Download - Bullwhip Effect - IoPP

8/11/2019 Bullwhip Effect - IoPP

1/40

1

The Bullwhip Effect in

Supply Chains

Leslie Gardner, Ph.D.University of Indianapolis

School of Business

Institute for Emerging Careers


2/40

2

Institute for Emerging Careers

Funded by Lilly EndowmentResearch emerging and expanding

career fields in Indiana as well as to

find ways to prevent "brain drain."

Identify future Indiana industries and

determine careers needed to supportfuture business development in Indiana.


3/40

3

$50,000 Grants

For emerging careersDevelop curriculum

Develop internships

Do research to develop facultyexpertise in area of emerging career


4/40

4

Planning, organizing, directing, & controlling

flows of materials Begins with raw materials

Continues through internal operations

Continues through distribution of finished goods Ends with returns or disposal of used up goods

Involves everyone in supply-chain Example: Your suppliers supplier, logistics providers,

information systems

Objective: Maximize value & lower waste Materials arrive when and where they should, JIT

Minimize excess inventory, minimize backorders

Supply-Chain Management


5/40

5

Consumer

Retailer

Manufacturing

Material Flow

VISA

Credit Flow

Supplier

Supplier Wholesaler

Retailer

CashFlow

OrderFlow

Schedules

The Supply-Chain


6/40

6

The Supply Chain

Supplier

Supplier

Supplier

Inventory

Inventory

Distributor

Inventory Inventory

Manufacturer

Customer

Customer

Customer

Market research data

Scheduling information

Engineering and design dataOrder flow and cash flow

Ideas and design to

satisfy end customer

Material flow

Credit flow


7/40

7

Demand Amplification & Forrester

Flywheel Effect

Shortages

Over Ordering

LateDeliveries

Increase inSafety

Stock

Excess

Inventories

Reduce

Inventories


8/40


9/40

9

Symptoms of

the Bullwhip Effect

Excessive InventoryPoor Forecasts

Insufficient and/or excessive capacities

Unavailable Products

Long Backlogs

Costs for Expedited Shipments andOvertime


10/40

10

The Beer Game

ProdnDelay

oooo

RETAILoooooooooooo

WHLSLRoooooooooooo

DISTRoooooooooooo

FACTRYoooooooooooo

Shipping

Delayoooo

ShippingDelayoooo

Shipping

Delay

oooo

ShippingDelayoooo

ShippingDelayoooo

Shipping

Delayoooo

ProdnDelay

oooo

RawMatl

CustOrder Order

PlacdIncgOrder

OrderPlacd

IncgOrder

OrderPlacd

IncgOrder

ProdOrder

Developed at MIT more than 40 years ago toteach students about simulation and economic

dynamicsDoes a good job of teaching students about

the bullwhip effect but not how to prevent it


11/40

11

What can we learn from the

Beer Game?

I have developed a Microsoft Excelsimulation to test various strategies

Goal teach our students how to

minimize the bullwhip effectBullwhip effect does not occur unless

backordering (filling orders late whenproduct is available) is allowed


12/40

12

Impact of Ordering Strategies on

Bullwhip EffectNave forecast order only what is ordered

Exponential smoothing at =0.1, 0.5, and 0.9Order what is ordered plus cumulativebacklog

Order what is ordered + cumulative backlogunless inventory is some amount more thanorder + cumulative backlog

Order what is ordered + this period backlog(not cumulative)


13/40

13

Nave Forecast

Order what was ordered from youLast time 4 units were ordered from you

Order 4 this time

Last time 8 units were ordered from you Order 8 this time


14/40

14

No bullwhip, but you never catch up onorders

Beer Game - Naive Forecast

-15

-10

-5

0

5

10

15

0 5 10 15 20 25 30

Week

Inventory

Le

vel

RetailWholesale

Distributor

Factory


15/40

15

Exponential smoothing at 0.1Forecast = (0.1)(last actual)

+(1-0.1)(last forecast)

Forecast=(0.1)(8)+(0.9)(4)=4.4

Order 4


16/40

16

No bullwhip, but retailer falls furtherand further behind

Beer Game - Exponential Smoothing(0.1)

-150

-100

-50

0

50

0 5 10 15 20 25 30

Week

In

ventory

Lev

el

Retail

Wholesale

Distributor

Factory


17/40

17

Exponential smoothing at 0.5

Forecast = (0.5)(last actual)

+(1-0.5)(last forecast)

Forecast=(0.5)(8)+(0.5)(4)=6

Order 6


18/40

18

No bullwhip, but retailer, wholesalerand distributor are always behind


-20

-10

0

10

20

0 5 10 15 20 25 30

Week

Inventory

Lev

el

Retail

Wholesale

Distributor

Factory


19/40


20/40

20

No bullwhip, but retailer, wholesaler anddistributor are always behind, but not as faras for 0.5


-20

-10

0

10

20

0 5 10 15 20 25 30

Week

Inventory

Lev

el

Retail

Wholesale

Distributor

Factory


21/40

21

Nave plus cumulative backlogOrder what is ordered plus cumulative

backlog Last time 12 were ordered from you, you have 8

in stock, and you have a backlog of 12

Order 12+12=24 Ship 8, your backlog is now 16

What happens upstream? The person upstream has nothing in stock, a

backlog of 16, and 8 coming in

He/she ships out the 8, now has a backlog of 32,and orders 24+32=56


22/40


23/40

23

Nave plus backlog

no order if excess inventoryEventually, the material for the large orders

starts flowing through the system and theplacing of large orders ceases

Inventory builds up and orders become small

Quit ordering if orders are less than someamount of inventory No order if order less than 3x inventory

Inventory=144, last time 12 were ordered fromyou, dont order any

No order if inventory is 12 more than order size

Inventory gradually drains out


24/40

24

Compensate relative to order size - Bullwhipwith inventory gradually draining out

Beer Game - Naive +BacklogNo Order if < 3xInventory

-200

0

200

400

600

0 5 10 15 20 25 30

Week

In

ventory

Level

Retail

Wholesale

Distributor

Factory


25/40

25

Compensate with inventory anchor - Bullwhipwith inventory gradually draining out

Beer Game - Naive + Backlog

No Order if < 12 + Inventory

-200

0

200

400

600

0 5 10 15 20 25 30

Week

I

nventory

Le

vel

RetailWholesale

Distributor

Factory


26/40

26

Nave plus one period backlog

Order what is ordered plus only this backlog,that is, the amount you were short this period Last time 12 were ordered from you, you have 8

in stock, and you have a backlog of 12

Ship 8, your backlog is now 16, but you wereonly 4 short this time

Order 12+4=16


27/40

27

Minimal bullwhip effect inventories afterbullwhip close but not quite on target

Beer Game - Naive+ One Period Backlog

-40

-20

0

20

40

0 5 10 15 20 25 30

Week

In

ventory

Level

Retail

Wholesale

Distributor

Factory


28/40

28

Lessons Learned

Must compensate for backlog or youfall further and further behind

Overcompensation for backlog causes

bullwhip effectUndercompensation causes steady orincreasing backlog

Minimize bullwhip effect by rightamount of compensation


29/40

29

Causes of Poor CompensationLee, Padmanabhan, Whang (1997)

1. Demand forecast updating2. Order batching

3. Price fluctuation

4. Rationing and shortage gaming


30/40

30

Demand Forecast Updating

Every manager will project demandbased on what he/she sees. Managersat different levels project demand

differently (signal processing).Safety stock complicates matters


31/40

31

Remedies for Demand Forecast

Updating

Make point-of-sale (POS) data available upsupply chain EDI

Internet

Vendor managed inventory (VMI)Make downstream inventory and demand infoavailable upstream

Shorten lead-timesSell directly to consumer


32/40

32

Point of Sale Data (POS)Information on retailer order passed

upstreamEveryone orders what retailer ordered


33/40


34/40

34

Order Batching

Periodic ordering (once a month, once aweek, etc.) Cannot handle frequent order processing

Transportation costs full-truckload cheaper

than less-than-truckload ratesPush ordering Salespeople sign orders early to fill quotas when

evaluatedPeriodic execution of MRP or DRP sometimes order cycles overlap


35/40

35

Remedies for Order Batching

Reduce ordering cost EDI

Blanket orders

VMI

Mixed SKU truckloads

3PLs


36/40


37/40

37

Remedies for Price Fluctuation

Stabilize prices Reduce wholesale price discounting

Uniform pricing policies

Activity-Based Costing Conventional accounting practices may

not show hidden costs of inventory,storage, special handling, premiumtransportation, etc.


38/40

38

Rationing and

Shortage Gaming

When demand exceeds supply,manufacturers ration products on thebasis of amounts ordered

Customers exaggerate needs to getmore

When demand cools, customers cancelorders, manufacturers stuck withexcess


39/40

39

Remedies for Rationing and

Shortage Gaming

Allocate in proportion to past salesrecords

Plan ahead, share information

Penalize returns


40/40

40

Summary

Supply chain management is a cuttingedge business strategy that integratesinternal and external logistics acrossmany manufacturers, suppliers,distributors, retailers, transportationproviders, and third party logistics firmsto increase productivity and to obtain acompetitive advantage for all partiesinvolved.