Many retailers already use bar
codes in their Point-of-Sale
(POS) and EDI systems to
provide nearly real-time external
customer demand information
and they can exchange data
between supply chain partners.
Suppliers then use the data to
leverage their forecasting and
inventory/production plans.
The information flow starts
from retailers and moves up the
chain to their suppliers. POS
technology helps the supply
chain network reduce bullwhip
effects by reducing demand
variability and uncertainty. POS
and EDI technology contributes
heavily to Wal-Mart’s efficient and
effective supply chain through its
distribution and logistics system.
Vendors are able to implement a
Vendor Managed Inventory (VMI)
process to manage inventory for
their customers and themselves
by using POS and EDI technology.
Since bar codes, POS, and EDI
are already helping supply
chain partners receive accurate
demand data to manage their
inventory and production plans,
other incentives to adopt RFID
are necessary.
Even though POS and EDI
systems can provide real-time
sales information, these systems
do not provide information on lost
sales. Lost sales happen when
customers want to purchase
products that are not available on
the shelves. Products might be in
the store backrooms but not on
the shelves. According to research
by the Grocery Manufacturers
Association (GMA), approximately
24% of all grocery stock-outs were
caused by misplaced products,
and a global average out-of-stock
rate is approximately 8.3% (GMA,
2002). Lost sales add up to
more than $69 billion in lost
revenue per year in the retail
industry. To reduce the stock-out
issue, suppliers and retailers
can collaborate to improve the
product replenishment process.
In most supply chains the
retailers are far away from the
manufacturer who is more likely
to work with distributors. Gaps
in information flow naturally
lead to less efficient inventory
management and production
management. RFID promises
to reduce these gaps and make
product transaction details
visible to the entire supply
chain. This obviously desirable
feature yields implementation
challenges. Upstream suppliers
report that they must invest
money to implement advanced
technology to satisfy needs of
downstream users without any
direct benefits to themselves.
The bullwhip effect mentioned
above is an issue worthy of
clarification. The bullwhip effect
describes the phenomenon that
the variation of demand increases
with each step up the supply
chain from customer to supplier.
Minor variability in retailer
demand leads to increased
variability in upstream suppliers.
For example, wholesalers must
use orders placed by retailers
to perform their forecasting.
In order to avoid out-of-stock,
the orders placed by retailers
are significantly higher than
the external customer demand.
Wholesalers then are forced to
carry more safety stock than
retailers to meet the same
customer service level.
The Bullwhip effect has a negative
impact on the supply chain in
two respects:
• Variation in inventory
level: The demand variability
leads to variation in the
inventory level itself. Local,
non-optimal decisions to
carry excess inventory and
safety stocks to meet service
levels dominate the supply
chain. The stronger the
bullwhip effect is in a supply
chain, the higher safety stock
is required. Higher inventory
levels result in higher costs
and significant risk at these
facilities.
• Utilization of capacity: The
demand variability causes
the variation in the use
of production, material,
and distribution capacity.
A typical response to this
problem is to design capacity
for peak demand and bear the
cost of underused capacity
during periods of average
demand.
Considerable research in this
area provides limited suggestions
for reducing the bullwhip effect:
reducing uncertainty, reducing
variability of the downstream
demand process, reducing lead
times, and engaging in strategic
partnerships (Simchi-Levi &
Kaminsky, 2003).