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The Bullwhip effect By Smita Sharma

What is Bullwhip effect?

What is Bullwhip effect?

The Bullwhip effect is an observed phenomenon in forecast driven distribution channels. It refers to larger and larger swing in inventory in response to changes in customer demand, as one looks at firms further back in the supply chain of the product. The concept first appeared in Jay Forrester's Industrial Dynamics (1961) and thus it is also known as the Forrester effect. Since the oscillating demand magnification upstream of a supply chain is reminiscent of a cracking whip, it became known as the bullwhip effect.

The Bullwhip effect.

Supply Chain in Equilibrium

Customer demand forecast = 10 units

Products & Services

Information

Cash

Key: = Inventory Levels

10 Units 10 Units 10 Units

10 Units 10 UnitsSuppliers Producers Distributors Retailers

Products & Services

Products & Services

10 Units

Retailers are selling product at a constant rate and price. Firms along the supply chain are able to set their inventory to meet demand.

Supply chain disruptedCustomer Demand forecast = 20 units

Key: = Inventory Levels

160 Units 80 Units 40 Units

SuppliersProducers

DistributorsRetailers

Products & Services

Products & Services

Products & Services

Information Flow

Cash Flow

80 Units 40 Units 20 Units

As demand increases, the distributor decides to accommodate the forecasted demand and increase inventory to buffer against unforeseen problems in demand. Each step along the supply chain increases their inventory (double in this example) to accommodate demand fluctuations. The top of the supply chain receives the harshest impact of the whip effect.

Doesn’t place order

to Wholesaler

6 Beer Bottles/Da

y

Sufficient

Stock at

Retailer

Doesn’t place

order to manufactu

re

Factory reduces

Production

Quantity

Doesn’t buy Raw Material

from Supplier

Finished Goods Stock

Reduces

Stock reduces

Sufficient stock to

meet normal Demand Demand

Increases to 40

Bottles/day

Raw Material

Stock vanishes

40 Bottles Order

Stock

Out

Places Huge

Order to wholesal

er

Stock

Out

Places Huge

Order to Manufact

urer

Stock

Out

Places Huge

Order to Supplier

Stock

Out

Raw Materi

al Suppli

ed

Production Starts

Waiting for Replenishmen

t

NOSTOC

K

Finished Goods Inventory piled

up

Replenishment occurs

Full Store

Full Warehous

e

Replenishment occurs

Demand returns to 6 Bottles/day

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Material Flow

Order Flow

Demand Change

by(+/-)10%

Order = (+/-) 20%

Change byDemand = (+/-)

10%Forecast = (+/-)

10%

Order = (+/-)40% Change by

Demand = (+/-) 20%

Forecast = (+/-) 20%

Order = (+/-) 80%

Change byDemand = (+/-)

40%Forecast = (+/-)

40%HUGE

Change in

RawMaterial Supply

Down Stream Order Amplification

Impact of bullwhip effect

Excess Inventory Unnecessary costs Insufficient or excess capacities Expedited transportation Poor customer service Poor forecast accuracy

Impact of Bullwhip effect

Poor quality Lengthened and inaccurate lead time Loss of sales

Causes of Bullwhip effect

Because customer demand is rarely perfectly stable, businesses must forecast demand to properly position inventory and other resources. Forecasts are based on statistics, and they are rarely perfectly accurate. Because forecast errors are given, companies often carry an inventory buffer called "safety stock”Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock.

Causes of Bullwhip effect

Behavioral causes Misuse of base-stock policies Misperceptions of feedback and time delays Panic ordering reactions after unmet demand Perceived risk of other players' bounded rationality

Causes of Bullwhip effect

Operational causes Dependent demand processing

Forecast errors Adjustment of inventory control parameters with

each demand observation

Lead time variability (forecast error during replenishment lead time)

Causes of Bullwhip effect

Lot-sizing/order synchronization Consolidation of demands Transaction motive Quantity discount

Trade promotion and forward buying

Causes of Bullwhip effect

Anticipation of shortages Allocation rule of suppliers Shortage gaming Lean and JIT style management of inventories and a

chase production strategy

How to cope up with Bullwhipeffect

Improve communication along the supply chain Improve sources of forecast data Share Information establish a demand-driven supply chain which reacts to actual

customer orders  Break order batches  Stabilize prices Eliminate gaming in shortage situations

Improve communication along the supply chain

Retailers notifying firms upstream of sales promotions will help clarify demand signals from consumers

Improved information will improve demand forecasts upstream in the supply chain

Improve sources of forecast data

Firms can use data from Point of Sale computer systems to derive data from forecasting

Firms along the supply chain can use EDI systems to retrieve data on items that are legitimately being purchased by customers

Information sharing

Lack of visibility = rise in costs. Encourage information sharing among your partners. Be a catalyst and good example of information sharing. Work with suppliers on releasing lead times and improving on time delivery.

establish a demand-driven supply chain which reacts to actual

customer orders 

In manufacturing, this concept is called kanban. This model has been successfully implemented in Wal-Mart's distribution system. Individual Wal-Mart stores transmit point-of-sale (POS) data from the cash register back to corporate headquarters several times a day. This demand information is used to queue shipments from the Wal-Mart distribution center to the store and from the supplier to the Wal-Mart distribution center. The result is near-perfect visibility of customer demand and inventory movement throughout the supply chain. Better information leads to better inventory positioning and lower costs throughout the supply chain.

Break order batches

Use EDI Exchange to reduce the cost of placing orders. Place orders more frequently. Ship assortments of products in a shipload to counter high transportation costs or use a third party logistics company to handle shipping. 

Stabilize prices

Manufacturers reduce the frequency and level of wholesale price discounting to keep customers from stockpiling

Work to develop consistent pricing of products to avoid demand fluctuations from the sale of inexpensive products.

Eliminate shortage gaming

Rationing and Shortage 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 affected is the IT hardware & telecom

industry

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Thank you!