Demand Variability: The Bullwhip Effect

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Demand Variability:The Bullwhip Effect

Dr. Joe Hage

© 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved.

Demand Variability – 1/2

• Increases as one moves up the supply chain away from end customers

• Small changes in customer demand may result in large variations in orders placed upstream

• Network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own narrow, often self-serving, perspective

2© 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved.

Demand Variability – 2/2

• Sources of Variability– Demand Variability– Quality Issues– Strikes and Disruptions– Plant Shutdown

• Variability coupled with time delays in the transmission of information up and down the supply chain and time delays in manufacturing and shipping goods up and down the supply chain create the Bullwhip Effect


Bullwhip Effect – 1/2

• Distortion of orders along the supply chain, where small fluctuations in end customer demand result in amplification of demand upstream, aka Demand Amplification

• The term ‘bullwhip’, where just a small flick of the wrist at the handle will create a large crack of the whip at its tip


time

Quantities Ordered by Distribution Centers

time

Quantities Ordered by Retailers

time

Quantities Ordered by End Customers

Bullwhip Effect – 2/2

Distribution Centers RetailersManufacturers

Fluctuation Increases

Fluctuation Increases


Cracking the Whip


The Bullwhip Effect – Orders

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 170

5

10

15

20

25

30

35

40

45

50 Bottled Water Corporation – Orders

Consumers Retailer Wholesaler Distributor Factory

Weeks

Ord

ers

(Tho

usan

d Ca

ses)

© 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 7

The Bullwhip Effect – Cost

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 170

20

40

60

80

100

120

140

160Bottled Water Corporation – Inventory Cost

Retailer Wholesaler Distributor FactoryWeeks

Cost

(M

illio

n $)


The Bullwhip Effect – Stockouts

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

-30

-20

-10

0

10

20

30

40

50 Bottled Water Corporation – Stockout

Retailer Wholesaler Distributor Factory

Weeks

Qua

ntity

(T

hous

and

Case

s)


Bullwhip Effect Creates Problems – 1/2

• High– Inventory Levels– Inventory Cost– Demand Fluctuation / Variability

• Low– Service Level (Backorders / Backlogs)– Efficiency– Customer Satisfaction

• Friction among Supply Chain Partners


Bullwhip Effect Creates Problems – 2/2

• To cope with peaks and valleys, variation in demand along the supply chain requires:– Shipment Capacity– Production Capacity– Inventory Capacity

• Most of the time capacity is idle– Resulting in significant costs and investments

• Conclusion– High overall cost in the supply chain– Unhealthy competition between supply chains and networks, not

just between individual companies!11© 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved.

Structure Creates Behavior

• Different people in the same organizational structure produce the same (or at least similar) results

Losses

Events(Backlogs/Surges/Friction)

Behavior(Process Oscillation/Demand Variation)

Structure


Reactions

• Typical organizational response is to find “the person responsible”, i.e. the person placing the orders or the inventory manager, and blame him or her

• However, such a response is inappropriate because different people following different decision rules for ordering have created similar variations and oscillations

• The structural setup must be changed13© 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved.

Factors Contributing to Bullwhip Effect – 1/2

• Demand Forecasting – Usage of aggregate and thus inaccurate data does not allow for good

predictions– High variability leads to continuous adaptations of order policies, thus

increasing variability upstream• Lead Time

– Longer lead times create uncertainty– Requires high safety stock levels– Reduces flexibility and adaptability to unforeseen changes in demand

• Inflated Orders– In time of shortages, suppliers place big orders when the expectation is

to be on proportional allocation14© 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved.

Factors Contributing to Bullwhip Effect – 2/2

• Batch Ordering– At one stage in supply chain leads to observing high

variability at next stage upstream– One week large order followed by weeks with no order– Contributors: fixed ordering costs, transportation and price

discounts• Price Fluctuation

– Stock up when prices are lower are leading to large orders

– Promotions and discounts15© 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved.

Lessons

• In traditional supply chains, information about consumer demand is only passed upstream through the orders placed with aggregated figures

• Information is therefore lost resulting in high buffer stocks• Even if each partner acts “optimally” individually, the

result is less than optimal for the entire supply chain• Result is higher prices, lower sales, less margins• However, competition is now supply chain against supply

chain and network against network


Dr. Joe Hage’s Contact Info

• E-mail: [email protected] • Skype: joe_hage• Web: www.joe.me • LinkedIn: http://www.linkedin.com/in/joehage • Twitter: http://twitter.com/DrJoeHage • Facebook: http://facebook.com/DrJoeHage • Amazon: http://www.amazon.com/author/joe-hage


mailto:[email protected]

http://www.joe.me/

http://www.linkedin.com/in/joehage

http://twitter.com/DrJoeHage

http://facebook.com/DrJoeHage

http://www.amazon.com/author/joe-hage

Date post:	30-Nov-2014
Category:	Business
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Demand Variability: The Bullwhip Effect

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