Bullwhip Effect
Presented by,
Gaurav Singh
BE Mech A
57
Abstract
This presentation brings forth the concept of the
‘Bullwhip Effect’. It will also explain the causes of this
observable fact, its effects on the supply chain and the
remedies for it.
Bullwhip Effect
Introduction
The Bullwhip effect is an observed phenomenon in forecast driven
distribution channels. Since the oscillating demand magnification
upstream a supply chain resembles someone cracking a whip; it
became famous as the Bullwhip Effect. It originates at the customer
end and it amplifies as it moves upstream in the supply chain,
disrupting the entire chain. It is highly undesirable in any supply
chain as throws the entire chain and the setup out of balance due to
sudden demand increase. Better forecasting, efficient customer
feedback services are a few examples of solutions that can prevent
the occurring of this phenomenon.
Causes of the Bullwhip Effect
Sources of variability can be demand variability, quality problems,
strikes, plant fires etc. Variability coupled with time delays in the
transmission of information up the supply chain and time delays in
manufacturing and shipping goods down the supply chain create the
bullwhip effect. The following all can contribute to the bullwhip
effect:
•Overreaction to backlogs
•Neglecting to order in an attempt to reduce inventory
•No communication up and down the supply chain
•No coordination up and down the supply chain
•Delay times for information and material flow
•Order batching - Larger orders result in more variance. Order
batching occurs in an effort to reduce ordering costs, to take
advantage of transportation economics such as full truck load
economies, and to benefit from sales incentives. Promotions often
result in forward buying to benefit more from the
lower prices.
•Shortage gaming: Customers order more than they need during a
period of short supply, hoping that the partial shipments they receive
will be sufficient.
•Demand forecast inaccuracies: Everybody in the chain adds a
certain percentage to the demand estimates. The result is no
visibility of true customer demand.
•Free return policies.
Consequences
In addition to greater safety stocks, the described effect can lead to
either inefficient production or excessive inventory as the producer
needs to fulfil the demand of its predecessor in the supply chain. This
also leads to a low utilization of the distribution channel. In spite of
having safety stocks there is still the hazard of stock-outs which
result in poor customer service. Furthermore, the Bullwhip
effect leads to a row of financial costs. Next to the (financially) hard
measurable consequences of poor customer services and the
damage of public image and loyalty an organization has to cope with
the ramifications of failed fulfilment which can lead to contract
penalties. Moreover the hiring and dismissals of employees to
manage the demand variability induce further costs due to training
and possible pay-offs.
Countermeasures to the Bullwhip Effect
Here are some of the solutions:
•Countermeasures to order batching - High order cost is countered
with Electronic Data Interchange (EDI) and computer aided ordering
(CAO). Full truck load economics are countered with third-party
logistics and assorted truckloads. Random or correlated ordering is
countered with regular delivery, appointments. More frequent
ordering results in smaller orders and smaller variance.
•Countermeasures to shortage gaming - Proportional rationing
schemes are countered by allocating units based on past sales.
Ignorance of supply chain conditions can be addressed by sharing
capacity and supply information.
Unrestricted ordering capability can be addressed by reducing the
order size flexibility and implementing capacity reservations. For
example, one can reserve a fixed quantity for a given year and
specify the quantity of each order shortly before it is needed, as long
as the sum of the order quantities equals to the reserved quantity.
•Countermeasures to fluctuating prices - High-low pricing can be
replaced with everyday low prices (EDLP). Special purchase contracts
can be implemented in order to specify ordering at regular intervals
to better synchronize delivery and purchase.
•Countermeasures to demand forecast inaccuracies - Lack of
demand visibility can be addressed by providing access to point of
sale (POS) data. Single control of replenishment or Vendor Managed
Inventory (VMI) can overcome exaggerated demand forecasts. Long
lead times should be reduced where economically advantageous.
•Free return policies are not addressed easily. Often, such policies
simply must be prohibited or limited.
