MRP “Lead Times & Bullwhip”

Why understanding your bullwhip effect can increase profit

A White Paper for MRP Controllers and Supply Chain Professionals

by Craig Heywood

“Material lead times can be the single biggest culprit in a poor performing MRP system, creating a bullwhip effect on your suppliers”

“Having a process to review your lead times on your materials is critical to your business success”

Running MRP run daily, fixed lead times within the ERP system, not allowing for accurate delivery times, shorter lead times than expected maintenance forecasting uncertain, this forces over supply of inventory, reduced cashflow and additional holding costs. Lead time longer than expected, procurement forced to expedite materials and additional freight charges

Every day the grumblings from maintenance having to revise their planning schedules waiting for materials that the ERP system said should be onsite are not

Procurement constantly on the phone expediting materials that should have arrive but haven’t

Suppliers spending countless hours having to meet customer requirements

MRP processes running by chance not by design, the inaccuracy in the lead time data is causing the bullwhip effect to be extreme for our suppliers

The bullwhip effect should not be underestimated, MRP should be designed and maintained with your suppliers in mind, B2B relationships are the corner stone of your supply chain process, how can your suppliers effectively reduce lead times and provide a competitive price when there is constant uncertainty with demand

We have orders being expedited and repetitive uneconomic orders being placed thus consuming resources, lost efficiencies causing lost productivity and additional financial cost all within your business and our business partners

“Suppliers are forced to factor in risk and additional resources to service your requirements, this comes as additional cost”

MRP, B2B Coordination and Bullwhip

According to (Chopra, 2013) One outcome is the lack of supply chain coordination causing the bullwhip effect in which fluctuations in orders increase as they move up the supply chain. This lack of coordination increases replenishment lead times in the supply chain thus increasing variability, resulting in a larger bullwhip effect.

(Alexandre Dolgui, 2017) has determined that lead time uncertainties provoke shortages or surplus in inventories. These uncertainties have been neglected for a long time in favour of focusing on demand uncertainties “maintenance schedules” thus causing increased bullwhip effect with the suppliers.

Procurement deal with MRP system issues daily, knowing that the system is not performing how it was intended. MRP systems that have a static lead time require constant review and analysis of their supplier lead times

Businesses can improve profitability and B2B relationships by ensuring MRP lead times are correct

(Chopra, 2013) suggests that lack of coordination between departments has a negative effect on performance at every stage, this actually impedes the relationships among the different stages of the supply chain

“There’s a tendency to assign blame to other stages of the supply chain because each stage thinks it’s doing the best it can”

The lack of coordination thus leads to a loss of trust among different stages of the supply chain and makes any potential coordination efforts more difficult.

Accourding to (Lutfu Sagbanşua, 2010) the benefits of the MRP system depend on a well maintained and upto date system. Lead time accuracy and data literecy within your inventory records play a vital role in reducing the bullwhip effect and ultimalty provide effeciances for all parties

Lets Look at some Models

There are two models that factor within the MRP lead time evaluation one is deterministic and Stochastic. Deterministic is whereby you have a known set of inputs and the business has a level of certainty that the lead times are within a small margin of error, thus reducing the bull whip effect on suppliers

Accordingly it has also been suggested that having a set deterministic lead times within the MRP system can also reduce uncertainty if other parameters where variable like production maintenance

According to (M. A. Wazed, 2009) This premise of deterministic environment seems somewhat off base since most production occurs stochastically. Production maintenance and associated components are rarely forecasted reliably. This is because there are random factors such as machine breakdowns, transport delays, customer demand variations, etc.

Therefore, in real life, the deterministic assumptions embedded in MRP are often too

limited

(M. A. Wazed, 2009) To avoid these uncertainties, companies use safety stock which is expensive and increases inventory holdings. Therefore, it is desirable to develop special methods of supply planning which focus on the stochastic properties of lead times

(Sunil Chopra, 2004)

Companies can reduce the sting of the bullwhip effect by adjusting pricing and incentives to decrease variation in orders. Increasing the visibility of demand information across the supply chain also helps

Continuous replenishment programs, and collaborative planning and forecasting and other supply-chain initiatives also can soften the bullwhip effect

Forecast risk can be lessened by selectively holding inventory and/or building responsive production and delivery capacity. Holding inventory is appropriate for commodity

products with relatively low holding costs

(Chopra, 2013) Companies often have no idea that the bullwhip effect plays a significant role in their supply chain

Managers should start by comparing the variability in the orders they receive from their customers with the variability in orders they place with their suppliers.

This helps the business quantify its own contribution to the bullwhip effect.

Once its contribution is visible, it becomes easier for a firm to accept the fact that all stages in the supply chain contribute to the bullwhip effect, leading to a significant loss in profits. In the absence of this concrete information, companies try to react better to the variability rather than eliminate the variability itself.

“Companies invest significant amounts in inventory management and scheduling systems only to see little improvement in performance or profits”

Evidence of the size of the bullwhip effect is effective in getting different stages of the supply chain to focus on efforts to achieve coordination and eliminate the variability created within the supply chain.

If firms are to realize the full benefit of the huge investments, they make in

current IT systems, particularly ERP systems, it is crucial that they make the extra effort

required to use these systems to facilitate collaborative forecasting and planning across the

supply chain

The bullwhip effect results in an increase in all costs in the supply chain process and a decrease in customer service levels

Real Solutions

Businesses that have stochastic lead times that are regularly reviewed and dynamic in the inventory record system reflect the true characteristics of the supply chain where randomness of the inputs will result.

Bullwhip can be described as distortive “waves” in your supply chain they experientially grow all awhile the variability being transferred and amplified to your business partners

Therefore, collaborative planning and forecasting and B2B relationships are so important

Stochastic lead times within the MRP system have been studied over the decades and found to provide better outcomes for variety of scenarios that enable lead times to be more accurate

Compared to the deterministic model which is a much simpler model and if your MRP system setup isn’t working as intended and some human intervention is being used to manage the short comings then deterministic – fixed lead times can be one solution

Controlling bullwhip is vital to supply chain, a small blip in demand, weather an increase or decrease may get amplified down the supply chain where your suppliers revise their forecasts factoring in that the blip maybe the new norm. this is why business coordination and B2B relationships are so important

(Gameleira, 2021) He who controls lead time controls the supply chain

(Sunil Chopra, 2004) collaborative planning, forecasting and replenishment, and other supply-chain initiatives also can soften the bullwhip effect

(Chopra, 2013) Lack of coordination has a negative effect on performance at every stage and thus hurts the relationships among different stages of the supply chain

Stochastic Lead Time Solutions

Stochastic lead times have long been overlooked within businesses; business can go years without ever reviewing this important supply chain component. MRP is a complex automated system which requires inventory records to be up to date

MRP material requirements planning and stochastic lead times helps address the uncertainty within your supply chain, by the introduction of a work plan to review lead times and make them more dynamic within the business will reduce stockouts, overstocking and thus reduce the bullwhip effect on your suppliers

Having a strong and transparent relationship with your business partners can reduce the effect of bullwhip across their business, once you realize that your business has a major impact in determining the strength and size of the bullwhip, only then can you address your supply chain issues

Bullwhip effects on your supply chain are real and understanding and working with your business partners to create a B2B relationship will reduce the bullwhip effect, having material contracts is one way to help businesses work together to help reduce the whip effect

(Chopra, 2013) The bullwhip effect distorts demand information within the supply chain, with each stage having a different estimate of what demand looks like

“Lack of co-ordination between your stakeholders internally can be a serious issue when it comes to the success of your materials planning and forecasting”

Bringing together your internal stakeholders to address “What is needed, When is it needed and How much is it” can help bring together individual departments to make sure the BOM, bills of materials and maintenance planning schedules all contribute to the integrity of the information provided

Accourding to (Chopra, 2013) Lack of coordination has a negative effect on performance at every stage and thus hurts the relationships among different stages of the supply chain

Stochastic Successful Lead Time Solution

If you want to look at a success story of having a stochastic inventory lead-time, look no further than Amazon. Amazon has 7 guiding rules why lead time is important to their business model

• Production
• Freight
• Competition
• Restocking time
• Cash flow
• Break even cycles
• ROI

The focus on each individual business unit helps reduce the bullwhip effect within their supply chain, improving internal costs and providing a high level of customer service

By having a high level of certainty around your lead times and building B2B relationships with your suppliers and customers, this allows them to offer delivery time packages for the goods, this can either be next day or within 5 days

Author

Craig Heywood

Director at Zoochey

Zoochey is a supply chain digital specialist company, delivering technical and consulting services to businesses across the world

Mobile: 61+ 466  589 590

Email: Admin @zoochey.com

References

Alexandre dolgui, c. P. (2017, 10 23). Supply planning under uncertainties in mrp environments: a stae of art. Annual reviews in control · december 2007, p. 27

Chopra, s. P. (2013). Supply chain management (5th ed.). Pearson

Gameleira, c. (2021, 10). Stochastic lead time: uncertainty on supply chains. Retrieved from https://supplybrain.ai/uncertanties-of-stochastich-lead-time

Lutfu sagbanşua, p. (2010). An mrp model for supply chains. International business research, 8

34. A. Wazed, s. A. (2009). Managing quality and lead time uncertainties using component commonality in a production environment. Engineering e-transaction (issn 1823-6379), 34.

Sunil chopra, m. S. (2004). Managing risk to avoid supply-chain breakdown. 10