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Amplification
Lecture by:
Prof M. K. Tiwari
Department of Industrial Engineering and
Management
Indian Institute of Technology, Kharagpur
Bullwhip Effect Defined
The bullwhip effect is the uncertainty
caused from distorted information
flowing up and down the supply chain.
Results of the bullwhip effect
Excess inventories
Problems with quality
Increased raw material costs
Overtime expenses
Increased shipping costs
Results of the bullwhip effect -
continued…
Lost customer service
Lengthened lead time
Lost sales
Unnecessary adjusted capacity
Causes of “Bullwhip” Effect
2 Order Batching
3 Price Fluctuation
600 to Distributors
400 Retailers’ Sales
200
0
1 Weeks 52
Order Quantity
15 15
10 10
5 5
0 0
Time Time
Order Quantity
15 15
10 10
5 5
0 0
Time Time
Solving the Bullwhip dilemma
Improve communication along the supply
chain.
Retailers notifying firms upstream of sales
promotions will help clarify demand signals
from consumers
Improved information will improve demand
forecasts upstream in the supply chain.
Solving the Bullwhip dilemma -
continued
Improve sources of forecast data
Firms can use data from Point of Sale
computer systems to derive data from
forecasting
Firms along the supply chain can use EDI
systems to retrieve data on items that are
legitimately being purchased by customers
Solving the Bullwhip dilemma -
continued
C Stabilize Prices
Point-of-sales Data-
Original
Dt qt
Retailer Manufacturer
L
How big is the increase?
2
Var(q) 2L 2L
1 2
Var( D) P P
Var(q)/Var(D):
For Various Lead Times
14
L=5
12
10
8 L=3
6
4 L=1
L=1
2
0
0 5 10 15 20 25 30
Consequences….
Inefficient allocation of
resources
Increased transportation
costs
A. Framework for supply chain
coordination initiatives (cont.)
EDI
Information
Internet Ordering (Trading Process
Sharing:
Network at GE)
B. Framework for supply chain
coordination initiatives (cont.)
Cause of
Bullwhip: Price Fluctuations
Channel
Alignment: Allocation based on past sales
Placing orders ahead of peak season
Stricter return and order cancellation
policies
Countermeasures to the
Bullwhip Effect
Countermeasures to the Bullwhip Effect
k 2 L 2 L i i
Var (q )
1
i 1
i 1
Var ( D) P P2
30
Dec, k=5
25
20
15
Cen, k=5
10
Dec, k=3
5 Cen, k=3
k=1
0
0 5 10 15 20 25
The Bullwhip Effect:
Managerial Insights
Exists, in part, due to the retailer’s need to
estimate the mean and variance of demand.
The increase in variability is an increasing
function of the lead time.
The more complicated the demand models and
the forecasting techniques, the greater the
increase.
Centralized demand information can
significantly reduce the bullwhip effect, but will
not eliminate it.
Example:
Quick Response at Benetton
Contributing factors
• High-Low Pricing leading to forward buy
• Delivery and Purchase not synchronized
Counter Measures
• Every day low prices (EDLP)
• Limited purchase quantities
• Scan based promotions
Our Focus!
Our Focus is on the counter measure of bullwhip effect,
where a policy based replenishments program are
developed to establish coordination between each
participated stages of supply chain.
Considers the situation
• The participants doesn’t share their demand information with other
members.
• Each player has more than one choices of transportations (fast
transportation facility, slow transportation facility).
• The participants follows the same replenishment policy that is
assigned by manufacturer to all of the participants.
Continue…
Optimal order up-to level based policy: According to this policy, the
optimal order up-to level (s) are assigned to the each participants of
the supply chain and they utilize it to decide the amount of product
that is to be ordered for replenishment.
An example:
• It is a multi-stage, serial and single product supply chain
• Supply chain comprises (Customer–Retailer–Warehouse-Distributor
and Manufacture)
• Each stage participants orders to immediate up-stream member of the
supply chain
• Manufacturer has database of the past demands ( Data of per period
customer demand )
• Retailer , warehouse and distributor have two types of transportation
options (their lead times are one period and two periods respectively)
to effectively replenish their demands.
Approach for replenishment
Traditional order up-to level approach- According to this approach
each member forecast their order up-to level in each period and
creates orders to achieve their inventory level up-to the forecasted
level.
order order
Customer demand
Retailer Distributor Manufacture
Order Order
replenishment replenishment
Replenishment
of order at
starting of time t
Remaining unit at
End of (t-1) order-up-to
inventory level at
time(t-1) – demand
realized by retailer
at (t-1)
Optimal order up-to level
approach
Optimal order up-to level approach-
It establish a continuous replenishment program. In the starting of the
period participant realize their inventory level and the amount it get below
to the assigned order up-to inventory level, they order to immediate
upstream member to replenish it.
Manipulation of optimal order up-to levels:
Objective-
• Maximization of acquired profit
• Maximum customer satisfaction
• Minimization of supply line inventory
• Minimum transportation cost
Manipulation Optimal order up-to level for the
supply chain participants
• Input
• Manufacturer have customer demand data sets of previous periods.
• Supply chain comprising five stage (Customer- Retailer – Warehouse-
Distributor -Manufacturer )
• There are two types of transportation facilities for all members of the SC,
thus two optimal levels are assigned for each members.
• Per unit back order/ Penalty cost, Per unit inventory holding cost, Per unit
sale price of the product, Per unit transportation costs for slow and fast
transportation, replenishment lead time of the transportations
• Supply chain modeling using optimal order up-to level
• Mathematical formulation (Objective function)
• Encoding (String representation)
• Manipulation of fitness value of the string
• Utilization of evolutionary algorithm to search best string
• Output (Optimal order up-to level which can provide most profitable
replenishment program)
Supply chain model using optimal
order up-to level approach
Customer Order
Order Order
demand
Ware-
Retailer Distributor Manufacture
house
Order Order Order
replenishment replenishment replenishment
Receive the
product that is
• Ordered quantity at the
in
starting of period =
transportation
(Optimal order up-to level)
– (Inventory at the end of
previous period)
Objective function
Total profit acquired by entire SC of M players, after running it for T period/weeks is
t T
k M
( SP Fcdt ) HC× Linvk,t + BC× Binvk,t + TC1 ×Y1,k,t TC2 Y2,k,t
t 1 k 1
Where
Linvk,t = Inventory at the end of the period t at the stage k
Binvk,t= Back order inventory that is not fulfilled
Y 1,k,t= Order created by the participant k using fast transportation
Y 2,k,t= Order created by the participant k using slow transportation
Fcdt= Fulfilled customer demand
HC, BC, TC1, TC2 per unit cost of holding, back order and
transportations respectively, SP = Per unit sale price of the product
Encoding
Customer
Demand Retailer Warehouse Distributor Manufacturer
•Order
•Order at the starting at the
of the starting
period •Order of at
thethe
period
starting
Order using fast It isofassumed
transportation
the period
= (Firstthat manufacturer
order up-to is able to satisfy all
level)-
Order using fast transportation = (First Orderorderusing
the of up-to
fast level)-
demand transportation
generated by=the
(First order up-to level)-
Distributor
(Inventory level
(Inventory level at the end of the period at the end
(Inventory the period t-1)
t-1) level at the end of the period t-1)
Order using slow
Order using slow transportation= (Second transportation=
Order using orderslowup-to(Second order up-to
transportation= (Second order up-to
level –at(the
level) – ( Inventorlevel) Inventor oflevel
end level) at( Inventor
the t-1
the –period end +oflevel
the period t-1 of
at the end + the period t-1 +
quantity replenished quantity
using replenished usingreplenished
first transportation)
quantity first transportation)
using first transportation)
•Inventory level at
•Inventory level at the starting of period the starting
•Inventory= Inventoryof period
level at the
level = Inventory
starting
at the end
of periodlevel=atInventory
the end level at the end
of + transported
of + transported inventory using fastinventory using fast
of transportation
+ transported transportation
inventory
in period (t-1)+
using fast in transportation
period (t-1)+ in period (t-1)+
transported
transported inventory using slowinventory using slow
transportation
transported transportation
inventory
in period using
(t-2) slow in transportation
period (t-2) in period (t-2)
•Satisfy demand
•Fulfillment of customer the orderin created
•Satisfy by order
the period
the the
t retailer
created in by
thewarehouse
period t in the period t
How supply chain are simulated
using fixed order up-to level
Let, released inventory from warehouse using slow transportation at period of (t-2)=26,
Released inventory from warehouse in the starting of the period (t-1)
using fast transportation =0,
using slow transportation =29,
Inventory level at the end of period (t-1)=8
If order up to levels represented as string 10 10 14 43 31 41
33 tth 34 33 1 0 2 2 33 27 29
26 (t+1)t 32 26 6 0 9 9 33 20 29
h
30 (t+2)t 42 30 12 0 4 4 33 27 31
h
This column contribute to provide
Incurred costs (back order cost, inventory holding
… … …
sum of acquired revenue
… … … … … … …
cost, transportation cost) at retailer stage
…
Example
40
30
20
10
0
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97
Number of period
Performance in form of customer
satisfaction
120
100
P ercentage
80
60
40
20
0
1 7 13 19 25 31 37 43 49 55 61 67 73 79 85 91 97
Number of period