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The Bullwhip Effect in
Supply Chains
Leslie Gardner, Ph.D.University of Indianapolis
School of Business
Institute for Emerging Careers
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Institute for Emerging Careers
Funded by Lilly EndowmentResearch emerging and expanding
career fields in Indiana as well as to
find ways to prevent "brain drain."
Identify future Indiana industries and
determine careers needed to supportfuture business development in Indiana.
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$50,000 Grants
For emerging careersDevelop curriculum
Develop internships
Do research to develop facultyexpertise in area of emerging career
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Planning, organizing, directing, & controlling
flows of materials Begins with raw materials
Continues through internal operations
Continues through distribution of finished goods Ends with returns or disposal of used up goods
Involves everyone in supply-chain Example: Your suppliers supplier, logistics providers,
information systems
Objective: Maximize value & lower waste Materials arrive when and where they should, JIT
Minimize excess inventory, minimize backorders
Supply-Chain Management
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Consumer
Retailer
Manufacturing
Material Flow
VISA
Credit Flow
Supplier
Supplier Wholesaler
Retailer
CashFlow
OrderFlow
Schedules
The Supply-Chain
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The Supply Chain
Supplier
Supplier
Supplier
Inventory
Inventory
Distributor
Inventory Inventory
Manufacturer
Customer
Customer
Customer
Market research data
Scheduling information
Engineering and design dataOrder flow and cash flow
Ideas and design to
satisfy end customer
Material flow
Credit flow
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Demand Amplification & Forrester
Flywheel Effect
Shortages
Over Ordering
LateDeliveries
Increase inSafety
Stock
Excess
Inventories
Reduce
Inventories
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Symptoms of
the Bullwhip Effect
Excessive InventoryPoor Forecasts
Insufficient and/or excessive capacities
Unavailable Products
Long Backlogs
Costs for Expedited Shipments andOvertime
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The Beer Game
ProdnDelay
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RETAILoooooooooooo
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FACTRYoooooooooooo
Shipping
Delayoooo
ShippingDelayoooo
Shipping
Delay
oooo
ShippingDelayoooo
ShippingDelayoooo
Shipping
Delayoooo
ProdnDelay
oooo
RawMatl
CustOrder Order
PlacdIncgOrder
OrderPlacd
IncgOrder
OrderPlacd
IncgOrder
ProdOrder
Developed at MIT more than 40 years ago toteach students about simulation and economic
dynamicsDoes a good job of teaching students about
the bullwhip effect but not how to prevent it
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What can we learn from the
Beer Game?
I have developed a Microsoft Excelsimulation to test various strategies
Goal teach our students how to
minimize the bullwhip effectBullwhip effect does not occur unless
backordering (filling orders late whenproduct is available) is allowed
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Impact of Ordering Strategies on
Bullwhip EffectNave forecast order only what is ordered
Exponential smoothing at =0.1, 0.5, and 0.9Order what is ordered plus cumulativebacklog
Order what is ordered + cumulative backlogunless inventory is some amount more thanorder + cumulative backlog
Order what is ordered + this period backlog(not cumulative)
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Nave Forecast
Order what was ordered from youLast time 4 units were ordered from you
Order 4 this time
Last time 8 units were ordered from you Order 8 this time
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No bullwhip, but you never catch up onorders
Beer Game - Naive Forecast
-15
-10
-5
0
5
10
15
0 5 10 15 20 25 30
Week
Inventory
Le
vel
RetailWholesale
Distributor
Factory
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Exponential smoothing at 0.1Forecast = (0.1)(last actual)
+(1-0.1)(last forecast)
Forecast=(0.1)(8)+(0.9)(4)=4.4
Order 4
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No bullwhip, but retailer falls furtherand further behind
Beer Game - Exponential Smoothing(0.1)
-150
-100
-50
0
50
0 5 10 15 20 25 30
Week
In
ventory
Lev
el
Retail
Wholesale
Distributor
Factory
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Exponential smoothing at 0.5
Forecast = (0.5)(last actual)
+(1-0.5)(last forecast)
Forecast=(0.5)(8)+(0.5)(4)=6
Order 6
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No bullwhip, but retailer, wholesalerand distributor are always behind
Beer Game - Exponential Smoothing(0.5)
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0
10
20
0 5 10 15 20 25 30
Week
Inventory
Lev
el
Retail
Wholesale
Distributor
Factory
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No bullwhip, but retailer, wholesaler anddistributor are always behind, but not as faras for 0.5
Beer Game - Exponential Smoothing(0.9)
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-10
0
10
20
0 5 10 15 20 25 30
Week
Inventory
Lev
el
Retail
Wholesale
Distributor
Factory
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Nave plus cumulative backlogOrder what is ordered plus cumulative
backlog Last time 12 were ordered from you, you have 8
in stock, and you have a backlog of 12
Order 12+12=24 Ship 8, your backlog is now 16
What happens upstream? The person upstream has nothing in stock, a
backlog of 16, and 8 coming in
He/she ships out the 8, now has a backlog of 32,and orders 24+32=56
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Nave plus backlog
no order if excess inventoryEventually, the material for the large orders
starts flowing through the system and theplacing of large orders ceases
Inventory builds up and orders become small
Quit ordering if orders are less than someamount of inventory No order if order less than 3x inventory
Inventory=144, last time 12 were ordered fromyou, dont order any
No order if inventory is 12 more than order size
Inventory gradually drains out
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Compensate relative to order size - Bullwhipwith inventory gradually draining out
Beer Game - Naive +BacklogNo Order if < 3xInventory
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0
200
400
600
0 5 10 15 20 25 30
Week
In
ventory
Level
Retail
Wholesale
Distributor
Factory
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Compensate with inventory anchor - Bullwhipwith inventory gradually draining out
Beer Game - Naive + Backlog
No Order if < 12 + Inventory
-200
0
200
400
600
0 5 10 15 20 25 30
Week
I
nventory
Le
vel
RetailWholesale
Distributor
Factory
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Nave plus one period backlog
Order what is ordered plus only this backlog,that is, the amount you were short this period Last time 12 were ordered from you, you have 8
in stock, and you have a backlog of 12
Ship 8, your backlog is now 16, but you wereonly 4 short this time
Order 12+4=16
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Minimal bullwhip effect inventories afterbullwhip close but not quite on target
Beer Game - Naive+ One Period Backlog
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0
20
40
0 5 10 15 20 25 30
Week
In
ventory
Level
Retail
Wholesale
Distributor
Factory
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Lessons Learned
Must compensate for backlog or youfall further and further behind
Overcompensation for backlog causes
bullwhip effectUndercompensation causes steady orincreasing backlog
Minimize bullwhip effect by rightamount of compensation
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Causes of Poor CompensationLee, Padmanabhan, Whang (1997)
1. Demand forecast updating2. Order batching
3. Price fluctuation
4. Rationing and shortage gaming
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Demand Forecast Updating
Every manager will project demandbased on what he/she sees. Managersat different levels project demand
differently (signal processing).Safety stock complicates matters
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Remedies for Demand Forecast
Updating
Make point-of-sale (POS) data available upsupply chain EDI
Internet
Vendor managed inventory (VMI)Make downstream inventory and demand infoavailable upstream
Shorten lead-timesSell directly to consumer
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Point of Sale Data (POS)Information on retailer order passed
upstreamEveryone orders what retailer ordered
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Order Batching
Periodic ordering (once a month, once aweek, etc.) Cannot handle frequent order processing
Transportation costs full-truckload cheaper
than less-than-truckload ratesPush ordering Salespeople sign orders early to fill quotas when
evaluatedPeriodic execution of MRP or DRP sometimes order cycles overlap
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Remedies for Order Batching
Reduce ordering cost EDI
Blanket orders
VMI
Mixed SKU truckloads
3PLs
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Remedies for Price Fluctuation
Stabilize prices Reduce wholesale price discounting
Uniform pricing policies
Activity-Based Costing Conventional accounting practices may
not show hidden costs of inventory,storage, special handling, premiumtransportation, etc.
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Rationing and
Shortage Gaming
When demand exceeds supply,manufacturers ration products on thebasis of amounts ordered
Customers exaggerate needs to getmore
When demand cools, customers cancelorders, manufacturers stuck withexcess
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Remedies for Rationing and
Shortage Gaming
Allocate in proportion to past salesrecords
Plan ahead, share information
Penalize returns
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Summary
Supply chain management is a cuttingedge business strategy that integratesinternal and external logistics acrossmany manufacturers, suppliers,distributors, retailers, transportationproviders, and third party logistics firmsto increase productivity and to obtain acompetitive advantage for all partiesinvolved.