Essay on Management Principles and Operational Contexts
The ‘Forrester’ or effect, suggests that demand variability increases as one moves up a supply chain. Should a customer change the order quantities for a product before the close of the planning period, these deviations from the forecast often cause a mismatch with what their distributors have planned to order from manufacturers. As such, the distributors will increase their orders from the manufacturers, and add in extra contingency to ensure they can cope with any further increases. The manufacturers will, in turn, increase their planned production, and raw material orders, to what is needed to meet the amended orders, with extra contingency. The deviations from the planned number of sales orders, and associated contingencies, will ripple through the supply chain, causing the Forrester effect.
As a result of these oscillations, firms across the supply chain are saddled with excess inventory, procurement cost overruns, additional warehousing costs and, most importantly, quality problems. The upstream firms, such as AB, have the option of taking the loss resulting from amended orders or passing on the costs by reducing other product attributes, thus quality is often the biggest casualty of rush orders, and distributors often return products manufactured to meet the wrongly amended demand, thus placing additional burdens on the supply chain. Economically, this can result in firms further up the supply chain, such as AB, experiencing lower surpluses due to having to move along their short term cost curves. If this occurs to a firm, there are three possible options to pursue: firstly they can reduce quality, secondly they can simply absorb the costs and accept lower surpluses, or finally, they can pass these extra costs along the supply chain to the distributors and end users. However if AB, which has identified price as a major selling point, attempts the final option, they risk…
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Tags: compensation, Forrester effect, principles, TE, VN
