Case Study of an Asian-European Automotive Supply Chain

International Journal of Information, Business and Management, Vol. 5, No.2, 2013 Bullwhip-Effect and Countermeasures: Case Study of an Asian-European Automotive Supply Chain Andreas H. Glas (correspondent author), Florian C. Kleemann, and Michael Essig Chair of Materials Management and Distribution, Competence Center for Performance-based Logistics Bundeswehr University Munich Werner-Heisenberg-Weg 39 85577 Neubiberg, Germany [email protected] [email protected] [email protected] The effect of a higher demand variation over a supply chain is de s c r i b e da s“ b ul l wh i p -e f f e c t ” . Si nc eFor r e s t e r( 19 5 8)d i s c o v e r e d around 45 years ago that variations of demand (and based on that the variations of orders and stocks) are increased up the supply chain from customer to supplier, researchers look for reasons and try to find countermeasures. While in-depth academic analysis has been conducted for retail markets, very little research has been done on this in global business-to-business networks. We used data from a case study of one Asian-European supply network in order to identify endogenous causes and counter-measures for demand variation. We analyzed the effects and clustered counter-measures with respect to information and behavior uncertainties. This study provides in-depth insights into the dependencies of supply structures to endogenous, even macroeconomic developments. At the same time this study recommends counter-measure strategies to the bullwhip-effect for practitioners and their global supply chains. Keywords: Bullwhip effect, Global supply chain management, Automotive industry, Case study INTRODUCTION Lacking coordination of demand and supply information is one of the main causes for demand and stock variation which propagates upstream with amplification occurring at each echelon of the supply chain. Lee, Padmanabhan, and Whang (1997a) a n dLe e ,So,a ndTa n g( 200 0)p op ul a r i z e dt h et e r m“ b ul l wh i p -e f f e c t ”f ort h i sph e n ome n onofde ma n dd i s t or t i on . Theb ul l wh i p 81 ISSN 2076-9202 inventory rationing. 1990. time and cause-effect chains of the problem. Banks and Malave 1984). Vol. Carlsson and Fuller 2000). This paper addresses the following guiding research questions. 1998. also behavioral causes of the bullwhip effect have been investigated (Croson and Donohue 2006). The bullwhip effect has a number of negative effects that cause significant inefficiencies. e. one approach of this paper is to shed light not to a supply chain connected to retailers and end customers. poor customer supply service and lost revenues due to shortages.g. Chen et al. As the problem is of high importance for the automotive industry (Tsou. order batching and price variations (Lee et al. Metters 1997. This supports our proposition that a holistic and integrating case-based view on the problem might help to get more theoretical insights and practical knowledge about causes and countermeasures of the bullwhip effect. 5. Kelly 1995.g. Operational causes are demand signal processing. 1997a. and logistics capacities (Lee et al. production. the demand variation will simply go up through the supply chain (Carlsson and Fuller 2000). if everybody reacts to the bullwhip effect with the same counter measure. Particularly in-depth academic analysis has been conducted on the bullwhip effect for retail markets. misguided management decisions regarding procurement. we have chosen a case from this industry branch. On the other hand.2. It is qualitative in nature and reveals in-depth insights into the problem illustrating the structure. e. 2012). which are –according to case study methodology – “ h ow”a nd“ why ” -questions (Yin. Forrester 1961). exponential smoothing technique. Business and Management. It is possible to evaluate different causes in a combined and integrated way. The application on a case study of a global supply chain allows illustrating the counter-measures with respect to both –operational and behavioral –causes of the bullwhip-effect. Many proposed counter measures have a history of successful application (Clark 1994. Gill and Abend 1997. Towill 1997). In-depth case analysis allows analyzing counter-measures to the bullwhip-effect from a holistic view. Changing the perspective. One important tool for optimizing a supply chain in respect to the bullwhip-effect is simulation (e. Warburton 2004). 1997a. In the last years. Therefore this paper does aim to analyze a global (Asian-European) business-to-business supply chain with respect to causes and countermeasures of the bullwhip-effect. but on the bullwhip-effect in a global (Asian-European) business-to-business network. No. 2013 effect has been documented as a significant problem for supply management in an experimental context (Sterman 1989) and in a wide variety of companies and industries (Buzzell et al. 2010): 82 ISSN 2076-9202 . excessive inventory investments throughout the supply chain. Early findings have shown that a close cooperation in one supply chain may decrease costs and optimize the flow of goods and information (Forrester 1958. Cachon 1999). Holmstrom 1997. Hammond 1993.International Journal of Information.g. even mathematical models demonstrate that the bullwhip effect is an outcome of the strategic interactions among rational supply chain members (Lee et al.2. the researchers focus on linear supply chain models.g. This is followed by the case content and findings. 2) supply shortages. 3) nonzero lead times. No. This paper concludes with a brief discussion and reflection of our findings. 2004). . 4) batch ordering. Warburton. also considering the effects on transport modes and lead times in the supply network. Five main causes of the bullwhip effect have been identified: 1) the misinterpreting of demand information (forecasting). Disney and Towill. 2000. Carlsson and Fuller (2000) summarized the effects of the bullwhip effect following Lee et al.As a result this work evaluates the applied management strategies and provides recommendations for further research. While these causes expect rational decisions of all supply chain members (operational causes). REVIEW ON THE BULLWHIP EFFECT After introducing the problem of this paper. This poses further questions about the appropriate assessment of a specific operational or behavioral contingency. demand and stock variation propagates upstream with amplification occurring at each echelon of the supply chain. Warburton. whereas the flow of goods is strictly linear with a reverse flow of information (Chen et al. we present a brief review on about 40 years of research in this field. (1997a and 1997b): 83 ISSN 2076-9202 . Lee et al. 1997a. and 5) price variations e. If the variance of the orders of one echolon in the supply chain is higher than the variance of the received orders of the same echelon. this work analyzes the purchase. simulation and optimization (a. this section provides a brief review on the bullwhip-effect research. Vol. irrationality or opportunistic behaviour (behavioural causes) is another source of the bullwhip effect (Croson and Donohue 2006). 1997b). Already in the 1960s. then we have a bullwhip effect (Cachon et al. The remainder of the paper is structured as follows: Firstly. As a result of those causes. Business and Management.International Journal of Information. 2002. 2007). Forrester defined in a simplified form the equations describing the relation between inventory and orders (Forrester. and forecast data of the case company for a period of four years. In this section we highlight and evaluate three managerial countermeasure initiatives. 5. Then we introduce the methodology. 1961). Analyzing the bullwhip-effect. 1997a and 1997b.o. price promotions (Lee et al. sales. However. Metters 1997). 2004). Since then research worked on a mathematical formulation. 2013 RQ1: Why is there a bullwhip-effect in the analyzed supply chain? (causes) RQ2: How is the demand and stock variation influenced by applied countermeasures? (effects) To answer both questions. No. Such decisions are probably misguided.2. This must pose surplus challenges to the bullwhip problem. which actually are completely unnecessary. as there are no real changes in the demand. which have been caused by the variations. As this paper focuses on a case firm in a business-to-business network and its intra-logistic. METHODOLOGY While many authors focus on retail and consumer industries. as much of the complex inventory behavior is determined by the replenishment delay (Warburton. 5. but can also optimize both sources of the bullwhip effect. At this point. Vol. Countermeasures to the bullwhip effect focus either on operational or behavioural causes. 2013 Exaggerated inventory investments throughout the supply chain as all supply chain members need to safeguard themselves against the demand variations. only inefficiencies in the supply chain. Bhattacharya and Bandyopadhyay 2010). Lost revenues due to shortages. (2) Improved coordination of capacities and batch orders in order to control the behaviour of single supply chain members. Replenishment in a global supply chain has long transport (shipping) times of about 20-30 days from Asia to Europa. This is surprising. very little research has been done on global business-to-business networks. we want to stress four major counter measures: (1) Improved information of each supply chain member in order to enhance the basis for rational decision making. Business and Management. Demand variations cause fluctuations in the planned use of transportation capacity. 2004). Demand fluctuations caused by the bullwhip effect may cause missed production schedules. 84 ISSN 2076-9202 . prices the c oun t e r me a s ur e“ e v e r y d a yl owp r i c e s ”i snot further regarded.( 4)“ Ev e r y d a yl ow p r i c e s ”t os moot h et h ed e ma ndv a r i ation of the end-customers (Lee et al 1997b. as peak demands may be eliminated by reorganisations of the supply chain.International Journal of Information. (3) Improved structure of the supply chain in order to reduce lead times. Decision-makers overreact to the demand fluctuations and make investment decisions or change capacity plans to meet peak demands. Therefore this study has chosen a global supply chain for its case analysis. The productivity of invested capital in operations becomes substandard as revenues are lost and capital is invested in inventories. This will again produce sub-optimal transportation schemes and increase transportation costs. Poor customer service if one member of the supply chain runs out of products due to the variability and insufficient means for coping with the variations. We studied the developments in the case firm starting from 2008 up to 2011. (2000). mostly 1st tier module suppliers (cockpit. The Asian headquarters coordinate and prioritize all orders from the world. Un i t e dKi ng d om) . Additionally the authors supposed an accelerator effect to the bullwhip variance for suppliers of electronic devices.Weh e l ds e ve r a lwor k s h op sa tt h eEur op e a nh e a d q ua r t e r sa ndi n t e r v i e we df i v es up p l yma n a g e r si nf our different organizational units (national subsidiaries. For example. The orders are then forwarded to the European headquarters. THE C ASE OF THE 2ND TIER ELECTRONIC AUTOMOTIVE COMPONENT SUPPLIER The Asian-European Supply Chain The supply chain of the case company connects the Asian production units (factories) in China. Japan or Thailand by ship or by plane with the European central warehouse in Germany or national warehouses all over Europe. Vol. Sp a i n . 2000). The applied methodology to the case company follows a three step analysis framework which firstly examines the causes of demand variances. we analyzed purchasing. sales and forecast data. Therefore we have chosen a 2nd tier supplier of the European automotive industry delivering electronic devices.t h i swoul de n f or c et h e“ n or ma l ”b ul l wh i p -effect in dependency of customer-sales data. entertainment) are supplied from those warehouses. 2012). I ft h eOEM woul dp us h the modernization (3 mor emod e l si nay e a rr e p l a c e d ) . On the other hand it is a field with numerous bullwhip effect challenges (Tsou. Th ec omp a n i e s ’c l i e n t s .Th i swoul dr e s ul ti na“ n or ma l ”or d e ri n c r e a s eof10%. The information flows from the clients (orders) in either a national subsidiary or a national sales office. Suppose that an automobile original equipment manufacturer (OEM) is operating with a given product s p e c t r uma n dmode r n i z e se v e r yy e a ron emod e l . navigation.2. Additionally.International Journal of Information. then analysis the (negative) effects for the supply chain and finally proposes evaluates the applied counter-measures (Scholz-Reiter 2005. Cz e c hRe p ub l i c . No. This is more or less 85 ISSN 2076-9202 . we follow Anderson et al. To illustrate this technological accelerator effect. For this study we focused on the logistics processes within the case f i r m( “ i n t r a -l og i s t i c s ” ) . central stock. Chen et al. Business and Management. However. European and Asian Headquarters). National warehouses are situated in countries with important automot i v eOEMs( I t a l y . the production of a modern car requires 10% more electronic devices than needed for an existing product. adding to the normal orders additional 30%. The demand (order) variance of the automotive industry to the case company is dominated by demand-induces changes in desired sales for modern automotive models. also direct orders from national sales offices or subsidiaries to the Asian production facilities are possible. Fr a n c e . 2013 The automotive sector delivers on the one hand side good examples for a global supply chain. 5. In total this has led to the supply following supply structure in 2008 (Fig. However. we had to verify. national stocks. we had insight into the sales. 2006) 86 ISSN 2076-9202 . which might explain the reduction of sales and purchase variances in 2011 (Fig. the characteristics of this structure are many –partly redundant –roles and responsibilities. Therefore we could detect the bullwhip effect (particularly for 2009). In general.International Journal of Information. For the case company. the bullwhip effect can be shown comparing the variances of all outgoing goods with the variances of all incoming goods (Cachon et al. In 2010 the later discussed countermeasures were initiated. A controlling of orders and stocks was hardly possible. because of a direct communication link from national sales offices to the factories and several central. if this structure is really affected by amplifying order and stock variances. Figure 1: Supply chain network of the electronics provider On a first glance. 2007). Figure 2: Comparison of the variances (Source: According to Croson and Donohue. Africa or Asia. For 2010 sales figures decreased (~50%) while now –with a time delay of one year –purchase data doubled. purchase and forecast data from 2008 to 2011. No. 1).2. For the year 2009 the aggregated variance of all outgoing goods (sales) compared to the variance of all incoming goods (purchase) showed significant differences. because sales figures doubled in 2009. North-America. Business and Management. The Asian headquarter does not manage single orders or regional stock levels. 2013 a role to allocate strategically the production capacities to different markets. 5. 2). Vol. while purchases kept relatively stable compared to 2008. such as Europe. South-America. In the most striking example. In leading markets such as France or Germany so-called “ car scrap” -bonus systems were used to stimulate end-customer demand. This forced European politicians to take action for protecting their national automotive industry. In order to reduce the capital lock-up in the central and national stocks and to get more stockage space. the demand unexpectedly increased. The financial-economic crisis and the “ c a rs c r a p ” -policy led to several effects for the case company: Firstly. due to the “ c a r -s c r a p ” -bonus systems in leading markets. sole cause.2. s c r a p p i ngupt he“ ol dmod e l ” . No. Beginning with the macroeconomic situation. In order to somehow satisfy demand. Due to the specific circumstances of this Asian-European intra-logistics supply chain we do not follow a simulation-based. Second. 2013 The existence of significant variances between sales (outgoing goods) and purchases (incoming goods) poses the question about the causes and possible assessment of these variances.International Journal of Information. Rather a mixture of causes and even macroeconomic effects led to the variances. This led to a bottleneck situation and demand exceeded the supply by several times. Business and Management. 5. The system awarded a customer with a bonus payment for buying a new c a rmod e l f r om( ad ome s t i c )OEM. Vol. Causes for the bullwhip effect in the case In the analysis of the sales and purchase variances it became obvious that it is not one. in 2008 the worldwide financial and economic crisis caused a significant decrease in the demand for automobiles. The case firm had enormous problems with the capital lock-up of their stocks. some – older –electric devices were even scrapped up. but rather a holistic and general management approach for this problem. demand decreased due to the crisis in 2008. products had already been shipped to Europe although it was clear that no client would need that delivery anymore. the Asian factories produced at 87 ISSN 2076-9202 . Discussing the five causes of the bullwhip effect. we show that a mixture of (over-) reactions supported the development of high order and stock variances. Reorganisation: Implementation of a central supply chain management The most challenging initiative for the case company was the transformation of the supply chain structure. even if transport means changed for a short period from sea to air freight. that electronic devices run short due to the bonus policy. 1) No forecasting function was in place to analyze the demand information in a structured way. customers placed very high batch orders to secure their supply. No. Business and Management. which require disproportionate many (modern) electronic devices built-in. Vol. This caused a supply shortage and led to behavioral problems. 2) Th e“ c a r -s c r a p ” -policy led to an increase in the demand for new car models. 5) Only the fifth cause was not of importance. 3) The demand and order data showed a very high variance. a new and strict policy was introduced to ship the goods either directly to the clients or to the central stock. because company stock is centralized in one European distribution centre. Therefore the national subsidies were transformed into nationa ls a l e sof f i c e s( “ on ef a c et ot h ec us t ome r ” ) . As a reaction. due to a satisfied market situation. 2013 the ultimate limit and the electronic products of the case firm were transported to Europe even by costly air freight. Production capacities again exceeded the demand by far. the objective was similar and aimed to avoid double structures and to reduce the number of interfaces. As a side-effect stock transparency was enhanced. Failures due to long lead-times were corrected using faster but costly air transport. and headquarters. the lead-time is about 30 days from Asia to Europe and it happened that parts in the wrong amount was produced and shipped. 4) The communication to the customers at the beginning of the case provided almost no additional order information. As the bonus system ended (2010). a change in the coordination and information system and the implementation of a forecast instrument.2. Altogether.International Journal of Information. sales offices. 5. as prices kept stable. particularly i nt h ef i r s tc oup l eofmon t h soft h e“ c a r -s c r a p ” -policy. which led to a misinterpretation of order data by numerous involved decision makers in the subsidiaries. the automotive industry and our case firm faced enormous challenges in the period from 2008 to 2010 and the most striking cause for the bullwhip effect was a macroeconomic one. as national sales offices or subsidiaries tried to satisfy –at any costs –their national customers. Considering the flow of goods. Considering the information flow. As it became obvious. However.All sales 88 ISSN 2076-9202 . demand decreased again. Three main initiatives have been realized: a reorganisation of the supply chain structure. due to long-term contracts. This abandoned national company stocks and reduced “ d oub l e ”s a f e t ys t oc k si nthe national and in the central warehouses. the case company introduced several countermeasures. the new supply network gave clear roles and responsibilities to each actor in the network. 5. all forecast figures are collected and sent to the Asian factories by this department. With these data. Firstly the national sales offices and the central supply chain management department now have access to the same database. this also reduced the necessity for costly expedite shipments. A governance model gives guidance to all persons involved. Altogether the case company has implemented three main initiatives: Reorganisation. This had significant impact on the order information management. There is a transparent information technology tool in place. as the central coordination also smoothed the demand orders of the sales offices. Once a month. Altogether. All goods have to be handled via the central warehouse of the European headquarters. 2 illustrates the decrease in sales and purchase variances in 2011. Controlling: Implementation of a forecast instrument and governance structure As a third management initiative. a specialised forecast department has been built up. Fig. which reduces operational and behavioural causes of the bullwhip effect. Process optimization. key customers. Altogether. the factories can manage their production planning more precise. the success bases mainly on the reduction of double or redundant interfaces in the information as well as in the logistical flows. No. At the same time. Business and Management. Bidirectional information and 89 ISSN 2076-9202 . which is now the connecting link of all European orders to the Asian factories. 2013 offices are now not allowed to have any own stock anymore. Vol.International Journal of Information. This department concentrates on the forecast of the automotive demand in Europe.2. This also helps to reduce lead times in the factory and provides more flexibility and adaptability in case of unforeseen demand changes. This bidirectional information sharing and central coordination mechanism reduced “ b l i n d ”orders. Process Optimization: Bottom-Up and Top-Down Information Sharing/Decision Making The enforced role of the central supply chain management department allowed implementing a new method of capacity and batch order coordination. Additionally.g. and supports the central supply chain department with forecast data in case of coordination conflicts with either the national sales offices or the Asian factories. provides additional information for rational decision making. risk-averse safety stocks and other behavioural causes of the bullwhip effect to an absolute minimum. The national sales offices place their demand in the system (bottom-up) and the central department is strategically coordinating (top-down). This allows the European Headquarters to consider e. stock levels and lead times. the European headquarters enforced the role of its central supply chain management department. and implementation of new controlling-tools and governance rules. 5. considering the “ b ot t l e n e c k -pa n i c ”or “ b l i n dor d e r s ” . which is traditionally examined for retail markets. The delivery performance has increased and dead stock situations were reduced to a minimum. governance and decisions also optimizes the behaviour of all involved personnel.International Journal of Information. we presented a brief literature review on the bullwhip effect. A joint approach of three main countermeasures (reorganisation. demonstrated in the extreme differences of the variance of demand and supply. The bullwhip effect had significant impact on the supply chain of the case firm. enhanced controlling) led to a significant reduction in the variances of sales (outgoing goods) and purchases (ingoing goods). 90 ISSN 2076-9202 . This provided the basis to present countermeasures against the bullwhip effect in form of three management initiatives. No. process optimization. The enhanced transparency in structure. Business and Management.Thes t r uc t ur eoft h et r a n s f or me ds up p l yne t wor ki sa sf ol l ows( Fi g . As a side effect and opposed to former times (before 2010). reduced stocks did not increase the danger of stock-outs and did not imply costly air freight transports. We adopted the concept on a global supply chain situation in the automotive industry using a case study of a 2 nd tier electronics supplier. Firstly. 2013 coordination flows are connected to a governance model for top-down decision making in critical issues. Vol. 3): Figure 3: New information and supply network of the case firm: DISCUSSION AND CONCLUSION This paper intended to analyse the bullwhip effect in an Asian-European business to business intra-logistics network in order to identify and evaluate management initiatives for reducing demand and stock variances.2. we suggest further research.“ Thes i mul a t i onofi nv e nt or ys ys t e ms : Anov e r vi e w. Inc. 6.“ I nSe a r c hoft heBul l whi pEf f e c t ” .“ Ma na g i ngs uppl yc ha i nv a r i a bi l i t ywi t hs c he dul e dor de r i ngpol i c i e s . C. 2013 This case study on the bullwhip effect is limited in the sense that only one case was examined from a holistic perspective. G. ”Management Science. 2. & Ma l a v eC. Vol. ( 1 9 90 ) . 5. 141–148. ( 19 99 ) . M. R. pp. T. Business and Management. 45. pp. Cachon. June. ”Harvard Business Review Vol. 843–856. pp. Nevertheless. 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