To study and quantify the Bullwhip

effect in Supply Chain management

A Dissertation submitted to
DEVI AHILYA VISHWAVIDYALAYA, INDORE
towards partial fulfillment
of the degree of
Bachelor of Engineering
(Mechanical Engineering)

Guided by: - Submitted by:-

Dr. Nagendra Sohani Sir Anup Chaturvedi

Aviral Verma
Ganesh Patidar
Prasanna Soni
Sonu Sejkar

Department of Mechanical Engineering

Institute of Engineering and Technology
Khandwa Road, Indore (M.P.) 452017
www.iet.dauniv.ac.in
 Institute of Engineering and Technology
Devi Ahilya Vishwavidyalaya
Indore

CERTIFICATE

This is to certify that the project report named “Study and quantify the Bullwhip
effect in Supply Chain management” submitted by

Anup Chaturvedi
Aviral Verma
Ganesh Patidar
Prasanna Soni
Sonu Sejkar

to Devi Ahilya Vishwavidyalaya, Indore in partial fulfillment of the requirement for

award of the degree of Bachelor of Engineering (Mechanical) is a satisfactory account
of their project work.

Dr. Nagendra Sohani

Project Guide
Department of Mechanical Engineering

Dr. Manohar Chandwani

Director
IET-DAVV
 ACKNOWLEDGEMENT

Words tend to loose their effectiveness when we turn the pages of

the encyclopedia of our hearts to express gratitude and thankfulness.
We would like to convey our heartiest thanks to our
project guide Dr. Nagendra Sohani sir. From the bottom of the heart
without whom devoted indulgence and expert guidance the project
could not have had taken the shape.
We here by find the golden opportunity to
acknowledge our sincere thanks to Dr. M.chandwani director IET-
DAVV and Dr . Ashesh Tiwari (HOD- Mechanical Engineering)
for letting us undertake this project.
 Institute of Engineering and Technology
Devi Ahilya Vishwavidyalaya
Indore

Dissertation approval sheet

This is to certify that Mr Anup chaturvedi , Mr. Aviral verma , Mr.

Ganesh patidar, Mr. Prasanna soni, Mr. Sonu sejkar (III yr B.E.
Mechanical Engineering) in the academic year 2008-09 of this
institute have successfully completed the project phase1 work
entitled “ To study and quantify the Bullwhip effect in Supply
chain management” and have submitted a satisfactory report as a
part of requirement for the award of degree of bachelor of
engineering from Devi Ahilya Vishwavidhyalaya, Indore.

External Examiner Internal Examiner

 CONTENTS
Page no.

1. Introduction to Supply Chain 5-12

2. Role of Information in Supply Chain 13-15

3. Bullwhip Effect 16-23

4. Beer Distribution game 24-28

5. Literature Review 29-31

6. Future endeavors 32-33

1. Introduction to Supply Chain
Supply chain management (SCM) is the term used to describe the
management of the flow of materials, information, and funds across the
entire supply chain, from suppliers to component producers to final
assemblers to distribution (warehouses and retailers), and ultimately to the
consumer. In fact, it often includes after-sales service and returns or
recycling. Figure 1 is a schematic of a supply chain. In contrast to
multiechelon inventory management, which coordinates inventories at
multiple locations, SCM typically involves coordination of information and
materials among multiple firms.

Supply chain management has generated much interest in recent years

for a number of reasons. Many managers now realize that actions taken
by one member of the chain can influence the profitability of all others
in the chain. Firms are increasingly thinking in terms of competing as
part of a supply chain against other supply chains, rather than as a
single firm against other individual firms. Also, as firms successfully
streamline their own operations, the next opportunity for improvement
is through better coordination with their suppliers and customers. The
costs of poor coordination can be extremely high. In the Italian pasta
industry, consumer demand is quite steady throughout the year.
However, because of trade promotions, volume discounts, long lead
times, full-truckload discounts, and end-of-quarter sales incentives the
orders seen at the manufacturers are highly variable (Hammond
(1994)). In fact, the variability increases in moving up the supply chain
from consumer to grocery store to distribution center to central
warehouse to factory, a phenomenon that is often called the bullwhip
effect .This would be discussed broadly in later section
It seems that integration, long the dream of management gurus, has
finally been sinking into the minds of western managers. Some would
argue that managers have long been interested in integration, but the
lack of information technology made it impossible to implement a
more “systems-oriented” approach. Clearly industrial dynamics
researchers dating back to the 1950’s (Forrester (1958); Forrester
(1961)) have maintained that supply chains should be viewed as an
integrated system. With the recent explosion of inexpensive
information technology, it seems only natural that business would
become more supply chain focused. However, while technology is
clearly an enabler of integration, it alone can not explain the radical
organizational changes in both individual firms and whole
industries. Changes in both technology and management theory set
the stage for integrated supply chain management. One reason for
the change in management theory is the power shift from
manufacturers to retailers. Wal-Mart, for instance, has forced many
manufacturers to improve their management of inventories, and
even to manage inventories of their products at Wal-Mart. While
integration, information technology and retail power may be key
catalysts in the surge of interest surrounding supply chains,
eBusiness is fueling even stronger excitement. eBusiness facilitates
the virtual supply chain, and as companies manage these virtual
networks, the importance of integration is magnified. Firms like
Amazon.com are superb at managing the flow of information and
funds, via the Internet and electronic funds transfer. Now, the
challenge is to efficiently manage the flow of products. Some would
argue that the language and metaphors are wrong. “Chains” evoke
images of linear, unchanging, and powerless. “Supply” feels pushy
and reeks of mass production rather than mass customization. Better
names, like “demand networks” or “customer driven webs” have
been proposed by many a potential book author hoping to invent a
new trend. Yet, for now, the name “supply chain” seems to have
stuck. And under any name, the future of supply chain management
appears bright.
Effective supply chain management

The complexities of getting material ordered, manufactured and

delivered overload most supply chain management (SCM) systems.
The fact is, most systems are just not up to handling all the variables
up and down the supply chain. For years, it was thought that it was
enough for manufacturers to have an MRP or ERP system that could
help answer fundamental questions such as: What are we going to
make? What do we need to make the products? What do we have
now? What materials do we need, and when? What resources/
capacity do we need and when? Manufacturers need to know a lot
more today to have a truly effective supply chain. There are a
number of fundamental weaknesses in the old system logic. Many
planning and scheduling systems in use today assume that lead times
are fixed, queues do not change, queues must exist, capacity is
infinite and backward scheduling logic will produce valid load
profiles and good shop floor schedules. These assumptions are
totally illogical, and following them causes many schedule
compliance problems. An effective fix is first to streamline
operations and then to apply predictive, preventive forms of
advanced planning and scheduling. SCM involves two flows.
Information flow signals the need to start the flow of material. In a
supply chain, the fast flow of high-quality information and material
is inextricably linked and of paramount importance to SCM success.
Untimely or low-quality information virtually guarantees poor
performance. Manufacturers need to develop flexible supply chain
processes that can adapt to the needs of various customer segments.
They must also develop supply chain strategy, processes and
supporting systems that conform to current and future requirements.
Generally, an effective SCM approach must focus on:
• Flexible supply and production processes that can very quickly
respond to changing customer demand
• A short-cycle, demand-driven order-to-delivery process
• Accurate, relevant information that is available on demand
throughout the supply chain. Throughout the supply chain, there are
some absolutely critical and predictive questions your system should
accurately and quickly answer:

• When will specific orders really ship?

• Which orders will be late?
• Why will these orders be late?
• What are the specific problems that are delaying the schedule?
• What are the future schedule problems and when will they occur?
• What is the best schedule that can be executed now?

If management can answer predictive questions, its decisions will

greatly improve. Preventive actions can offset what were once
unforeseen problems. The supply chain will be managed more
effectively and improve chances of gaining a competitive advantage.
In the early 1980s, with the introduction of just-in-time production
to the United States, many were convinced that pull signals
(kanbans) and instant material deliveries would eradicate the need
for MRP. The announcement of MRP’s death was premature, except
for firms with simple products and absolute control of supplier
deliveries. Those with more complex products
requiring more supply sources for more parts discovered that longer
lead times and demand and supply variability were still issues to be
dealt with. Simply put, the more diverse your product line and the
more complex your products, the more valuable MRP is for
planning raw material needs. This is not to say pull logic is not
useful for raw material planning, because it is. Yet for most, it is not
necessary (or desirable) to put every part number from every
supplier on a pull system. Scheduling production with MRP
push logic, however, is like pushing a rope. You don’t know what
direction it will go. Pull systems will eventually dominate the entire
supply chain—to customers and from suppliers, as well as internal
material movement. Yet, MRP can, and must, coexist with pull
scheduling. Cycle time compression should be the first objective in
the order-to-delivery process. Midrange manufacturers often have
limited clout with suppliers, making across-the-board mandatory
lead-time reductions unlikely. While there are many ways to work
out mutually beneficial and necessary improvements with suppliers, the
real enemy is time. The alternative is to work selectively on supply
improvements while using a rationalized inventory deployment strategy
to support the first objective—reducing order-to-delivery cycle time.
Good collaborative forecasting, good planning and realistic
replenishment scheduling are essential to effective SCM. Further
improvements come from redesigning supplier links to make them
firm, fast and flexible for the benefit of the entire supply chain.
During the transformation, companies have learned the value of
minimising cycle time and having predictable schedules, especially
with mass customization. Both are necessary for effective supply
chain performance.
Fig. Four supply chain scenarios
2. Role of information in supply chain
Information could be overlooked as a major supply chain driver
because it does not have a physical presence. Information, however,
deeply affects every part of supply chain. Its impact is easy to
underestimate as information affects a supply chain in many
different ways. Consider the following:

1) Information serves as the connection between the supply chain’s

various stages, allowing them to coordinate and bring out many of
the benefits of maximizing total supply chain profitability.

2) Information is also crucial to the daily operation of each stage in

a supply chain. For instance, a production scheduling system uses
information on Demand to create a schedule that allows a factory to
produce the right products in an efficient manner .A warehouse
management system uses information to create a visibility of the
warehouse’s inventory. The company can then use this information
to determine whether new orders can be filled.
Further we can classified information as follows

a) Centralized information –: one of the most frequent suggestion

for reducing the bullwhip effect is to centralized demand
information within a supply chain that is to provide each stage
of supply chain with complete information on the actual
customer demand. if the demand information is centralized,
each stage of supply chain can use the actual customer demand
data to create more accurate forecasts, rather than relying on
the orders received from the previous which can vary
significantly more than the actual customer demand

b) Decentralized information-: second type of supply chain that

we consider is the decentralize supply chain. In this case the
retailer does not make its forecast mean demand available to
the remainder of supply chain . instead the wholesaler must
estimate the mean demand based on the orders received from
the retailer.

Information is a driver whose importance has grown as company’s

have used it to become both more efficient and more responsive.
Another key decision involves what information is most valuable in
reducing cost and improving responsiveness within a supply chain.
This decision will very depending on the supply chain structure and
the market segments served. Some companies target
Customers who require customized product that carry a premium
prize tag. This company might
Find that investment in information allow them to respond more
quickly to their customers.
3. Bullwhip Effect
What is the Bullwhip Effect?

The bullwhip effect is the magnification of demand

fluctuations, not the magnification of demand. The bullwhip effect
is evident in a supply chain when demand increases and decreases.
The effect is that these increases and decreases are exaggerated up
the supply chain.

The essence of the bullwhip effect is that orders to suppliers

tend to have larger variance than sales to the buyer. The more chains
in the supply chain the more complex this issue becomes. This
distortion of demand is amplified the farther demand is passed up
the supply chain.

Proctor & Gamble coined the term “bullwhip effect” by

studying the demand fluctuations for Pampers (disposable diapers).
This is a classic example of a product with very little consumer
demand fluctuation. P&G observed that distributor orders to the
factory varied far more than the preceding retail demand. P & G
orders to their material suppliers fluctuated even more.
Babies use diapers at a very predictable rate, and retail sales
resemble this fact. Information is readily available concerning the
number of babies in all stages of diaper wearing. Even so P&G
observed that this product with uniform demand created a wave of
changes up the supply chain due to very minor changes in demand.
Figure 3. Increasing variability of orders up the supply chain:
Bullwhip effect
(Lee et al. 1997a).
The four main causes
of the bullwhip effect have been identified by Lee et al. (1997a, b),
which are Demand Forecast Updating, Order Batching, Rationing
and Shortage Gaming, and Price
Variations.
Demand forecast updating

Forecasting data used are normally based on the previous orders

received by the company from its customers. The main reason for
this problem is that the data are usually based on forecast orders and
not actual customer demand. As most companies are untrusting, this
leads to companies not wanting to share information about demand,
which leads to information distortion throughout the supply chain
(Lee et al. 1997a, b). Various methods of forecasting such as
exponential smoothing or moving average forecasting have been
employed by many companies to find the
‘truest’ demand. Unfortunately, any type of forecasting can cause
the bullwhip effect (Chen et al. 1998). However, it is possible to
reduce the bullwhip effect significantly by using centralized
information and allowing only one member of the supply chain to
place orders on behalf of all other members via Vendor Managed
Inventory (VMI) and Continuous Replenishment Programmes
(CRP) (Lee et al. 1997a, b).

Order batching

Order batching has been identified as another major cause of the bullwhip
effect (Lee et al. 1997a, b, Chen et al. 1998, 2000a). Order batching refers
to a company ordering a large quantity of a product in one week and not
ordering any for many weeks. The main reason for a company ordering in
batches is that it may prove to be less costly because of transportation
costs or the company will receive a discount if a large quantity is ordered
in one period. Although this may reduce the cost for the company, the
other members of the supply chain are likely to suffer. The impact of
batch ordering is simple to understand. Where the retailer uses batch
ordering, the manufacturer will observe a very large order, followed by
several periods of no orders and then another large order, etc. The
manufacturer forecast demand will be greatly distorted as it will base
future demand forecasts on orders rather than actual sales (Chen et al.
1998). One method of reducing the bullwhip effect is by ordering less
product and more frequently, which will allow the supplier to determine
the true demand.

Rationing and shortage gaming

When a product demand exceeds supply, a manufacturer often rations its

product to customers (Lee et al. 1997a, b). Rationing schemes that
allocate limited production in proportion to the orders placed by retailers
lead to a magnification of the bullwhip effect (Chopra and Meindl 2004).
When this problem arises, many customers will exaggerate their orders to
ensure that they receive a sufficient amount of the required product. This
can cause major problems, as when demand is not as high, the orders will
stop, and cancellations will begin to arise. This leaves the manufacturer
with excess inventory and no customer orders. This also makes it difficult
for the manufacturer to believe that there is an increase in demand,
whereas customer demand is actually unchanged.

Price variations/sales promotions

If the price of products changes dramatically, customers will

purchase the product when it is cheapest. This may cause customers
to buy in bulk, which also adds to the order-batching problem.
Manufacturers and distributors occasionally have special promotions
like price discounts, quantity discounts, coupons, rebates, etc. (Lee
et al. 1997b). All these price promotions result in price fluctuations,
and the customers’ ordering patterns will not reflect the true demand
pattern. One method of avoiding price fluctuations is by stabilizing

prices (Lee et al. 1997b). If companies can reduce the price of their
product to a single reduced price, the fluctuations in demand will not
be as aggressive. Sales promotion is another major contributor to
this problem. If the consumer purchases more of the product
because of the promotion, this will cause a large spike to appear in
demand and further upstream the supply chain. Despite the lowered
price for consumers, this will have the opposite effect on the supply
chain causing forecast information to be distorted and in effect
causing inefficiencies, i.e. excessive inventory, quality problems,
higher raw-material costs, overtime expenses, shipping costs, poor
customer service, and missed production schedule (Lee et al. 1997b,
Chen et al. 1998). Campbells Soup provides a useful illustration of
how price promotions can cause an increase in the bullwhip effect
(Fisher 1997). With the use of Electronic Data Interchange (EDI)
and shortened lead times, Campells became aware of the negative
impact the overuse of price promotions can have on physical
efficiency. When Campbells offered a promotion, retailers would
stock up on the product. This proved inefficient for both the supplier
and the retailer. The retailer had to pay to carry the excess inventory,
and the supplier had to pay for the increase in shipments (Fisher
1997). This illustration proves that a consistent low price should be
employed by retailers and suppliers to avoid the increase in demand.
This increase in demand is the main cause of the bullwhip effect as
it causes demand information to become distorted and large ‘one-off
’ shipments, which are extremely costly. Retailers use promotions to
meet monthly quotas for products, which can result in the overuse of
promotions. The result is an addiction to incentives that turn simple
predictable demand patterns into a chaotic series of spikes that only
add to cost (Fisher 1997). No matter where a promotion occurs,
whether it is a sales promotion to consumer to buy a specific product
or a discount for retailers from a manufacturer, it is more prudent to
provide lower prices all year round and disregard promotional
strategies altogether (Fisher 1997). In an ideal world, companies
would use everyday low pricing. Unfortunately, this is not the case,
as companies compete with other competitors by using price
promotions to increase profits and improve market share.

How to remedy the Bullwhip Effect?

When the bullwhip effect is first identified in a supply chain, it is

important to identify the problem areas. The following areas are
places in the supply chain that should be considered when trying to
decrease the bullwhip effect. Although many of these areas many
seem like proper business practices, the reality is that they diminish
the efficiency of the supply chain. Once changes are made in these
areas, the productivity and timeliness of the supply chain will
increase greatly and the bullwhip effect will be dramatically
lessened.

How do costs increase?

Excess raw materials costs arise from the last minute purchasing
decisions made to accommodate an unplanned increase in demand.
The result of these panicked buying periods is an inventory of
unused supplies. As these unused supplies grow, so do the
associated costs.
Excess capacity during periods of low volume of demand is
followed by inefficient utilization and overtime expenses incurred
during high demand periods. This is made worse by the excess
warehousing expenses that are incurred because of unused storage
space, as well as increases in shipping costs caused by premium
rates paid for last minute orders.
1. Demand Signal Processing
• Retailers often use realized demand as an indicator of future
demand.
• Inference and data dependency problems.

2. Rationing Gaming
• Used when demand outstrips supply.
• Rationing might indicate internal problems that limit meeting
supply goals.
3. Order Batching
• Used because organizations are attempting to obtain benefits from
large-volume pricing discounts and reduced costs of transportation.
• Can lead to large inventory volumes and misleading demand
figures for upstream suppliers.
4. Price Variations
• Used to position suppliers that are involved in market share wars
with other suppliers.
• Might cut off established relationships in efforts to “shop around”
for a better price.
4. The Beer Distribution Game
The Beer distribution game, which was developed by the Systems
Dynamics Group at the Massachusetts Institute of Technology in the
1960s, demonstrates the bullwhip effect by simulating a make-to-
stock supply chain with four tiers. Participants of the beer
distribution game take the role of the retailer, the wholesaler, the
distributor or the factory (see figure 3). An end customer places
orders at the retailer. His demand pattern is given, but unknown to
the participants. The retailer is asked for four units during the first
six periods and for eight units during the following periods of the
simulation. The partners up the supply chain receive orders from
their customers and decide—
based on their current stock situation, the products in transport,
which will reach their stock within the next periods, and the orders
they received—how much to order from their supplier for
replenishment. This way, information on the end customer demand
is passed on
up the supply chain with a delay of one period of time at each tier.
Material is forwarded in the other direction – down the supply chain.
The material flow is delayed as well: Material has to be transported
(see the trucks between tiers in figure 3) and it has to pass materials
receiving. Therefore, it takes two periods until material received
from a supplier can be delivered to a customer from stock at each
tier. The goal is to minimise the over-all logistics costs of the
simulated supply chain. A product on stock costs E0.5 per period
(costs of capital employed). If a tier cannot deliver, this causes costs
of E1 per product per period (penalty for out-of-stock situations).
Thus participants have to take into account a trade-off between
minimising the costs of capital employed in stocks on the one hand
and avoiding of out-of-stock situations, on the other hand. The beer
distribution game has proved to be an effective means of illustrating
systems thinking
(Goodwin and Franklin 1994). By enabling managers to experience
the negative impact of the bullwhip effect on supply chain
performance, the beer distribution game makes them aware of the
application of countermeasures in their companies. Therefore, the

beer distribution game is successfully applied in many management

development programs.

The beer distribution game online: A supply chain

with humans and agents as participants

If the beer distribution game is played as a board game, the feedback

given to participants is limited for time reasons. Usually giving
feedback takes two persons: One presents diagrams of orders placed
by the participants and of their stock situation during the game
whereas the other is manually calculating the resulting costs for
capital employed in stocks and backorders. The idea of giving an
instant feedback on the beer distribution game originally led to the
concept of the beer distribution game online (Center of Enterprise
Sciences 2003, www.beergame.lim.ethz.ch). Participants from all
over the world meet on the web site and arrange games. There are
two game modes:

The classic version has the rules of the physical beer distribution
game implemented while the version ‘classic plus’ allows
parameterisation. Participants decide how many periods they would
like to simulate, whether they want to have full visibility of the
stock situation throughout the supply chain and whether they want
to allow information exchange between players or not. Other
participants can join the game and choose a tier of the supply chain
(see figure 4). Alternatively, players can assign agent-based
strategies (Hieber and Hartel 2003) to the tiers. Currently, there are
two strategies to choose from. The first is ‘moving average/standard
deviation’, where the agent orders the amount that was in average
ordered from him during the last five periods, plus an amount to
create a safety stock depending on the standard deviation of orders
he received. The second strategy, ‘keep level of stock’, is even
simpler: Each order received from a customer is passed on to the
supplier.

Surprisingly enough, this simple strategy is the best

solution to the beer distribution game. The best solution to the beer
distribution game—easy to achieve If each tier in the supply chain
would target refilling his stock after delivery to his customer by just
passing on the customer’s order to his supplier, the initial stock
levels would cover the unexpectedly higher demand during the lead
time of information and material. Figure 5 shows orders (from left to
right: the customer, the retailer, the wholesaler, the distributor and
the
factory) and stock levels (from left to right: the retailer, the
wholesaler, the distributor and the factory) of a simulation in which
all tiers followed this strategy. At each tier of the supply chain it
takes one period to inform the supplier of the change of demand. It
takes
two further periods for the material to be shipped from the supplier’s
to the customer’s stock. Thus, at each tier the supply chain can react
on the demand change within three periods. During these three
periods, tiers are required to meet—according to the demand pattern
mentioned above—an unexpected demand of four additional units
without being able to react on it. The initial stock of 12 units allows
them to cover this unexpected demand. Stock level in period one
after
demand change is eight, in period two it is four and in period three it
is zero. As soon as the stock is empty, the supply chain is adjusted to
the new demand and eight instead of only four units arrive at the
stock enabling partners to fulfil orders.
Figure 3. The four-tier supply chain simulated in the beer
distribution game.
5. Literature Review
1) Boute et al Studied that :->
A major cause of supply chain
deficiencies is the bullwhip problem, which refers to the tendency of
replenishment orders to increase in variability as they move up a
supply chain.
Conventional bullwhip reduction is only one
side of the coin, however. In developing a replenishment rule one
has to consider the impact on the inventory variance as well.

2) According to Huang et al. research :->

The bullwhip effect refers to the
phenomenon of the amplification of demand variability from a
downstream site to an upstream site in the supply chain.

3) According to Sterman et al study :->

The Bullwhip effect stems from a non-
optimal solution applied by members of the supply chain who see
their strategies as a sum of individual strategies rather than a unit.

4) Forrester observed that :->

A small change in the rate of sale
at the retail level could result in a much larger change in demand for
the manufacturer.
The magnitude of the distortion in
the demand information is amplified as one travels up through the
supply chain.
5) Seokcheon Lee et al found that:->
As supply chains become bigger and
dynamically structured involving multipl
organizations with different interests, it is impossible for a single
organization to control a whole supply chain. So, decentralization of
decision rights is an inevitable facet of managing modern supply
chains.

6) J. NIENHAUS et al found that :->

The aspects of human behaviour need to be
recognised as further amplifying the bullwhip effect. Humans act as
obstacles for information flow in supply chains in practice and by
that increase the lead time of information and as a consequence the
bullwhip effect.

7). Riddalls and Bennett :->

They successfully shown that --

Disruptions can be costly in supply chain systems and can cause a

variety of problems such as long lead-times, stock-outs, inability to
meet customer demand and increases in costs and finds that
disruptions in an supply chain can lead to unexpected costs when
shipping lead-times are long.

8).Goldbergs et al :-> According to him --

Genetic algorithms do not carry out examinations sequentially but

search in parallel
mode using a multi individual population, where each individual is
being examined at the same time.
6. Future Endeavors
1. To study the information distortion in an industry and quantify
the Bullwhip Effect in its Supply Chain.

2. To study Beer distribution game online and to develop logics

to detect Information distortion & Bullwhip Effect.

3. To study the researches made on Supply chain Management

and The Bullwhip Effect.

4. To study and apply a mathematical model to quantify

Bullwhip Effect.