Scm Bullwhip Effect

Bullwhip Effect in Supply Bullwhip Effect in Supply Chain ManagementChain 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 retailer’s 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 1960’s at MIT’s 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.