costs. Tying seller and buyer together with an integrated supply chain management helps increase efficiency and everyone shares in the increased profits.