Introduction

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Relying on the statement that the supply chain management system is an extremely important
part of a company that can also assure (if working properly) and bring company benefits such as
reduction of wastes and resources. Understanding the importance of the successfully functioning
supply chain is necessary in order to fully understand the bullwhip effect. According to the
literature, the bullwhip effect is the phenomenon, which according to the author is consisting of
increasing demand variability in the supply chain from downstream echelons (retail) to upstream
echelons (manufacturing). (In Search of the Bullwhip Effect). Other literature sources also
describe this phenomenon as a fluctuation of the variance of orders which in a specific case can
be bigger than the estimated amount.( Lee et al. (1997b).A specific amount of attention is given
to the bullwhip effect for a reason. Despite different factors that could affect the supply chain in
a damaging way, according to the source Bullwhip effect continues to be considered exceptional
occurrence that can actually influence the whole supply chain system.

Table Nr.1 Source:Slack, Chambers and Johnston, Operations Management, 6th Edition, © Nigel
Slack, Stuart Chambers, and Robert Johnston 2010)

In order to manage this effect, it is especially important to analyze what factors cause this
problem in the supply chain. Therefore, in this paper, we also analyze the major causes of the
bullwhip effect such as Demand forecast updating, order batching, price fluctuation and
rationing and shortage gaming. Lee et al. (1997ab).
Product push vs Demand pull

It is important to highlight that there are disagreements between different authors about the
exact definition of push and pull factors. According to Bonney M et al (1999), it depends on
different information resources and they can be separated into the two – push and pull factors.
The push is being described as the factor which means anticipating the demands and taking
action based on it while pull - take action depends on market demands. Based on the source,
these measures also in a way suggest the reason behind the unsuccessful push and pull
process.
pull system -> poor system -> reason behind it: lack of observation of JIT
push system -> poor system -> reason behind it: a systematic issue of push system
( factories follow a push system in which each phase in the manufacturing process accumulates
its production which would then be removed by the following phase.
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Just in time (JIT) also known as doing only what is necessary when it is necessary and
in with the amount that is necessary is based on the idea that no action must be taken
unless there is a real need. As an explanation, it is based on the view that taking action
too early can lead to accumulation of inventory or even unfinished products while being
late would definitely disappoint customers and increase customer dissatisfaction. It is
also being discussed that the JIT principle provides benefits such as inventory
reduction, quick setups, and orders, quality of the source, supplier networks, teamwork,
and participation, continuous improvement ( Bonney et al., 1999).

Just in time (JIT)

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The data that is required for the extraction of the information and
the formulation of conclusions and suggestions

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Regarding the Chinese Haier Group’s case study conducted by Yi Xiao, and Ronghe Peng
(2013) here you can find the process of data analysis which is used in the conducted study.
The data from the company is collected via interviews from people in different departments. The
department which is directly related is the Purchase and Sales department from which the
information collected can be both quantitative and qualitative. Besides them, the managers of the
departments are those who are making the final decisions and estimating the objectives.
Furthermore, it is very important people that have direct observation what are the impacts of the
bullwhip effect in each process to be contacted for details. Also to share what are the causes of
the effect, how they are trying to mitigate the effect, what are their measurements against it and
what problems they have faced with managing it. On this point as much data is collected as
better.
After collecting data from interviews and secondary data it must be sorted into different
categories. The next step is describing theses data which includes not only the questions and the
answers, but the reflection of them and highlighting the keys points. After that is the step when
the case must be built. Then, building theoretical framework via the already analysed
information from the purchase and sales department. Last but now least, figuring out answers to
meet the research objectives.
Figure 1: The processes of data analysis for Haier Group case study
Source (Yi Xiao & Ronghe Peng, 2013)

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The impacts of the bullwhip effect

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We can find the bullwhip effect during the information sharing from downstream to
upstream. This means that as much bad information is shared between suppliers and
customers, there will be a bigger influence caused by this effect. For example, “Once
the market demand from the end-users in the supply chain increases, the production
capacity of the entire supply chain increase.“ (Yi Xiao & Ronghe Peng, 2013).
Hussain and Drake (2011) have made a study and they summarized the impacts of the
bullwhip effects in three different aspects:
-> inaccurate forecasting which probably will cause periods of low capacity utilization or
periods of not having enough capacity
-> hight inventory costs
-> inadequate customer service

After this, Yi Xiao and Ronghe Peng (2013) analyzed that the speed of response of the
market is also affected in terms that “the more in the back end of the supply chain, the
slower the response speed of the enterprise is”. The consequences are inevitable
since, for instance, whenever the market demand increases, suppliers will be unable to
support manufacturers. On the other hand, whenever the market demand is slowing
down, the suppliers will continue to produce and the manufacturers don’t have the
capacity to drain all the products.
Furthermore, another impact found in the purchasing department of the Chinese Haier
Group is the noon-cooperation inside the supply chain after the bullwhip effect
destroyed the original plans that every member followed with. Once the plans were
broken, the whole supply chain couldn’t adjust to cooperate.
According to the purchase manager of the Chinese company, the costs and losses
would increase (not only the costs of inventory but also transactions and managerial
costs) and will reduce the financial performance of the firm and also of other supply
chain members.

Causes and counter-measures to the Bullwhip Effect

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The Bullwhip effect can cause major impact on the supply chain management. Some actions are
established to mitigate and to cope up with the effect. These measurements can improve the
business performance and the overall efficiency of the supply chain.

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"Lee et al. (1997a b) puts forward the solutions from four aspects based on the four causes: avoid
multiple demand forecast updates, break order batches, stabilize prices and eliminate gaming in
shortage."(Yi Xiao & Ronghe Peng, 2013)

Avoid multiple demand forecast updates

"Members of a supply chain conduct forecasting in association with its planning based demand
input from their immediate downstream member in producing their own forecasts. Demand input
from the immediate downstream member, results from that member’s forecasting, whose input is
from its own downstream member."(Essays, UK.,November 2018) This problem can be solved
by collaboration between the organizations in the supply chain by sharing the data and
distributing it directly to companies further upstream in the supply chain by single source of
forecasting for the entire supply chain. Another solution is lead time reduction. Which leads to
better forecasts due to the fact that less time is needed for orders to reach the customer, so orders
are more in line with the real demand of the market.

Break order batches

"Random or correlated ordering, high order cost and full truck load (FTL) economics are the
main reasons causing the bullwhip effect."(Yi Xiao & Ronghe Peng, 2013)
Solutions can be smaller and synchronized batch sizes, regular delivery appointments. Also by
using EDI (Electronic data interchange) to reduce administrative ordering costs and using third-
party logistics service providers or even discounts on assorted truckloads.
Stabilize price variations

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This happens because of promotions and tread deals when the price of the goods decrease and
the demand for them increases. When the price is low the customers buy in bigger quantities
and after that when the price turns to normal the customer does not buy the same quantity as
before. The solutions are developing appropriate pricing strategies- stabilizing prices, special
purchase contact and EDLP -retailers and distributors can aggressively negotiate with their
suppliers to give them everyday low cost.
Eliminate gaming in shortage

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Shortage gaming occurs when customers place multiple orders for a product with one or more
suppliers or when they place an order for more than what they want which leads to false
predictions regarding the forecasting of the supplier.
Some contributing factors are proportional rationing, ignorance of supply conditions and
unrestricted order and free return policy. Solutions can be introducing rationing methods based
on past sales rather than on orders, shared capacity and supply information, flexibility limited
over time and capacity reservation.

To sum up, the bullwhip effect can not be completely eliminated from the supply chain, but if
the method is properly realistic, the negative impact from the effects can be weakened on the
supply chain management.

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The main difficulties were found when applying the measurements for the bullwhip effect in a
realistic event where occurred several problems related to arguments between purchase
departments and sales departments. Since the sales department aims to sale as much as
possible, they always decide to order more products than the market really needs in order to
avoid a stock shortage, leading to an increase in “potential risks of unmarketable and price
reduction of the project which higher cost for the firm” (Yi Xiao & Ronghe Peng, 2013). On
the other hand, the purchase department tries to save costs of purchasing, reducing
inventory to avoid unnecessary risks. These are two different ways of thinking, resulting in
several arguments between the two departments.

The main difficulties that impede evolution in this sector

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Proof of concept on a case study

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As we’ve been referring, Bullwhip effect is not just an academic and theoretical perspective. In
fact, it is and real problematic challenge that companies must address efforts in order to
prevent or even redeem on a daily basis.
In this part, we will exclusively look at how the bullwhip effect impacts the electrical appliance
industry.
As we’ve seen before, the bullwhip effect is harmful to the supply chain and all the people and
companies involved.
According to the interviews made on the Chinese company with both sales manager and
purchase manager, the information provided by them can be summarized in the table below:

(Source:Yi Xiao & Ronghe Peng, 2013)

As we can see in this table, the are different perspectives between Sales Department and
Purchase Department.
On the other hand, there are also identical opinions and measurements, like “both sales and
purchase managers pointed out the incomprehensive performance appraisal of sales
department and short of data collection and exchange network are included in causes of the
bullwhip effect.” Also, in both cases, the two managers introduced the same “T-13 forecast
system” as a measure for dealing with the bullwhip effect inside the company.

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References

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How the student perceives the importance of the topic.
Bonney, M. C., Zhang, Z., Head, M. A., Tien, C. C., & Barson, R. J. (1999). Are push
and pull systems really so different?.International Journal of Production
Economics,59(1), 53-64
In my opinion, the Bullwhip effect is up-to-date phenomenon which exists in many supply chain
organizations across different
Essays, UK. (November industries
2018). even nowadays
Counter-measures to and
the therefore
Bullwhipincrease dramatically
Effect. Retrieved the
from
https://www.ukessays.com/essays/business/counter-measures-to-the-bullwhip-effect-
operating costs and prevents companies from smooth operations.
business-essay.php?vref=1
The major reason why this harmful phenomenon occurs is due to a lack of information across the
supply
Yi Xiao,chain no matter
Ronghe in which industry,
Peng,2013,How because
to manage theallbullwhip
of them rely on in
effect day-to-day
the supply chain: A
case study on Chinese Haier Group
communication.
Follows one example which occurs due to lack of communication with reference to
https://www.sciencedirect.com/science/article/abs/pii/S0925527398000942
misunderstood flow of information and demand variation:
Primarily, suppliers prefer to hold extra stock for their customers, the same way retailers hold
extra stock for their customers and due to this actions difference in the variance of demand input
from the immediate downstream member is created. This generates an unavoidable effect of
demand variation, without knowing from where this demand is created. At the end the
consequences are excess stocks, quality problems, higher raw material costs, overtime expenses
and shipping costs.
I believe that for organizations is not only important to understand the bull-whip effect but
also to develop strategies to counter the same in any industry, if possible. But first the creation
of guidelines regarding different industries with different principles that must be followed can
be a reliable indicator which can help faster prevention of future mistakes. In different industries
some causes which create the Bull-whip effect are more likely to happen than in another.
Therefore different measurements can be taken into account in the levels of effect development.

Individual work - Vanya

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