What is the Bullwhip Effect? Demand variability increases as
you move up the supply chain away from the consumers Small changes
by customers can result in large variations on orders placed up the
chain creating a bullwhip effect
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Supply Chain Management SCM is the management of a network of
interconnected businesses involved in getting the product or
service required by the end customers in a supply chain
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Why is it called a Bullwhip Effect? This phenomenon occurs when
companies significantly cut or add inventories. Economists call it
a bullwhip because even small increases in demand can cause a big
snap in the need for parts and materials further down the supply
chain. Wall Street Journal
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Background The concept first appeared in Jay Forrester's
Industrial Dynamics in 1961 and thus, it is also known as the
Forrester effect Also can be called the Whiplash Effect
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Importance It is frequently the cause of serious inefficiencies
that result from ordering too much or too little of a given product
Links in the supply chain react to changes further downstream
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Consumer Bill likes Coke Bill goes to the store and drinks a
lot of Coke daily So the store has to refill its stock
regularly
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What if But what if Bill gets sick and cant drink Coke for a
few weeks? The store has too much inventory and stops its orders
due to decreased demand The supplier stops orders as well The
manufacturer will slow down production of Coke
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But Wait Bill gets better and starts buying Coke from the store
and starts drinking again (this time more!) Now the store places
more orders to account for the increased demand The supplier
doubles his order with the Coke manufacturer The manufacturers
increase production
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Consumer Manufacturer Supplier Coke Supply Chain
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Therefore A small customer (like Bill) fluctuation can cause a
major oscillation in the many stages of the supply chain The effect
is felt greater closer to the manufacturing stages
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What Causes this Effect? Over reacting to the backlog orders
Little or no communication between supply chain partners
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What Causes this Effect? Delay times between order processing,
demand, and receipt of products Order batching Instead of ordering
frequently, companies may order weekly, biweekly, or even
monthly
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What Causes this Effect? Limitations on order size (Ex.
retailers can order products in cases of 10 from suppliers;
however, distributors receive orders in cases of 1,000) Inaccurate
demand forecasts. Free return policies
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Consequences Customer demand is difficult to predict and
relatively unstable When demand increases, customers will increase
their orders When demand decreases, orders will fall or stop
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Countermeasures to the Bullwhip Effect Make use of Electronic
Data Interchange (EDI) to facilitate better communication and data
sharing More frequent orders instead of order batching
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Countermeasures to the Bullwhip Effect Stabilize Prices reduce
both the frequency and the level of wholesale price discounting
Eliminate Gaming in Shortage information sharing and allocating
units on past sales instead of number of orders
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Countermeasures to the Bullwhip Effect Vendor Managed Inventory
(VMI) Just in Time Replenishment (JIT) Computer Aided Ordering
(CAO)
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Works Cited http://www.quickmba.com/ops/bullwhip-effect/
http://en.wikipedia.org/wiki/Bullwhip_effect
http://www.ehow.com/about_6367519_example-bullwhip-
effect.htmlhttp://www.ehow.com/about_6367519_example-bullwhip-
effect.html http://www.quickmba.com/ops/vendor-managed-inventory/
http://sloanreview.mit.edu/improvisations/2010/01/27/underst
anding-the-bullwhip-effect-in-supply-chains/#.UJvpmbT3C2whttp://sloanreview.mit.edu/improvisations/2010/01/27/underst
anding-the-bullwhip-effect-in-supply-chains/#.UJvpmbT3C2w Hau L
Lee, V Padmanabhan, and Seungjin Whang. The Bullwhip Effect In
Supply Chains. Sloan Management Review, Spring 1997, Volume 38,
Issue 3, pp. 93-102
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Times Up! About your speaker: Name: Karlo Cantor School:
University of Toronto Mississauga