The Bullwhip Effect

The Bullwhip Effect

By Karlo Cantor

What is the Bullwhip Effect?• Demand variability

increases as you move up the supply chain away from the consumers

• Small changes by customers can result in large variations on orders placed up the chain creating a bullwhip effect

Supply Chain Management• SCM is the management of a network

of interconnected businesses involved in getting the product or service required by the end customers in a supply chain

Why is it called a Bullwhip Effect?

• “This phenomenon occurs when companies significantly cut or add inventories. Economists call it a bullwhip because even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain.” – Wall Street Journal

Background• The concept first appeared in Jay

Forrester's “Industrial Dynamics” in 1961 and thus, it is also known as the Forrester effect

• Also can be called the Whiplash Effect

Importance• It is frequently the cause of serious

inefficiencies that result from ordering too much or too little of a given product

• Links in the supply chain react to changes further downstream

Consumer• Bill likes Coke• Bill goes to the

store and drinks a lot of Coke daily

• So the store has to refill its stock regularly

What if…• But what if Bill gets sick and can’t

drink Coke for a few weeks?• The store has too much inventory and

stops its orders due to decreased demand

• The supplier stops orders as well• The manufacturer will slow down

production of Coke

But Wait…• Bill gets better and starts buying Coke

from the store and starts drinking again (this time more!)

• Now the store places more orders to account for the increased demand

• The supplier doubles his order with the Coke manufacturer

• The manufacturers increase production

Consumer

Manufacturer

Supplier

Coke Supply Chain

Therefore• A small customer (like Bill) fluctuation

can cause a major oscillation in the many stages of the supply chain

• The effect is felt greater closer to the manufacturing stages

What Causes this Effect?• Over reacting to the backlog orders• Little or no communication between

supply chain partners

What Causes this Effect?• Delay times between

order processing, demand, and receipt of products

• Order batching – Instead of ordering frequently, companies may order weekly, biweekly, or even monthly

What Causes this Effect?• Limitations on order size (Ex. retailers

can order products in cases of 10 from suppliers; however, distributors receive orders in cases of 1,000)

• Inaccurate demand forecasts.• Free return policies

Consequences• Customer demand is difficult to

predict and relatively unstable• When demand increases, customers

will increase their orders• When demand decreases, orders will

fall or stop

Countermeasures to the Bullwhip Effect

• Make use of Electronic Data Interchange (EDI) to facilitate better communication and data sharing

• More frequent orders instead of order batching

Countermeasures to the Bullwhip Effect

• Stabilize Prices – reduce both the frequency and the level of wholesale price discounting

• Eliminate Gaming in Shortage – information sharing and allocating units on past sales instead of number of orders

Countermeasures to the Bullwhip Effect

• Vendor Managed Inventory (VMI)• Just in Time Replenishment (JIT)• Computer Aided Ordering (CAO)

Works Cited• http://www.quickmba.com/ops/bullwhip-effect/• http://en.wikipedia.org/wiki/Bullwhip_effect• http://www.ehow.com/about_6367519_example-bullwhip-

effect.html• http://www.quickmba.com/ops/vendor-managed-inventory/• http://sloanreview.mit.edu/improvisations/2010/01/27/underst

anding-the-bullwhip-effect-in-supply-chains/#.UJvpmbT3C2w

• Hau L Lee, V Padmanabhan, and Seungjin Whang. The Bullwhip Effect In Supply Chains. Sloan Management Review, Spring 1997, Volume 38, Issue 3, pp. 93-102

Time’s Up!• About your speaker:

– Name: Karlo Cantor– School: University of Toronto Mississauga