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Bullwhip Effect
Increasing propagation of
variability upstream through the
supply chain
Time
A lot of retailers
each with little
variability in their
orders.
Manufacturers Orders
Order
Quantity
Order
Quantity
Wholesalers Orders
Order
Quantity
Retailers Orders
Time
can lead to
greater variability for
a fewer number of
wholesalers, and
Time
Bullwhip Effect
Distortion of demand information of a product while it passes from
one firm to the next across SC
The information transferred in the form of orders tend to be
distorted and can misguide upstream members in their inventory
and production decisions.
In particular, variance of orders > variance of sales
Information sharing in SCs is important
Sales Information available in the form of orders received from the
downstream member should be used with great caution.
Slide 9
Distribut
or
Manufactur
er
Order
Order
Order
Stock
Stock
Stock
Increased Variability
Suppli
er
Order
Stock
Producers
80 Units
160 Units
80 Units
Retailers
20 Units
40 Units
Cash Flow
As demand increases, the distributor decides to accommodate the forecasted
demand and increase inventory to buffer against unforeseen problems in demand.
Each step along the supply chain increases their inventory (double in this example)
to accommodate demand fluctuations.
The top of the supply chain receives the harshest impact of the whip effect.
Key:
= Inventory Levels
Slide 15
Batch ordering
Volume & transportation discount
Inflated orders
Orders placed increase during shortage
periods
IBM Aptiva orders increased by 2-3 times
when retailers thought that IBM would be out
of stock over Christmas
Reducing variability
Use of EDLP strategy (Payless)
Strategic partnership
Vendor managed inventory (VMI)
Sharing of customer information
Collaborative forecasting
Results:
Higher transportation costs
Higher inventory levels and/or higher manufacturing
costs
more emergency production changeovers
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