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Bullwhip Effect & Value of Information

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    Bullwhip effect & value of

    information

    By

    Dr. Debadyuti Das

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    Bullwhip Effect

    Fluctuations in orders increase as theymove up the supply chain from retailers towholesalers to manufacturers to suppliers

    Distorts demand information within thesupply chain, where different stages havevery different estimates of what demandlooks like

    Results in a loss of supply chaincoordination

    Eamples! "roctor & #amble $"ampers% '"$printers% Barilla $pasta%

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    Figure 1. Point-of-sales

    Data-Original

    Figure 2. POS Data After

    Removing Promotions

    (he Bullwhip Effect and its)mpact on the *upply +hain

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    Figure 3. POS Data After Removing Promotion & Trend

    (he Bullwhip Effect and its)mpact on the *upply +hain

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    'igher ariability in -rders "laced by+omputer Retailer to anufacturer than

    /ctual *ales

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    )ncreasing ariability of -rders

    0p the *upply +hain

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    1e +onclude 2.

    -rder variability is amplified up

    the supply chain upstreamechelons face higher variability.

    1hat you see is not what they

    face.

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    1hat are the +auses of Bullwhipeffect3

    Demand forecasting & )nventorymanagement -rder4up4to points are modified as

    forecasts change

    5ong cycle times 5ong lead times magnify this effect

    "romotional sales Forward buying

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    1hat are the +auses of Bullwhipeffect3

    "rice fluctuation

    olume and transportation discounts

    Batch ordering )nflated orders )B /ptiva orders increased by 647 times

    when retailers thought that )B would

    be out of stock over +hristmas

    otorola cell phones

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    1hat are the +auses2.

    *ingle retailer, single manufacturer. Retailer observes customer demand, Dt.

    Retailer orders 8tfrom manufacturer.

    Retailer Manufacturer Dt qt

    L

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    'ow big is the increase3

    *uppose a " period moving average is used.

    2

    2221

    )

    )

    P

    L

    P

    L

    DVar

    qVar ++

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    ar$8%9ar$D%!For arious 5ead (imes

    L=5

    L=3

    L=1

    0

    2

    4

    6

    8

    10

    12

    14

    0 5 10 15 20 25 30

    L=5

    L=3

    L=1

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    +onse8uences2.

    )ncreased safety stock

    Reduced service level

    )nefficient allocation ofresources

    )ncreased transportation costs

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    ulti4*tage *upply +hains

    +onsider a multi4stage supply chain! *tage iplaces order qi to stage i+1.

    Liis lead time between stage iand i+1.

    RetailerStage 1

    Manufacturer Stage 2

    SupplierStage 3

    qo

    =D q1 q2

    L1 L2

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    ulti stage systems

    +entrali:ed! each stage bases orders onretailer;s forecast demand.

    Decentrali:ed! each stage bases orders onprevious stage;s demand

    2

    2

    11 221)

    )

    P

    L

    P

    L

    DVar

    qVar

    k

    ii

    k

    iik

    ++ ==

    =

    ++

    k

    i

    ii

    k

    P

    L

    P

    L

    DVar

    qVar

    12

    222

    1)

    )

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    ulti4*tage *ystems!

    ar$8k

    %9ar$D%

    0

    5

    10

    15

    20

    25

    30

    0 5 10 15 20 25

    Dec, k=5

    Cen, k=5

    Dec, k=3Cen, k=3

    k=1

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    (he Bullwhip Effect!anagerial )nsights

    Eists, in part, due to the retailer;s need toestimate the mean and variance of demand.

    (he increase in variability is an increasing

    function of the lead time. (he more complicated the demand models

    and the forecasting techni8ues, the greaterthe increase.

    +entrali:ed demand information cansignificantly reduce the bullwhip effect, butwill not eliminate it.

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    +oping with the Bullwhip Effect 9/chieving *+ +oordination

    Reduce uncertainty

    *haring "-* data

    *haring forecasts and inventory policies

    )mplementing +"FR Designing single stage control of

    replenishment

    Reduce variability

    Eliminate promotions

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    +oping with the Bullwhip Effect 9/chieving *+ +oordination

    Reduce lead times $order lead time & deliverylead time%

    ED)

    +ross docking

    /*=

    Reduce lot si:es

    +ombine shipments of different products

    +ombine shipments for several retailers

    +ombine shipments from multiple suppliers

    Distribute demand evenly over time

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    +oping with the Bullwhip Effect 9/chieving *+ +oordination

    Rationing based on past sales(urn and earn)nformation sharing

    *trategic partnerships endor managed inventory $)% +ontinuous replenishment programs $+R"%

    /ligning goals and incentives /lign incentives across functions

    "ricing for coordination/lter sales force incentives from sell4in $to theretailer% to sell4through $by the retailer%

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    Eample! >uick Response at Benetton

    Benetton, the )talian sportswearmanufacturer, was founded in ?@A. )n?@C Benetton had 6 stores across

    )taly. (en years later, the company epanded

    to the 0.*., apan and Eastern Europe.*ales in ?@@? reached 6 trillion.

    any attribute Benetton;s success tosuccessful use of communication andinformation technologies.

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    Eample! >uick Response at Benetton

    Benetton uses an effective strategy, referred toas >uick Response, in which manufacturing,warehousing, sales and retailers are linked

    together. )n this strategy a Benetton retailerreorders a product through a direct link withBenetton;s mainframe computer in )taly.

    0sing this strategy, Benetton is capable ofshipping a new order in only four weeks,several week earlier than most of itscompetitors.

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    'ow Does Benetton+ope with the Bullwhip Effect3

    ?. )ntegrated )nformation *ystems

    #lobal ED) network that links agents withproduction and inventory information

    ED) order transmission to '>ED) linkage with air carriers

    Data linked to manufacturing

    6. +oordinated "lanning

    Fre8uent review allows fast reaction

    )ntegrated distribution strategy

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    )nformation for +oordination of*ystems

    )nformation is re8uired to move from local toglobal optimi:ation

    >uestions!

    1ho will optimi:e3 'ow will savings be split3

    )nformation is needed ! "roduction status and costs (ransportation availability and costs )nventory information +apacity information Demand information

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    5ead4(ime Reduction

    1hy3 +ustomer orders are filled 8uickly

    Bullwhip effect is reduced

    Forecasts are more accurate

    )nventory levels are reduced

    'ow3

    ED) "-* data leading to anticipating

    incoming orders.

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    )nformation to /ddress +onflicts

    5ot *i:e G )nventory! /dvanced manufacturing systems

    "-* data for advance warnings )nventory 44 (ransportation! 5ead time reduction for batching

    )nformation systems for combining

    shipments +ross docking

    /dvanced D**

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    )nformation to /ddress +onflicts

    5ead (ime G (ransportation! 5ower transportation costs

    )mproved forecasting

    5ower order lead times

    "roduct ariety G )nventory! Delayed differentiation

    +ost G +ustomer *ervice! (ransshipment


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