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Bull Whip Effect

Bull Whip Effect

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Published by: ramanrockstar21 on Dec 18, 2010
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05/12/2014

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SUPPLY CHAIN DYNAMICSTHE BULLWHIP EFFECT
It was demonstrated in the 1960s by Jay Forrester that certain dynamics exist betweenfirms in supply chains that cause errors, inaccuracies and volatility and that these cascadefor operations upstream in the supply chain. This effect is known as the
Forrester Effect
,or the Bullwhip Effect.
It is called the Bullwhip Effect because a small disturbance orfluctuation at the customer end (at the bottom of the supply stream) causesincreasingly large disturbances as it works its way towards the upstream end.
Itsmain cause is a perfectly understandable and rational desire by the different links in thesupply chain to manage their production rates and inventory levels sensibly. Todemonstrate this, examine the production rate and stock levels for the supply chain shownin the table below which is a 4 stage supply chain where an OEM (Original EquipmentManufacturer) is served by three tiers of suppliers.
FLUCTUATIONS OF PRODUCTION LEVELS ALONG SUPPLY CHAIN INRESPONSE TO SMALL CHANGE IN END-CUSTOMER DEMANDPeriodThird-TierSupplierSecond-tierSupplierFirst-tierSupplierOriginalEquipmentManufacturerDemand
Prodn.StockProdn.StockProdn.StockProdn.Stoc1100100100100100100100100100100100100100220100606010080801009090100959531806012012080100100909595959595460120909010095959595959595955100909595959595959595959595695959595959595959595959595
The demand from the OEM’s market has been running at a rate of 100 items per period, but in period 2 demand reduces to 95 items per period. All stages in the supply chainwork on the principle that they will keep in stock one period’s demand. This is asimplification but not a gross one. Many operations gear their inventory levels to their demand rate. The column headed ‘stock’ for each level of supply shows the starting stock at the beginning of the period and the finish stock at the end of the period.At the beginning of period 2, the OEM has 100 units in stock (that being the rate of demand up to period 2). Demand in period 2 is 95 and so the OEM knows that it wouldneed to produce sufficient items to finish up at the end of the period with 95 in stock (this being the new demand rate). To do this, it need only manufacture 90 items; these together with five items taken out of the starting stock will supply demand and leave a finishedstock of 95 items.
 
The beginning of period 3 finds the OEM with 95 items in stock. Demand is also 95items and therefore its production rate to maintain a stock level of 95 will be 95 items per  period. The OEM now operates at a steady rate of producing 95 items per period. Note, however that a change in demand of only 5 items has produced a fluctuation of 10items in the OEM’s production rate. Now carry this same logic through to the first-tier supplier. At the beginning of period 2,the second-tier supplier has 100 items in stock. The demand which it has to supply in period 2 is derived from the production rate of the OEM. This has dropped down to 90 in period 2. The first-tier supplier therefore has to produce sufficient to supply the demandof 90 items ( or the equivalent) and leave one month’s demand (now 90 items) as itsfinish stock. A production rate of 80 items per month will achieve this. It will thereforestart period 3 with an opening stock of 90 items, but the demand from the OEM has nowrisen to 95 items. It therefore has to produce sufficient to fulfil this demand of 95 itemsand leave 95 items in stock. To do this, it must produce 100 items in period 3. After  period 3 the first-tier supplier then resumes a steady state, producing 95 items per month. Note again, however, that the fluctuation has been even greater than that in the OEM’s production rate, decreasing to 80 items a period, increasing to 100 items a period, andthen achieving a steady rate of 95 items a period.In this simple case, the decision of how much to produce each month was governed bythe following relationship:Total available for sale in any period = total required in the same periodStarting stock + production rate = demand*closing stock Starting stock + production rate= 2*demand(because closing stock = demand)Production rate= 2* (demand starting stock)
Questions1. Extend the logic right back to the third-tier supplier and complete the table above2. Can you generalize that the farther back up the supply chain an operation isplaced, the more drastic are the fluctuations caused by the relatively small change indemand from the final customer
?This relatively simple exercise does not include any time lag between a demandoccurring in one part of the supply chain and it being transmitted to its supplier. In practice there will such a lag, and this will make the fluctuations even more marked.Furthermore, the way different entities in the supply chain batch their manufacturingquantities (EOQ or other) can cause distortions which make production volumes fluctuatein upstream suppliers.
 
DISTORTION OF BATCHING IN THE SUPPLY CHAINManufacturerArea DistributorLocal DistributorRetail Store
1005010555555555
In the table above there is reasonably steady end-customer demand at a rate of 5 items per week. The end customer (a retail store perhaps) orders from a local distributor at this rateand this local distributor, perhaps because of custom and practice, places bi-weeklyorders with the area distributor. The area distributor delivers at this bi-weekly rate, but, toreplenish its stock, places monthly orders back to the manufacturer. The manufacturer actually makes them in economic batches (EBQ) of 100 and therefore makes them onlyoccasionally.
3. Complete the above table in accordance with what is described above.
Whenever two operations in a supply chain arrange for one to provide products or services to the other, there is the potential for misunderstanding and miscommunication.This may be caused simply by not being sufficiently clear about what a customer expectsor what a supplier is capable of delivering. There may also be subtle reasons stemmingfrom differences in perceptions of seemingly clear agreements. The effect is analogous tothe children’s game of Chinese whispers. The more children the message passes betweenthe more distorted it tends to become. When the game finishes and the last child says outloud what the message is, the first child and all intervening children are amused.Given the disruptive nature of the supply chain dynamics described previously, animportant aspect of supply chain planning and control is the attempt by operationsmanagers to improve supply chain performance.The first step is to understand the dynamics – which is what you are doing as studentsThe proactive actions which operations can take are all concerned with coordinating thesupply chain activities
Efforts to coordinate supply chain activity fall into three categories
1.
Information sharing
– We will see how Green Gear Cycling attempts to do thisThis is also the reason
why lack of information drives plans and people crazy
.2.
Channel Alignment
– This can be done through
vendor managed inventory
to
harmonize decision making ensuring that differences in forecasting methods

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