Bullwhip Effect in Supply Chain Management

Bullwhip effect

In 2001, Cisco was forced to write down $2.2 billion worth of obsolete inventory, due to uncertain variations in its demand in its supply chain. Wild swings in orders due to lack of coordination and trust among supply chain members Information Distortion and Demand Amplification in the supply chain Bullwhip effect is also known as whiplash or the whipsaw effect

Definition

The bullwhip effect is the uncertainty caused from distorted information flowing up and down the supply chain

Nearly all industries are affected! Firms that experience large variations in demand are at risk. Firms that depend on suppliers upstream or distributors and retailers downstream may be at risk.

Remark..

Stakeholders along supply chain

Have different and frequently conflicting objectives.

Often operated independently.

The network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective(local view) rather than looking at the entire chain holistically (global view).
Variability increases as one moves up the supply chain

Bullwhip effect..

Exists in part due to retailers need to estimate the mean and variance of demand.
The increase in variability is an increase function of lead time. The more complicated the demand models and the forecasting techniques, the greater the increase.

Consequences

Increased safety stocks.

Reduced service level.

Inefficient allocation of resources. Increased transportation cost.

Major causes..1..

Demand forecasting updating Order batch sizing Price fluctuation Rationing and shortage gaming Overreaction to backlogs Neglecting to order in an attempt to reduce inventory No communication up and down the supply chain No coordination up and down the supply chain Delay times for information and material flow

Major causes ..2..

Forecasting is often updated based on the order history from immediate customers The longer the lead time, the greater the fluctuation

The longer planning horizon, the greater possibility of scheduling changes and demand changes

Demand Forecasting
Updating

Natural economic behavior

Periodic ordering - the economics of transportation such as full truckload (FTL) and less-than-truckload rates

Push ordering

Order Batching

A forward buy arrangement

Customers buy in quantities that do not reflect their immediate needs or accurate consumption patterns.

Price Fluctuation

A manufacturer often rations its product to customers when product demand exceeds supply Dynamics of Competition Gamesmanship

Rationing and Shortage Gaming

Underlying coordination mechanism Information sharing Channel alignment Operational efficiency

Remedial measures to counteract bullwhip effect ..1..

Avoid multiple demand forecast updates

Break order batches

Stabilize prices

Eliminate gaming in shortage situations

Remedial measures to counteract bullwhip effect..2..

Reduce variability and uncertainty. 1. POS 2. Sharing information

3. Year round low pricing

Reduce lead times. 1. EDI

2. Cross Docking

Alliance arrangements. 1. Vendor managed inventory

2. On-site vendor representative

Remedial measures to counteract bullwhip effect..3..

Understanding system dynamics

- Use point-of-sale (POS) data

- EDI, Internet - Computer-assisted ordering (CAO) - Internet ordering

Remedial measures to counteract bullwhip effect..4..

Sharing sales, capacity, and inventory date Allocation based on past sales

Enhance Operational Efficiency

Initiatives for Lead-time reduction Echelon-based inventory control

Remedial measures to counteract bullwhip effect..5..

Discount for information sharing Discount for truckload assortment

Delivery appointments
Consolidation

Logistics outsourcing

Beer game

Role-playing simulation developed in the 1960s at MITs Sloan School of Management Production and distribution of beer. Players at act as : Retailer, Wholesaler, Distributor, and Brewer. Weekly consumer demand simulated Retailer sells from his inventory and reorders from the Wholesaler, who sells from his inventory and reorders from the Distributor, who in turn sells from his inventory and reorders from the Brewer, who finally sells from his inventory and restocks from his production. Order processing delays; Shipping delays Inventory carrying costs; Stock out costs Players base their decisions strictly on the orders they receive from their respective buyers.

Observation

In virtually all cases, the inventory levels of the retailer decline, followed in sequence by a decline in the inventory of the wholesaler, distributor, and factory. As inventory falls, players tend to increase their orders. Players soon stock out. Backlogs of unfilled orders grow. Faced with rising orders and large backlogs, players dramatically boost the orders they place with their supplier. Eventually, the factory brews and ships this huge quantity of beer, and inventory levels surge. In many cases one can observe a second cycle.

John Sterman, one of the original proponents of the Beer Game

Summary

Order variability is amplified up the supply chain; upstream echelons face higher variability. What you see is not what they face Integration and information sharing is a must. Act as a team in supply chain Bullwhip effect is caused from distortions in information along the supply chain Results of the bullwhip effect can include: excess inventories, problems with quality, increased costs, overtime expenditures, lost customer service, lost sales and more.

Summary

(Cont.)

Causes of the bullwhip effect may include: poor forecasting of sales, incorrect information along the supply chain, sales incentives, sales promotions and lack of customer confidence.

Solutions to the bullwhip effect include: improved information flow between firms along the supply chain, stable pricing, small order increments, focused demand on EDI or POS systems and removal of sales incentives.