bullwhip (2)

8/8/2019 bullwhip (2)

1/19

The Bullwhip Effect in the

Supply Chain

What is the Bullwhip Effect?

I t r esult s in t he st ockpiling of invent or yat every point of t he chain, due t o ahigh degr ee of demand uncer t aint y &var iabilit y

Distortion of demand information asit is transmitted up the supply chain

8/8/2019 bullwhip (2)

2/19

The bullwhip effect - Small changes can

reverberate through a supply chain,causing huge swings of inventory andproduction levels.

RETAILER WHOLESALER MANUFACTURER SUPPLIER

UPSTREAMDOWNSTREAM

Consumer Sales

0

50

100

150

200

OrderQua

Order Quantity

Retailer's Order

0

50

100150

200

OrderQua

Order Quantity

8/8/2019 bullwhip (2)

3/19

Wholesaler's Order

0

50

100

150

200

OrderQu

Order Quantity

Manufacturer's Order

0

50

100

150

200

Ord

erQu

Order Quantity

What causes the Bullwhip Effect?

Stermans Experiment

Variability in the amplified order is attributable

to the irrational decision making of the

participants

Bullwhip ef f ect is a consequence ofhuman ir r at ionalit y

8/8/2019 bullwhip (2)

4/19


However

Rational behaviour of the participantswithin the supply chain infrastructure

causes the Bullwhip effect

Hence,

I n or der t o cont r ol t he supply chain, t he

f ocus needs t o be on modif ying t hechains inf r ast r uct ur e, r at her t han t he

decision maker s behaviour


Rationing & ShortageGamingPrice Fluctuation

Order BatchingDemand ForecastUpdating

8/8/2019 bullwhip (2)

5/19

What causes the Bullwhip

Effect?

Rationing & ShortageGaming

Price Fluctuation

Order BatchingDemand ForecastUpdatingDemand ForecastUpdating

Demand

ForecastUpdating

Forecasting is based on the order history from

the company's immediate customers

RetailerStockistManufacturerSupplier

DownstreamUpstream

Demand Signal Processing

When a retailer places an order, the stockist processesthat order as a signal about future product demand

The stockist readjusts his demand forecast and in turnplaces orders with the manufacturer

Successive exponent ial smoothing f or demand andsafety stocks translate to w ider swings in orders,as one moves upst ream of the supply chain

8/8/2019 bullwhip (2)

6/19


Effect?

Rationing & ShortageGaming

Price Fluctuation

Order BatchingDemand ForecastUpdating Order Batching

OrderBatching

Companies normally accumulate demand &

place orders in batches

Periodic Ordering

Companies place orders in bulk either weekly/ monthly

Major deterrent to frequent ordering is theeconomics of transportation

A supplier receiving an order f rom a company once amont h faces a highly erratic stream of orders

There is a spike in demand once a month, follow ed by

no demandsThis variabil it y is higher than t he demand faced by thecompany

Periodic Ordering amplif ies variabilit y &

contribut es t o the Bullw hip Effect

8/8/2019 bullwhip (2)

7/19

OrderBatching

Companies normally accumulate demand &place orders in batches

Push Ordering

Companies experience regular surges in demand

Orders are pushed ont o it f rom custom ers periodi cally

This ordering patt ern from custom ers is more errati cthan the consumpt ion that their custom ers face

Overall,

I f order cycles were evenly spread out, the bullw hip

effect w ould be minimised

But, more oft en than not , order cycles overlap, mostlyat t he beginning of t he month, compounding thebullw hip effect


Effect?



Price Fluctuation

8/8/2019 bullwhip (2)

8/19

8/8/2019 bullwhip (2)

9/19

PriceFluctuation

Forward Buying

Pitfalls

Erratic demand fluctuations force factories to runovertime at certain times & remain idle on others

Need to build inventories to anticipate bigdemand swings

Pay premium freight rates to transport products

I ronical ly,

These variat ions are induced by pr ice

f luctuations that the manufactu rers set upthemselves!

Dumbest m arketing ploy ever


Effect?



Rationing &Shortage Gaming

8/8/2019 bullwhip (2)

10/19

Ration

ing&S

hortageGaming

When demand for a product exceedssupply, manufacturers ration products tocustomers

Know ing this, customers exaggerate theirreal needs when they order

They place duplicate orders w it h

mul t iple suppliers, buy from t he first one t hat

can deliver , and t hen cancel all duplicate

orders

Hence, customers orders give the supplierlittle information about the products realdemand

Countering the Bullwhip Effect

Eliminate Gaming inShortage SituationsStabilise Prices

Break Order BatchesAvoid Multiple DemandForecast Updates

8/8/2019 bullwhip (2)

11/19


Effect?

Eliminate Gaming inShortage Situations

Stabilise Prices

Break Order BatchesDemand ForecastUpdating

Avoid MultipleDemand Forecast

Updates

AvoidMultip

leDemandForecastUpda

tes

Supply chain mem bers process demand i nput

f rom their immediate downstream m ember inproducing their ow n forecast s

Make demand data from dow nstreamavailable to upstream sites

All sites w ill update forecasts using thesame raw data

Upstream site would control re-supply

from upstream to downstreamUpstream site would have demand &

inventory information of the downstream site &update the forecasts and re-supplies for thedownstream site

8/8/2019 bullwhip (2)

12/19

AvoidMu

ltipleDemandForecastU

pdates

Bypass the downstream site w hile gettingdemand information

Just In Time Replenishment

AvoidMultip


tes

What is Information Visibility?

It is the process of sharing critical data

required to manage the flow of products,

services & information in real time between

suppliers & customers

If information is available, but it cannot beaccessed by the parties, its value degrades

exponentially

8/8/2019 bullwhip (2)

13/19

AvoidMu


pdates

Information Visibility

Traditional supply chains are evolving into dynamic

trading networks made of groups of independent

business units sharing planning & execution

information to satisfy demand with an immediate,

coordinated response

AvoidMultip


tes

Information Visibility in the SupplyChain

Initiatives:

Ef f icient Consumer Response (ECR)

Collaborat ive Planning, For ecast ing &Replenishment (CPFR)

Quick Response

Vendor Managed I nvent or y

8/8/2019 bullwhip (2)

14/19

AvoidMu


pdates

Efficient Consumer Response (ECR)

It is the realization of a simple, fast and consumer

driven system , in which all links of the logistic

chain work together, in order to satisfy consum er

needs with the lowest possible costs

Focus Areas of ECR

CategoryManagement

Product

Replenishment

EnablingTechnologies


Effect?



Break OrderBatches

8/8/2019 bullwhip (2)

15/19

BreakOrderBatches

Devise strategies for smaller batches ormore frequent replenishment

Large order batches/ Low order frequencies resultfrom:

High cost of order placement & replenishment

High transportation cost

Mix ed SKU truckloads can be delivered tothe w arehouse for direct delivery to retailer

Engagement of third party logisticcompanies wil l make small batch sizeeconomical

When custom ers spread replenishmentorders over t ime, negat ive eff ect of bat ching

is reduced


Effect?



Stabilise Prices

8/8/2019 bullwhip (2)

16/19

StabilisePrices

Reduce forward buying by reducing the

frequency & level of wholesale pricing

Practices such as CRP, RationalisedWholesale Pricing & Computer Assisted

Ordering (CAO) helps to reduce forwardbuying

Activity Based Costing (ABC) systems help

companies to ascertain the costsassociated with forward buying


Effect?



Eliminate Gaming

in ShortageSituations

8/8/2019 bullwhip (2)

17/19

EliminateGaminginShortageSitu

ations

When a supplier faces shortages, it canallocate products in the proportion ofpastsales record, instead oforders placed

Customers then have no incentive to

exaggerate orders

EliminateGa

minginShortageSituatio

ns

Gaming Exaggerated order placing by customers

Gaming peaks when customers have

inadequate information about themanufacturers supply situation

Sharing of capacity & inventory

information reduces customers propensityto indulge in gaming

8/8/2019 bullwhip (2)

18/19

8/8/2019 bullwhip (2)

19/19

The Bullwhip Effect in the

Supply Chain

Date post:	10-Apr-2018
Category:	Documents
Upload:	aashi
View:	223 times
Download:	0 times

bullwhip (2)

Documents