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NO 1 2 3 4 5 6 TITLE EXECUTIVE SUMMARY BULLWHIP EFFECTS DEFINITION CAUSES OF THE BULLWHIP EFFECT DEMAND FORECAST COMPANY BACKGROUND SIME DARBY KEMPAS SDN BHD CONSEQUENCES OF THE BULLWHIP EFFECTS IN SIME DARBY KEMPAS SDN BHD HOW TO MINIMIZE BULLWHIP EFFECTS ADOPTING SCM BEST PRACTISED CONCLUSION REFFERENCES PAGES
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suppliers. and the distribution of these finished products to customers. facilities and capacities. manufacturers and distributors. Below is an example of a very simple supply chain for a single product. The flow of materials is not always along network.Executive Summary Supply Chain Management Supply Chain Management is involves the flows of material. Realistic supply chains have multiple end products with shared components. 2 . A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials. and ultimately. information and finance in a network consisting of customers. where raw material is procured from vendors. customers. various modes of transportation may be considered. transformed into finished goods in a single step. although the complexity of the chain may vary greatly from industry to industry and firm to firm. and the bill of materials for the end items may be both deep and large. and then transported to distribution centres. transformation of these materials into intermediate and finished products. Supply chains exist in both service and manufacturing organizations.
where the entire material flow is owned by a single firm. Marketing's objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. integrated plan for the organization--there were as many plans as businesses. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is typically viewed to lie between fully vertically integrated firms. 3 . Such a team is more competitive when each player knows how to be positioned for the hand-off. distribution. and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. but the entire team needs to make a coordinated effort to win the race. Cooper and Ellram  compare supply chain management to a well-balanced and well-practiced relay team. Clearly. The relationships are the strongest between players who directly pass the baton. The result of these factors is that there is not a single. marketing.Traditionally. planning. Supply chain management is a strategy through which such an integration can be achieved. and those where each channel member operates independently. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. Therefore coordination between the various players in the chain is key in its effective management. manufacturing.
Definition: "It is a phenomenon observed in forecast driven supply chain and describes that the variation in demand increases up the supply chain from consumer to supplier. 4 .Bullwhip Effects Definition 1. -> the more steps that are in between of the consumer and the supplier. the bigger the variation gets Therefore it can be said that the bullwhip effect is an inefficiency of the supply chain and small changes in customer demand can result in large swings in orders placed upstream.
Monthly etc. forecasts are made at whims & fancies of managers Upstream manager updates his/her demand forecasts based on customer demand variations. end of season sales Customers buy in bulk But the buying pattern never matches the consumption pattern This results in overstocking at the far ends of the supply chain and also results in idle capacity 5 . Creates spikes in order sizes. disrupting supplier’s demand forecasts Benefits from transportation & distribution side Push Ordering: Orders are pushed by sales personnel Done usually at monthly/quarterly sales review and demand estimates from sales team This results in uneven spread of customer orders resulting in the bullwhip effect Price fluctuation Forward buys. Techniques like exponential smoothing creates bigger swings at the supplier’s end Order batching Periodic Ordering: Weekly. longer lead times. price fluctuations etc. rebates. Fortnightly. coupons. offer merchandise. discount sales.Causes of the Bullwhip effect: Primary cause: lead time of information and material Secondary causes: Demand forecast updating Forecasting is based on order history from company’s immediate customer Often.
Rationing and shortage gaming When demand exceeds supply. manufacture ration supplies to distributors This results in distributors ordering more than they need. in the absence of unexplained demand changes 6 . to fulfil the demand When the market cools down. orders start getting cancelled. the bullwhip effect can be described as the phenomenon where a small change in the demand is translated into a large change in the next replenishment order in the supply chain. leading to the bullwhip effect Real demand is never known in such market conditions. Most commonly affected is the IT hardware & telecom industry In conclusion. excess inventory piles up.
Forecasts are developed for a company’s finished goods. forecasting is necessary for companies that manufacture items for inventory and that are not made to order. quantities and safety stock levels. Manufacturers will use material forecasting to ensure that they produce the level of material that satisfies their customers without producing an overcapacity situation where too much inventory is produced and remains on the shelf. The cost of failing to maintain an accurate forecast can be financially catastrophic. budgetary planning o Personnel: workforce planning.Demand Forecast In the modern supply chain. hiring. The forecast is not static and should be reviewed by management on a regular basis. promotions. This is to ensure that information on future trends. the forecast must not fall short and the manufacturer finds them without inventory to fulfill customer’s orders. The forecast is used by the production team to develop production or purchase order triggers. new production introduction o Finance: plant/equipment investment. inventory. layoffs All of these decisions are interrelated 7 . the internal or external environment is incorporated into the forecast to give a more accurate calculation Role of Forecasting in SCM The basis for all strategic and planning decisions in a supply chain Used for both push and pull processes Examples: o Production: scheduling. Equally. components and service parts. aggregate planning o Marketing: sales force allocation.
COMPANY BACKGROUND SIME DARBY KEMPAS SDN BHD Incorporated on 19 September 1974. Sime Darby Kempas Sdn. from Marketing. Bhd. is a fully-owned subsidiary of Sime Darby Plantation. R&D. Bhd engages in all aspects of the supply chain. Sime Darby Kempas Sdn. on the southern tip of Peninsular Malaysia. With its long history of reliability. Johor. This total commitment enables us to work closely with our valued customers. the Sime Darby Group spans 5 continents with a workforce of more than 100. a division of Sime Darby Berhad which is one of the leading multinational conglomerates in the Asia Pacific region. Sime Darby Kempas Sdn. Johor 8 . is served by the Ports of Pasir Gudang and Tanjung Pelepas.000 employees. quality and excellence. Based in Malaysia. Bhd. customising products to meet their stringent requirements. Process Facilities : • Refinery • Fractionation • Hydrogenation • Packing • Interesterification Nature of Business : Manufacturer of edible oils and specialty fats Location : Pasir Gudang. Sime Darby Kempas Sdn. is a leading refiner and manufacturer of specialty fats and vegetable oils for the food industries worldwide. Manufacturing and delivery. Bhd. Situated in Pasir Gudang. Being a fully integrated organisation.
sourcing. poor responsiveness to market dynamics and poor customer service. At the operational level. knowing where to invest effort and resources for this purpose should be a high priority for supply chain managers. overtime expense. stockouts or material shortages. the manufacturer could incur excess raw materials cost due to unplanned purchases of supplies. The distortion of demand information implies that the manufacturer who observes only its own immediate order data will be misled by the amplified demand patterns. For example. the bullwhip effect induces poor service levels. high transport costs. obsolescence. At the macro level. Indicates that the bullwhip effect has implications for efficiency on various levels. and significantly erode revenue realisation through price discounts. It is important to understand the causes of the bullwhip effect to limit the effect. This has serious cost implications. At a performance level it can reduce the velocity of cash. cash flow problems. and longer cycle times. the bullwhip effect could have a major impact on organisations’ costs. excess warehouse expenses and additional transportation costs due to inefficient scheduling and premium shipping rates.Consequences of Bullwhip Effects in Sime Darby Kempas Sdn Bhd The consequences and implications of the bullwhip effect have already become clear in the abovementioned discussion of the phenomenon and its causes. the bullwhip effect can drive 13 – 25% of operating costs. It can potentially dilute competitive strategy and position and therefore can be a ‘strategy buster’. inefficiencies in production and production costs. inefficient utilisation and overtime. destroy potential revenue. lost sales. In some supply chains. scheduling (capacity utilisation). it generates more (additional) inventory and keeps it in the most inappropriate place to meet a specified service level. 9 . Therefore. high material costs. distribution. additional manufacturing expenses created by excess capacity. list the possible implications of the bullwhip effect as: excessive inventory quantities. The bullwhip effect contributes to high cost and poor service in supply chains . revenue generation and revenue realisation. poor profitability. Thus.
There are several issues that can lead to the bullwhip effect and those issues can be exacerbated by delays in transmitting information. To meet this goal. and a lack of coordination up and down the supply chain. This is often referred to as the bullwhip effect. Additionally. 10 .How to manage Bullwhip Effect The goal of any supply chain is to get the right selection of goods and services to customers in the most efficient way possible. such as order batching. Organizations may accumulate larger orders before processing them in an effort to reduce costs and create transportation economics. each link along the supply chain must not only function as efficiently as possible. The keystone for a lean supply chain is accuracy in demand planning. By padding the forecast to compensate for possible errors. Demand forecasting manipulation is another cause. They may also wait to place larger orders to benefit from lower prices offered during a promotion. Customers can also contribute to the bullwhip effect by engaging in shortage gaming during periods of short supply by purchasing more than they need. What Causes the Bullwhip Effect? Supply chain management is a complex process. Some causes of the bullwhip effect include: Consumer demand swings Natural disasters that disrupt the flow of goods and services Overcompensation when addressing inventory issues Ordering processes. the organization loses sight of true customer demand. customers taking advantage of liberal return policies can create problems with developing accurate demand forecasts. it must also coordinate and integrate with links both upstream and downstream in the chain. Production and supply issues then impact the consumer end of the supply chain and the effects ripple up and down the chain. can also contribute to the bullwhip effect. Unforeseen spikes in demand or overestimations of demand stimulate the supply end of the chain to respond with changes in production.
such as volume transportation discounts. Special purchase contracts can be implemented to encourage ordering at regular intervals to better synchronize delivery and purchase. They may also choose to share information through an arrangement such as vendor-managed inventory (VMI). Reducing the bullwhip effect requires a thorough evaluation of organizational policies. can contribute to a lean supply chain and minimize the bullwhip effect. Offering products at stable and fair prices can prevent buying surges triggered by temporary promotional discounts. The higher order cost associated with smaller or more frequent orders can be offset with Electronic Data Interchange (EDI) and computer aided ordering (CAO). such as order batching.How to Minimize the Bullwhip Effect The first step in minimizing the bullwhip effect is to understand what drives customer demand planning and inventory consumption. sales. 11 . Suppliers and customers must then work collaboratively to improve both the quality and frequency of information communication throughout the supply chain. systems. Eliminating incentives that cause customers to delay orders. Adopting Supply Chain Management Best Practices Using sound chain management processes and systems will result in the efficient flow of goods from a raw stage to the consumer while enhancing ROI for the company. can also help. Adopting successful practices such as Walmart’s use of cross docking. Reviewing case studies and other resources detailing best practices can suggest opportunities for improvement. Based on the positive implications an efficient supply chain can have on costs. Lack of demand visibility can be addressed by providing all key players in the supply chain with access to point of sale (POS) data. and practices. and addressing the causes of order cancellations or reductions can help create smoother ordering patterns. or Dell’s process of bypassing the middle man by offering made-to-order computers directly to customers. measurements. Pricing strategies and policies can also help reduce the bullwhip effect. Eliminating practices that introduce spikes in demand. profits and customer satisfaction. it’s an undertaking well worth the investment and effort.
That means adopting the philosophies. the council provides an effective forum for cross-functional communication. By addressing these barriers. you (and many other supply chain managers) must transform rather than simply improve your operation. and processes that will make your organization "best in class. its mere existence will indicate that supply chain management has the endorsement and commitment of senior leadership. When it is clear that the executive leadership is fully embracing the supply chain organization. Some of these practices may be simple. A governing council's purpose is to give direction and help align supply chain strategy with the company's overall strategy. doing what you've always done—even if you do it very well—is no longer acceptable. members of the council help to ensure that the supply chain organization is given the opportunity to perform up to its potential. Under pressure to contain costs and produce results despite challenging circumstances. and other influential company leaders. methods. The council's membership should include the leader of the supply chain organization as well as corporate executives. A governing council can prevent that from happening by providing constant. Others may be new to company. business unit managers. Implement them all and you will have a strong foundation for supply chain excellence. Every company has such barriers—usually individuals or organizations that don't see or accept the value that a wellmanaged supply chain provides. but there are some practices that many leading companies are adopting now. Ideally the council should hold regularly scheduled meetings. Finally. But even if it doesn't. 1. The council can also help to remove barriers to success that exist within the organization.Adopting SCM best practised In today's economic environment. We often see supply chain organizations struggling for recognition because their objectives and strategies differ from their companies' stated objectives and strategies. it is likely that key business-unit stakeholders will be more willing to work with and support supply chain efforts and initiatives. An active governing council creates an opportunity for business unit leaders to provide the 12 . Establish a governing supply chain council. and familiar. straightforward." What makes a supply chain organization best in class? The answer will vary for each company. consistent validation that the supply chain strategy directly correlates with the corporate strategy.
have adopted a hybrid approach that combines a centralized strategy to gain consensus with decentralized execution to improve service. and a focus on value creation. and they structure their workflows and processes around that chosen technology. As supply chain leaders move up to join their companies' management teams. and forecasting/demand planning and similar management functions under the supply chain leader. and only then select the technology that best satisfies those process needs. 13 . Perhaps that is why in many companies. For others. and they have difficulty retrieving the type of data they need for making sound strategy and business decisions. Best-in-class companies hire supply chain managers who have strong communication and relationship management skills (both internally and externally). but it does give an idea of current thinking about supply chain management and the reporting structure. Instead. But top leadership focuses more on strategy and is less concerned about transactional ability. That may seem self-evident. This approach. Elevating staff members' supply chain management skills and knowledge is always a priority. contract management. the supply chain organization seems to be "feeding the system" (such as an enterprise resource planning system) with information. Many of the progressive companies we have worked with. logistics. correctly staffing the supply chain organization is vital to success. 2. Another emerging trend we have seen involves placing procurement. Too many companies select software they hope will make them more efficient. a more centralized operation is most effective. 3.supply chain management leadership with information regarding future strategies and projects. Make technology work for you. It can be difficult to organize the supply chain function in a way that will maximize its effectiveness and bring commensurate benefits to the company. Whatever structure you adopt. but I have seen more than a few companies buy first and figure things out later. therefore. Properly align and staff the supply chain organization. depicted in Figure 1. Some companies are best served by embedding proficient supply chain management professionals in various business units. they must have additional characteristics. is not appropriate for all companies. however. the ability to think strategically. they should first review the processes that need improvement. of course.
Create a platform for problem resolution 3. Establish alliances with key suppliers 5. Establish a governing supply chain council 2. Establish alliances with key suppliers.At best-in-class companies. Engage in collaborative strategic sourcing 6. A more appropriate term for this best practice might be "alliance management. Develop continuous improvement goals with the objective of achieving value for both parties 4. managers understand that "the system" should help them better manage their supply chains. The four primary objectives of an effective alliance management program with key suppliers include: 1. Ensure that performance measurement objectives are achieved With a sound alliance management program in place. They find a way to use technology to produce beneficial information without having to perform various "work-arounds" to extract and view the data. is more effective. not price 7. Some may be familiar while others may be new to your company. Implement them all and you will have a strong foundation for supply chain excellence. 10 ideas from best-in-class supply chain organizations Many leading companies have adopted these 10 best practices. They recognize the importance of an efficient purchase-to-pay process and have adopted strategies and mechanisms to get the greatest benefits from technology. In most circles today. Best-in-class companies work closely with suppliers long after a deal has been signed. Make technology work for you 4." But that implies one-way communication (telling the supplier how to do it)." with representatives from both parties working together to enhance the buyer/supplier relationship. Focus on total cost of ownership. by contrast. 1. Properly align and staff the supply chain organization 3. Provide a mechanism to ensure that the relationship stays healthy and vibrant 2. this is called "supplier relationship management. which requires both buyer and seller to jointly manage the relationship. Optimize company-owned inventory 14 . 4. Put contracts under the supply chain function 8. Two-way communication. you will be equipped to use the talents of your supply base to create sustained value while constantly seeking improvement.
The distortion of demand information implies that the manufacturer who observes only its immediate order data will be misled by the amplified demand patterns. The main causes of the bullwhip effect are dependence on demand forecasting information and updating of demand information from customers. maintenance. Rather than consider strategic sourcing as just a matter for the purchasing department. This has serious cost implications. But a collaborative strategic sourcing initiative produces even better results. cancellation of orders. they solicit feedback and information regarding their objectives and strategies from those customers. This leads to order fluctuations. Take green initiatives and social responsibility seriously 5. and quality assurance—any internal business unit or function that will contribute to the initiative's success. long lead time and price fluctuations 15 . Since the bullwhip effect can have a major impact on organisations’ costs. More importantly.9. This approach not only ensures availability of supplies but also results in lower total cost. a lack of supply chain visibility. Establish appropriate levels of control and minimize risk 10. The bullwhip effect is the consequence of a lack of coordination among organisations and suppliers in supply chains. operations. engineering. safety/health/environment. knowing where to invest effort and resources should be a high priority for supply chain managers. The bullwhip effect can be summarised as small variations in demand at the customer end of the supply chain which produce massive variations in orders upstream due to demand information distortion. a lack of coordination and ineffective management of relationships. streamlined processes. Conclusion The fundamental challenge today is for supply chains to achieve coordination in spite of multiple ownership and increased product variety. Strategic sourcing is a cornerstone of successful supply chain management. Engage in collaborative strategic sourcing. which may include functional areas such as finance and accounting. bestin-class organizations get internal "customers" actively involved in the decision-making process. and increased responsiveness to customers' changing needs.
logisticabout.my 2. (2010) “Managing the Bullwhip 16 . http://www. www. W.sap.Refferences 1.com.simedarbykempas.com 4. Joseph H.com 3.
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