DYNAMICS OF SUPPLY CHAINUnderstanding the Bullwhip Effect

ABOUT ME

Alumnus of BIMTECH PGDIB 2005-2007

batch

Gold Medalist PDGIB 2005-2007 batch

Working with Future Logistics Indias largest

retail supply chain company

Handle supply chain for 6 businesses of

Future Group for North Zone.

PRE-REQUISITES FOR THIS SESSION What is Supply Chain & what are its

components Lead Time Inventory Demand Safety Stock Batch Size & EOQ

DYNAMICS OF SUPPLY CHAIN Demand Information flow Large number of touch-points Lead time Shelf-life Oil prices Real-estate Manpower Competition Working capital

WHAT IS BULLWHIP EFFECT? It is a phenomenon observed in forecast

driven supply chain & describes that the variation in demand increases up the supply chain from consumer to supplier

The further you are in the chain from the consumer the more amplified is the variation

It is nothing but an inefficiency of supply chain

BULLWHIP EFFECT ILLUSTRATED

LEAD TIME OF INFORMATION & MATERIAL IS THE PRIMARY CAUSE OF BULLWHIP EFFECT

SECONDARY CAUSES THE BULLWHIP EFFECT Demand forecast updating

Order batching

Price Fluctuation

Rationing and shortage gaming

DEMAND FORECAST UPDATING Forecasting is based on order history from

companys immediate customer Often, forecasts are made at whims & fancies

of managers Upstream manager updates his/her demand

forecasts based on customer demand variations, longer lead times, price fluctuations etc.

Techniques like exponential smoothing creates bigger swings at the suppliers end

VARIABILITY OF ORDERS TO SALE

SECONDARY CAUSES THE BULLWHIP EFFECT Demand forecast updating

Order batching

Price Fluctuation

Rationing and shortage gaming

ORDER BATCHING Periodic Ordering

Weekly, Fortnightly, Monthly etc. Creates spikes in order sizes, disrupting

suppliers demand forecasts Benefits from transportation & distribution side

Push OrderingOrders are pushed by sales personnelDone usually at monthly/quarterly sales review

and demand estimates from sales team This results in uneven spread of customer orders

resulting in the bullwhip effect

SECONDARY CAUSES THE BULLWHIP EFFECT Demand forecast updating

Order batching

Price Fluctuation

Rationing and shortage gaming

PRICE FLUCTUATIONS Forward buys; discount sales; offer

merchandise; coupons; rebates; end of season sales

Customers buy in bulk But the buying pattern never matches the

consumption pattern This results in overstocking at the far ends of

the supply chain and also results in idle capacity

SEASONAL EFFECT

SECONDARY CAUSES THE BULLWHIP EFFECT Demand forecast updating

Order batching

Price Fluctuation

Rationing and shortage gaming

RATIONING & SHORT-GAMING When demand exceeds supply, manufacture

ration supplies to distributors This results in distributors ordering more

than they need, to fulfill the demand When the market cools down, orders start

getting cancelled, excess inventory piles up, leading to the bullwhip effect

Real demand is never known in such market conditions.

Most commonly effected is the IT hardware & telecom industry

IMPACT OF BULLWHIP ON SUPPLY CHAIN Dimensioning of capacities

Variation in demand causes varying capacities Capacities based on average demand Non

serviceability during peak loads Capacities based on peak demand poorly used

resources Variation in Inventory Levels

High levels of inventory poor liquidity and high carrying costs

Lower levels of inventory reliability at risk Safety Stock

Stronger the bullwhip effect higher is the safety stock needed

A GAME INVOLVING

THE BEER DISTRIBUTION GAME

THE BEER DISTRIBUTION GAME

RULES OF THE GAME Give your brewery a NAME No communication is allowed between two nodes

other than passing on the orders and beer Real customer demand is only known by the

retailer Each node is directly linked

Material and information passes through the nodes without skipping any node in between

The Game will last for 26 weeks

RULES OF THE GAME Cost of holding inventory per week = Re.

0.50/bottle/week Cost of stock out/back-orders/backlogs = Re.

1.0/bottle/week Orders to fill = New orders + Backlogs Lead Time between any two nodes is 3 weeks Every node will start with an inventory of 15

bottles In-transit stock to each node per week is 4

bottles

SOLUTIONS TO BULLWHIP EFFECT Sharing accurate Demand Information

across supply chain partners Reduce ordering cost, transportation costs to

bring down EOQ 3PL providers are efficient way to bring down

logistics costs. Sharing marketing plans, demand

information helps reduce short-gaming & rationing

To eliminate the problem of price fluctuations, the concept of everyday low prices and everyday low costs to smooth of buying spikes

SOLVING THE BULLWHIP EFFECT

COLLABORATIVE PLANNING, FORECASTING & REPLENISHMENT Collaborative Planning

Negotiate a front-end agreement that defines the responsibilities of the companies that will collaborate with each other

Build a joint business plan that shows how the companies will work together to meet demand

Collaborative Forecasting Create sales forecasts for all the collaborating

companies Identify any exceptions or differences between

companies Resolve the exceptions to provide a common

sales forecast

COLLABORATIVE PLANNING, FORECASTING & REPLENISHMENT Collaborative Replenishment

Create order forecasts for all the collaborating companies

Identify exceptions between companies

Resolve the exceptions to provide an efficient production and delivery schedule

Generate actual orders to meet customer demand

RECAP What is Bullwhip effect? What causes it? How can you minimize bullwhip effect?

THANK YOUYou may contact me at:puneit.singh@gmail.com93508320209953324595