SUPPLY AND DEMAND

Supply and Demand

Supply and Demand

Introduction

Supply-chain management (SCM) refers to the management of materials, information, and funds across the entire supply-chain, from suppliers through manufacturing and distribution, to the final consumer. It also includes aftersales service and reverse-product flows such as handling customer returns, recycling of packaging and discarded products (see Figure 40.1). In contrast to multiechelon inventory management, which coordinates inventories at multiple locations of a single firm, or traditional logistics management, SCM involves coordination of information, materials, and financial flows among multiple firms (Bowersox, 2007).

Also, as firms successfully squeeze inefficiency from their own operations, the next opportunity for improvement is through better coordination with suppliers and customers. During the 1970s and 1980s, global competition forced many manufacturing companies to improve the quality of their products and reduce their manufacturing costs. With 20 years of progress, many of these manufacturers found that the biggest challenges they faced in the new millennium were outside of their immediate control, and solutions required better coordination with their upstream and downstream partners (Billington, 2006). This paper discusses Supply and Demand.

Discussion

While they have reduced their own costs, they found that costs of poor coordination could be very high. For example, both Procter & Gamble and Campbell Soup sell products whose consumer demand is fairly stable—the consumption of Pampers or Chicken Noodle Soup does not swing wildly from week to week. Yet both these firms faced extremely variable demand at their factories (Ballou, 2005). After some investigation, they found that the wide swings in demand were caused by the ordering practices of retailers, wholesalers, and distributors. For example, a manager observing a small increase in consumer demand decided to place larger than usual orders at the retailer's distribution center. The distribution center managers, not knowing the actual store demand, yet seeing the increase in orders, placed even larger orders with the wholesaler to ensure product availability. The snowballing effect was off and by the time it hit the factory, the demand was greatly exaggerated (Baganha, 2008).

This phenomenon—termed the bullwhip effect—has many causes. Sometimes it is caused by supply-chain members forecasting in isolation, as in the previous example. Order batching may also set the snowball rolling since changes in demand are hidden in the large batches. Some of these practices may be exacerbated by the marketing efforts of the company. For example, in the grocery industry, price promotions cause grocery chains to place very large orders, which is called forward buying (Fisher, 2006). These spikes in demand ripple through the supply-chain causing shortages upstream while filling up downstream warehouses. Regardless of the cause, the end result is a greatly distorted demand signal for upstream members of the supply-chain. These large demand swings erode order fulfillment and drive up costs. Fortunately, as discussed next, the bullwhip can be tamed through an integrative approach that employs timely information shared by supply-chain partners and strong relationships that enable coordination (Baganha, 2008).

Such interfirm integration, long the dream of management theorists, finally began gaining momentum in the late ...