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Table of Contents
No. 1 2 Title Executive Summary Why the Bullwhip Effect is so Bad for Supply Chains and Companies What Causes the Bullwhip Effect Bullwhip Effect in P&G Eliminating the Bullwhip Effect across the Extended Retail Supply Chain Conclusion Refferences Pages 2 5
3 4 5
5 7 13
2 . These organizations are referred to collectively as the supply chain. The result was disjointed and often ineffective supply chains.” Few businesses understood. They are the most visible piece of the supply chain. production. It represents a conscious effort by the supply chain firms to develop and run supply chains in the most effective & efficient ways possible. and to control the day-to-day flow of goods and material up and down the supply chain. The first is that practically every product that reaches an end user represents the cumulative effort of multiple organizations. The second idea is that while supply chains have existed for a long time. movement. the entire chain of activities that ultimately delivered products to the final customer. and logistics. Information flows allow the various supply chain partners to coordinate their long-term plans. much less managed. as well as the information systems needed to coordinate these activities. and storage of goods and materials. most organizations have only paid attention to what was happening within their “four walls. Supply chain activities cover everything from product development. sourcing. But just as important are information flows. is the active management of supply chain activities to maximize customer value and achieve a sustainable competitive advantage. Supply chain management. then. Physical flows involve the transformation.0 Executive Summary What is SCM? The concept of Supply Chain Management is based on two core ideas. The organizations that make up the supply chain are “linked” together through physical flows and information flows.Mohan Subramaniam (730122025199) 1.
Because forecast errors are a given. Forecasts are based on statistics. Moving up the supply chain from end-consumer to raw materials supplier. The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer). In periods of rising demand. The concept first appeared in Jay Forrester's Industrial Dynamics (1961) and thus it is also known as the Forrester effect.Mohan Subramaniam (730122025199) What is Bullwhip Effect? The bullwhip effect (or whiplash effect) is an observed phenomenon in forecastdriven distribution channels. It refers to a trend of larger and larger swings in inventory in response to changes in demand. companies often carry an inventory buffer called "safety stock". This sequence of events is well simulated by theBeer Distribution Game which was developed by MIT Sloan School of Management in the 1960s. as one looks at firms further back in thesupply chain for a product. The causes can further be divided into behavioral and operational causes: Behavioral causes misuse of base-stock policies misapplication of trinomial theorem[further explanation needed] 3 . thereby not reducing inventory. each supply chain participant has greater observed variation in demand and thus greater need for safety stock. and they are rarely perfectly accurate. orders fall or stop. businesses must forecast demand to properly position inventory and other resources. In periods of falling demand. down-stream participants increase orders. it became known as the bullwhip effect Because customer demand is rarely perfectly stable. Since the oscillating demand magnification upstream of a supply chain is reminiscent of a cracking whip.
However. people with high self-efficacy are experiencing less trouble handling the bullwhip-effect in the supply chain.Mohan Subramaniam (730122025199) misperceptions of feedback and time delays panic ordering reactions after unmet demand perceived risk of other players' bounded rationality Operational causes dependent demand processing Forecast Errors adjustment of inventory control parameters with each demand observation Lead time Variability (forecast error during replenishment lead time) lot-sizing/order synchronization consolidation of demands transaction motive quantity discount trade promotion and forward buying anticipation of shortages allocation rule of suppliers shortage gaming (including dereliction under Benford's law) Lean and JIT style management of inventories and a chase production strategy Human factors influencing the behavior in supply chains are largely unexplored. 4 . Furthermore. studies suggest that people with increased need for safety and security seem to perform worse than risk-takers in a simulated supply chain environment.
0 What Causes the Bullwhip Effect Dr. People (being people) will react to current demand trends. warehouse.0 Why the Bullwhip Effect is so Bad for Supply Chains and Companies By creating these peaks and valleys. he also discovered a less common cause. 3. which I will not cover in this article. 5 . (Note. The size of these is greater than what is needed to handle true customer demand variation.Mohan Subramaniam (730122025199) 2. Lee discovered three very common causes of the bullwhip effect. followed by periods where their employees may be idle because of lower demand during a bullwhip “valley”. companies have to handle alternating periods of very high demand followed by very low demand. they will have to schedule overtime. staff and inventory to handle these peaks. Because companies are loath to forgo sales they will size their factories.) The three common causes are: “Over and Under Forecasting” occurs when a company forecasts demand to place orders with its suppliers. In addition. but because of the bullwhip effect companies have to over-size to fulfill customer orders.
they may order 500 because it fills up a large truck. and will adjust orders above what a computer reorder point will recommend. Unfortunately “Economies of Scale” in transportation and ordering is a real factor. It is much easier (and costs less) to fill up an entire truck at one site. companies know that they need to create retail excitement or compete during important holiday 6 . “Price Discounting” is one of the most confounding causes of the Bullwhip Effect to us Supply Chain people. Freight rates for less-than-truckload shipments are much higher than truck-load because of economies of scale for the shipping company. if a company needs 100 units to fulfill their production requirements for the next week. because it seems so easily avoidable. In addition. people use the latest customer demand levels to adjust forecasts. However. it is usually not practical or cost-effective. people (again being people) forget to consider inventory they may already have on order. This 500 unit order becomes a peak of demand to the supplier. There are many other reasons for economies of scale in transportation. Who wants to under-order when demand is “going through the roof” or over-order when demand is “cratering”? Therefore. and all procurement and logistics people know they exist. up or down. For example. Filling up a large truck or rail car is the best way to lower unit costs of transportation. and orders to suppliers. While we would all like to have supplies shipped “just-in-time”. drive it to the destination and unload the entire truck.Mohan Subramaniam (730122025199) even if history doesn‟t support these trends being sustained.
The logistics executives at P&G examined the order rates for Pampers across the supply chain.. and household care. namely. In the early 1990s P&G faced a problem of extreme demand variations for one of its bestselling brands . 7 .Pampers diapers. and family care. baby. Though the purchase rate remained more or less steady at the consumer end. the logistics executives found that the variation of orders increased from the retailer level to the distributor level up the supply chain. beauty care. health..Mohan Subramaniam (730122025199) 4. P&G's products fall under three broad categories. the world's leading producer of household products. markets over 300 brands to 5 billion people around the world.0 Bullwhip Effect in P&G Introduction Procter & Gamble (P&G).
The bullwhip effect is the magnification of demand fluctuations. including Always. The world's largest maker of consumer packaged goods divides its business into two global units: Beauty and Grooming and Household Care. Mach3. Crest. water filters. This distortion of demand is amplified the farther demand is passed up the supply chain.Mohan Subramaniam (730122025199) The Procter & Gamble Company (P&G) boasts dozens of billion-dollar brands for home. and over-the-counter acid-reflux medication. This is a classic example of a product with very little consumer demand fluctuation. hair. Iams. Charmin. Gillette. Dawn. P & G orders to their material suppliers fluctuated even more. Braun. Pampers. P&G's hundreds of brands are available in more than 180 countries. The more chains in the supply chain the more complex this issue becomes. not the magnification of demand. Oral-B. Pantene. and Tide in the household care segment. The effect is that these increases and decreases are exaggerated up the supply chain. The bullwhip effect is evident in a supply chain when demand increases and decreases. About two dozen of P&G's brands are billion-dollar sellers. P&G observed that distributor orders to the factory varied far more than the preceding retail demand. Gain. and Wella in the beauty and grooming segment. and health. Proctor & Gamble coined the term “bullwhip effect” by studying the demand fluctuations for Pampers (disposable diapers). Olay. The company also makes pet food. 8 . Duracell. as well as Bounty. Head & Shoulders. Fusion. Downy. The essence of the bullwhip effect is that orders to suppliers tend to have larger variance than sales to the buyer.
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. Over time as the Distributor builds inventory and fulfills orders. Example of the Bullwhip Effect Re tail Orde rs to Dis tributor 40000 35000 30000 25000 20000 15000 10000 5000 0 1 2 3 4 5 6 7 8 9 10 11 12 M onths Demand Dis tributor Orde rs to Factory 40000 35000 30000 25000 20000 15000 10000 5000 0 1 2 3 4 5 6 7 8 9 10 11 12 M onths The graphical representations above show the bullwhip effect between two supply chain partners. it communicates very different demand levels to the 9 Demand .Mohan Subramaniam (730122025199) Babies use diapers at a very predictable rate. Information is readily available concerning the number of babies in all stages of diaper wearing. and retail sales resemble this fact. It can be seen that the Distributor orders to the factory experience demand fluctuate far more drastically than the retail demand.
retailers can order products in cases of 10 from wholesaler.Mohan Subramaniam (730122025199) upstream factory by the order amounts it requests. Delay times between order processing. This is made worse by the excess warehousing expenses that are incurred because of unused storage space. Limitations on order size (i. transportation expense decrease by ordering full-truck loads. Order batching: method for reduction of ordering costs due to price discounts for bulk ordering. This becomes more complicated the farther up the supply chain we go. as well as increases in shipping costs caused by premium rates paid for last minute orders. distributors receive orders in cases of 1. so do the associated costs. The result of these panicked buying periods is an inventory of unused supplies. Excess capacity during periods of low volume of demand is followed by inefficient utilization and overtime expenses incurred during high demand periods.. however. How to remedy the Bullwhip Effect 10 .000) Inaccurate demand forecasts. and receipt of products. How do costs increase? Excess raw materials costs arise from the last minute purchasing decisions made to accommodate an unplanned increase in demand.e. Some of the reasons that the bullwhip effect occurs include the following: Over reacting to the backlog orders. etc. Free return policies. As these unused supplies grow. demand. Little or no communication between supply chain partners.
Mohan Subramaniam (730122025199) When the bullwhip effect is first identified in a supply chain. Might cut off established relationships in efforts to “shop around” for a better price. Can lead to large inventory volumes and misleading demand figures for upstream suppliers. Rationing might indicate internal problems that limit meeting supply goals. Price Variations Used to position suppliers that are involved in market share wars with other suppliers. 2. the productivity and timeliness of the supply chain will increase greatly and the bullwhip effect will be dramatically lessened. 4. it is important to identify the problem areas. Although many of these areas many seem like proper business practices. 3. Demand Signal Processing Retailers often use realized demand as an indicator of future demand. 11 . Inference and data dependency problems. 1. Once changes are made in these areas. Order Batching Used because organizations are attempting to obtain benefits from large-volume pricing discounts and reduced costs of transportation. the reality is that they diminish the efficiency of the supply chain. The following areas are places in the supply chain that should be considered when trying to decrease the bullwhip effect. Rationing Gaming Used when demand outstrips supply.
Today. we have not been standing still in our attempts to resolve store OOS. Vendor Managed Inventories. Forecasting & Replenishment have all had positive impacts on inventories and service levels. Indeed. store OOS in the grocery sector has not budged from the 8 percent range in 15+ years. Unfortunately. it is not uncommon to hear of lag times from store to factory in the 3 to 6 weeks range. as time impacts inventory. In addition. Suffice it to say that industry initiatives such as Quick Response. Efficient Consumer Response and Collaborative Planning. But have we really addressed supply chain responsiveness to the consumer? As a result of these initiatives. Fast forward to today. What about store out-of-stocks (OOS). lag times have been reduced. the most critical KPI in any retail supply chain? When products are not on the shelf everybody loses. Trade magazines are filled with stories about capturing store consumer demand and using it to 12 . Forrester demonstrated it could take up to 6 months for a 10 percent increase in store demand to cascade across the extended retail supply chain and it could result in as much as a 40 percent increase in demand on the factory. we have seen improvements in inventory turns in the extended retail supply chain. That is quite an improvement from Forrester‟s findings of 6 months.0 Eliminating the Bullwhip Effect across the Extended Retail Supply Chain The Bullwhip Effect is a 50 year old problem first described by Jay Forrester at MIT in 1958.Mohan Subramaniam (730122025199) 5.
in reality. they are typically not used to do anything beyond creating the next order. Demand Driven Supply Networks. Unfortunately.Mohan Subramaniam (730122025199) drive the extended retail supply chain. next week or next month. What is more important is to connect the store to the rest of the retail supply chain. Reducing lag time from store to factory from 6 months to 6 weeks is a good thing. Inventory management systems in retail stores. upstream and downstream supply chain systems do not really know what will be needed tomorrow. This is largely due to the fact that traditional inventory planning systems were never designed to handle the vast scale of information needed at the store level. we have to ask what value is in the daily capture of Point-of-Sale (POS) if the store inventory management system is a manual process where inventory clerks walk the aisles looking for gaps to fill on empty shelves? Even when retailers use advanced computer assisted ordering systems. retail DCs. To connect the “head” back on to the retail supply chain. The store is the beginning of information flow and the end of product delivery. As a result. However. Yet. everything starts and ends at the store. wholesale DCs and manufacturing DCs are completely disconnected from one another. in many cases we are managing “HEADLESS” retail supply chains where retail store inventory management systems are not connected to anything. Our retail supply chains are fragmented. 13 . Consumer Signal Integration and Consumer Driven Supply Chains are prevalent in the press nowadays. Terms such as Demand Signal Repositories.
there is no getting around the fact that full trucks are lower unit cost than small or partially full trucks. worry about running out or react to current demand signals from customers.” The first is to use computer advice to order materials. It is not as inexpensive as filling up a truck all 14 . you should work with suppliers to reduce lead times. Dr.0 Conclusion “Over and Under Forecasting” There are two ways to easily reduce “over and under forecasting. Lee proved mathematically that longer lead times increase the bullwhip effect because you have to forecast over a longer period of time. Computers don‟t react. but not fill one up. So the key is that you have to fill up a large truck. Second. How can you do this… by using a third-party logistics (often called a 3PL) company.Mohan Subramaniam (730122025199) 6. They are more logical and don‟t over or under forecast. and more importantly. These firms work with many customers and fill up trucks from multiple stops that then travel a freight lane full. “Economies of Scale in Transportation” As stated before.
6.com http://www.supplyvelocity. Cachon.Mohan Subramaniam (730122025199) by yourself. “Price Discounting” Wal-Mart got it right when it introduced Every Day Low Pricing (EDLP). G. and M. Fisher (2000) “Supply Chain Inventory Management and the Value of Shared Information. G. J. If people know that you won‟t have a sale. Cachon. they won‟t wait to purchase what they need or want. Lariviere (1999) “Capacity Choice and Allocation: Strategic Behavior and Supply Chain Performance. July 26.” Management Science. 5. (1999) “Managing supply chain demand variability with scheduled ordering policies.pdf 3.com/wp-content/uploads/2013/01/The-Bullwhip-Effect-in-SupplyChains. 7.” Management Science Wikipedia. If you don‟t deep discount then they won‟t over-purchase causing first the sharp peak and then the deep valley of demand in the following time period. (1999a) “Expert Warns of „Bullwhip Effect‟.com Quickmba.” Management Science. 4. but it is a good compromise and helps to reduce the bullwhip effect.” Electronic Buyers’ News. and M. Baljko. Cachon. G. 15 . 2.0 References 1. 7.
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