The Bullwhip EffectThe Bullwhip Effect

By: Shannon ReimerBy: Shannon Reimer

What’s covered?What’s covered?

• Bullwhip effect definedBullwhip effect defined• Results of the bullwhip effectResults of the bullwhip effect• Causes of the bullwhip effectCauses of the bullwhip effect• An exampleAn example• Reducing the bullwhip effectReducing the bullwhip effect• Your firm and the bullwhip effectYour firm and the bullwhip effect• SummarySummary

Bullwhip Effect DefinedBullwhip Effect Defined

The bullwhip effect is the uncertainty The bullwhip effect is the uncertainty caused from distorted information caused from distorted information flowing up and down the supply flowing up and down the supply chain. chain.

Who is affected?Who is affected?

• Nearly all industries are affected!Nearly all industries are affected!• Firms that experience large Firms that experience large

variations in demand are at risk.variations in demand are at risk.• Firms that depend on suppliers Firms that depend on suppliers

upstream or distributors and upstream or distributors and retailers downstream may be at retailers downstream may be at risk.risk.

Results of the bullwhip Results of the bullwhip effecteffect

• Excess inventoriesExcess inventories• Problems with qualityProblems with quality• Increased raw material costsIncreased raw material costs• Overtime expensesOvertime expenses• Increased shipping costsIncreased shipping costs

Results of the bullwhip Results of the bullwhip effect - continued.effect - continued.

• Lost customer serviceLost customer service• Lengthened lead timeLengthened lead time• Lost salesLost sales• Unnecessary adjusted capacityUnnecessary adjusted capacity

Causes of the bullwhip Causes of the bullwhip effecteffect

• Un-forecasted sales promotionsUn-forecasted sales promotions• Sales incentivesSales incentives• Lack of customer confidenceLack of customer confidence• Customers turning back sales Customers turning back sales

ordersorders• Freight incentivesFreight incentives

Bullwhip effect - an Bullwhip effect - an exampleexample

Chronology of company “X’s” supply Chronology of company “X’s” supply chain problem.chain problem.

• Company X produces widgets for Company X produces widgets for sale on the open market.sale on the open market.

• Customer demand for Company Customer demand for Company X’s widgets become stagnantX’s widgets become stagnant

• Retailers offer a sales promotion Retailers offer a sales promotion to boost sales of Company X to boost sales of Company X widgetswidgets

Example – continuedExample – continued

• Retailers fail to notify manufacturers of Retailers fail to notify manufacturers of sales promotionsales promotion

• Company X recognizes that demand Company X recognizes that demand for widgets has increased.for widgets has increased.

• Company X increases inventory to Company X increases inventory to allow for increased manufacturing of allow for increased manufacturing of widgets.widgets.

Example - continuedExample - continued

• Company X notifies part suppliers Company X notifies part suppliers of increased demand.of increased demand.

• Suppliers increase inventory to Suppliers increase inventory to meet demand.meet demand.

Moral of the storyMoral of the story

Distorted information along the Distorted information along the supply chain caused inventory supply chain caused inventory levels to increase along the supply levels to increase along the supply chain which may result in chain which may result in increased inventory costs, poor increased inventory costs, poor customer service, adjusted customer service, adjusted capacity and many other problems capacity and many other problems associated with the bullwhip effect.associated with the bullwhip effect.

Supply Chain in Supply Chain in EquilibriumEquilibrium

Customer demand forecast = 10 unitsCustomer demand forecast = 10 units

Suppliers Producers Distributors Retailers

Products & Services

Products & Services

Products & Services

Information

Cash

Key: = Inventory Levels

10 Units 10 Units 10 Units

10 Units 10 Units 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 DisruptedSupply Chain Disrupted

Customer Demand forecast = 20 unitsCustomer Demand forecast = 20 units

SuppliersProducers

Distributors

Retailers

Products & Services

Products & Services

Products & Services

Information Flow

Cash Flow

Key: = Inventory Levels

160 Units 80 Units 40 Units

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.

Solving the Bullwhip Solving the Bullwhip dilemmadilemma

• Improve communication along the Improve communication along the supply chain.supply chain. Retailers notifying firms upstream of Retailers notifying firms upstream of

sales promotions will help clarify sales promotions will help clarify demand signals from consumersdemand signals from consumers

Improved information will improve Improved information will improve demand forecasts upstream in the demand forecasts upstream in the supply chain.supply chain.

Solving the Bullwhip Solving the Bullwhip dilemma - continueddilemma - continued

• Improve sources of forecast dataImprove sources of forecast dataFirms can use data from Point of Sale Firms can use data from Point of Sale

computer systems to derive data from computer systems to derive data from forecastingforecasting

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

Solving the Bullwhip Solving the Bullwhip dilemma - continueddilemma - continued

• Work with firms upstream and Work with firms upstream and downstream in the supply chaindownstream in the supply chain Create smaller order increments to Create smaller order increments to

decrease time between orders. Order decrease time between orders. Order processing will become closer to real-processing will become closer to real-time.time.

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

Reducing the bullwhip Reducing the bullwhip effect in your firmeffect in your firm

• Are prices in your supply chain Are prices in your supply chain stable?stable?

• Is information between firms along Is information between firms along the supply chain accurate and the supply chain accurate and timely?timely?

Reducing the bullwhip Reducing the bullwhip effect in your firmeffect in your firm

• Is sales being forecasted on Is sales being forecasted on projected data?projected data?

• Are you forecasting sales using Are you forecasting sales using data from EDI or Point of Sale data from EDI or Point of Sale computer systems.computer systems.

• Are incentives for sales Are incentives for sales representatives along the supply representatives along the supply chain at minimum?chain at minimum?

Reducing the bullwhip Reducing the bullwhip effect in your firmeffect in your firm

• Are orders being placed in small Are orders being placed in small increments?increments?

• Are batch orders reduced to Are batch orders reduced to minimum levels?minimum levels?

Reducing the bullwhip Reducing the bullwhip effect in your firmeffect in your firm

If you answered If you answered nono to any of the to any of the previous questions regarding your previous questions regarding your firm and the bullwhip effect, then firm and the bullwhip effect, then you may have an opportunity to you may have an opportunity to reduce costs to your individual reduce costs to your individual firm.firm.

SummarySummary

• Bullwhip effect is caused from Bullwhip effect is caused from distortions in information along the distortions in information along the supply chainsupply chain

• Results of the bullwhip effect can Results of the bullwhip effect can include: excess inventories, problems include: excess inventories, problems with quality, increased costs, overtime with quality, increased costs, overtime expenditures, lost customer service, lost expenditures, lost customer service, lost sales and more.sales and more.

Summary - ContinuedSummary - Continued

• Causes of the bullwhip effect may Causes of the bullwhip effect may include: poor forecasting of sales, include: poor forecasting of sales, incorrect information along the incorrect information along the supply chain, sales incentives, supply chain, sales incentives, sales promotions and lack of sales promotions and lack of customer confidence.customer confidence.

Summary - ContinuedSummary - Continued

• Solutions to the bullwhip effect Solutions to the bullwhip effect include: improved information flow include: improved information flow between firms along the supply between firms along the supply chain, stable pricing, small order chain, stable pricing, small order increments, focused demand on increments, focused demand on EDI or POS systems and removal of EDI or POS systems and removal of sales incentives.sales incentives.

Helpful ReadingsHelpful Readings

• Supply Chain Management: Cracking the Supply Chain Management: Cracking the Bullwhip EffectBullwhip Effect Michael Donovan Michael Donovan

• Taming the Bullwhip EffectTaming the Bullwhip EffectRam ReddyRam Reddy

• The Bullwhip EffectThe Bullwhip EffectFactory Logic whitepaperFactory Logic whitepaper

• Operations Management 4Operations Management 4thth edition editionRoberta S. Russell & Bernard W. TaylorRoberta S. Russell & Bernard W. Taylor