Tech

Jashore University of Science and Technology

Department of Industrial and Production Engineering (IPE)

Course Title: Supply Chain Management

Course Code: 4105

Assignment No: 01

An Assignment

On

Analysis of Bullwhip Effect on Food Industry due to Food Delivery Apps

Submitted By Submitted To
Name: Md. Shariar Islam Mustafizur Rahman
Roll: 160717 Assistant Professor
4th Year, 1st Semester Department of IPE
Session: 2016-17 Jashore University of Science &
Technology
Department of IPE
Jashore University of Science &
Technology

Remarks

Date of Submission: 25/10/2021

 Analysis of Bullwhip effect on Food Industry due to
Food Delivery apps

Introduction

Advancement in Internet Technology (IT) has been a non-detachable part of many industries and
food industry is not a special case. This has helped online Food Delivery Apps (FDAs) to reach a
larger audience. As per CARE rating report, “with the increasing number of internet users in the
country, the food industry in Bangladesh has seen a sharp growth in demand of food items”. A
number of other reasons may include growth in working population, young generation and
growing use of plastic money, which was reinforced in Bangladesh at the time of
demonetization. With the fast development of the worldwide advanced economy, the
promotional activities have solid intrigue to online customers because of the incentives and ease
provided by FDAs. Almost every restaurant, food eatery and even street vendors are available
online through FDAs. Availability of all food outlets at single platform, frequent offers and
instant free home delivery even in odd hours of day has made it more preferable for customers to
order online. In simple terms, FDAs work as medium which brings together food eateries,
restaurants, customers and logistics partners. These are platforms from where wished food can be
selected, ordered and paid online from one’s desired restaurants through mobile applications,
independent of whether restaurant provide delivery on its own or not. Not only this, even the tips
can be paid through these apps. Examples of some such Bangladeshi apps are efood, Foodpanda,
Pathao Food, Shohoz Food, HungryNaki, Khaas Food and Cookups etc. The ascent of
technology i.e. web as retailing channel has now furnished the food outlets with a perfect domain
to showcase their specialties and special discount offers, if any. In traditional offline market only
some of big restaurants, very famous food eateries or location specific outlets could attract
customers but now due to ease of internet facilities, a small food outlet which might be located
inside some residential area can easily promote its business and get fame just by putting itself on
FDAs. It has not only made it easier for customers to switch their food outlets but has generated
the new demand from old customers and from entirely new set of customers too.

Bullwhip Effect

The bullwhip effect (also known as the Forrester effect) is defined as the demand distortion that
travels upstream in the supply chain from the retailer through to the wholesaler and manufacturer
due to the variance of orders which may be larger than that of sales.

The Causes of Bullwhip effect

 Demand forecast updating: Members of the supply chain updating their demand

forecasting.
 Order batching: Members of the supply chain rounding up or down the quantity of
orders.
 Price fluctuations: Usually driven by discounting resulting in larger quantities of
purchases.
 Rationing and gaming: Buyers and sellers delivering over or under their order
quantities.

The bullwhip effect reduces supply chain profitability of a food industry by making it more
expensive to provide to a given level of product availability

–Manufacturing cost (increases)

–Inventory cost (increases)

–Replenishment lead time (increases)

–Transportation cost (increases)

–Labor cost for shipping and receiving (increases)

–Level of product availability (decreases)

–Waste within the supply chain (increases)

–Relationships across the supply chain (worsens)

–Profitability (decreases).

Problem Statement
Bullwhip effect of food delivery apps causes problems in food industry in two ways- demand
signal processing and price variation.

Bullwhip effect is usually quantified as a ratio of variance of sales (or orders) to variance of
demand. Rather than quantifying measure, bullwhip effect can be measured qualitatively by
studying change in efficiency and effectiveness of supply chain.

Method of Analysis

To meet the objective of reducing the bullwhip effect due to food delivery apps, each and every
echelon of supply chain followed by FDAs is critically studied qualitatively as well as
quantitatively. In quantitative analysis, different parameters like percentage of annual growth
rate, distribution of orders in different cities of Bangladesh, order volume of different FDAs etc.
are used to check comparative status of efficiency and effectiveness of supply chain and hence of
bullwhip effect. For this purpose, data provided by Statista , Mc Kinsey and report of CARE are
used. For developing the qualitative results, the facts from different published research are
merged with the strategy followed by FDAs and are discussed in following section.

Qualitative Analysis

FDA’s supply chain optimization depends on many factors. The optimization policy includes
resource planning, logistics planning, scheduling and routing. This modeling and optimization is
tricky because of many unquantifiable constraints such as: customer tolerance time or service
level, efficiency, effectiveness, delivery lag, traffic factors, customer factors, supply factors etc.
Before discussing the constraints, it is necessary to understand the features of the system enjoyed
by different members of supply chain so that impact of FDAs on demand and hence on bullwhip
effect can be analyzed. Such supply chains are composed of restaurants, customers and FDAs.

Restaurants FDAs offers dual benefits for the restaurants. They provide them extra business
by optimal use of existing resource and give them chance to associate with new customers
without spending on promotional activities. It gives opportunity for free marketing and a well-
developed network for home deliveries, especially for those restaurants who can’t provide home
delivery on their own. As per survey reports, 1 percent of current on-premises customers forced
to migrate to home delivery, but increase in home delivery customers is much larger to
compensate the loss (if any) because of migration of customers.

Customer FDAs offers maximum advantages for customers. The taste and variety of outside
food in home comfort, Combination of specialties of different outlets under one roof, at desired
place, desired time and moreover at discounted price (most of the times) makes it preferable for
everyone. Prior to this platform such facility was available only for food items like pizza, but
now many healthy choices are available for each kind of meal, whether breakfast or lunch or
dinner. Not only this, but one can order for mid-day meals also. The customers can track delivery
in real time.

FDAs This new online platform has great control over the customer’s experience. The reason
is direct one-to-one correspondence and online feedback. Availability of large number of
restaurants on one platform adds on to the popularity of FDAs. Addition of such restaurants,
which does not provide home delivery prior to this platform helped in increasing the number of
customers. Under the penetration pricing FDAs used to give discount on price of food items,
which is not offered by restaurants, it helps them to gain more and more business.

Usually, penetration pricing and surge pricing increases bullwhip effect, as demand patterns
gets disturbed and forecasting gets failed, but in present case it helped in reduction of bullwhip
effect.

Quantitative Analysis
As per reports of Statista the revenue in online food delivery segment amounts to 107,438
million US $ in 2019. It can be considered as an average increase of 17.5% on year-on-year
basis. It includes the delivery of food by restaurants as well as by FDAs. On an average 971.6
million customers are associated with online food industry. It is estimated as an average increase
of 15.4% on year-on-year basis. The average revenue per user in the FDAs segment amounts to
US$99.79 in 2019. It is expected to show a Compound Annual Growth Rate (CAGR) of 9.9%
for the period of 4 years i.e. 2019-2023. According to CARE report [28], it is expected as 10.4%.
However, both the reports shows that approximately 10% CAGR would remain in next 4 years.
With the evolution of FDAs, the online food delivery market is growing at faster pace. As per the
records of Mc Kinsey, the world wide Annual Growth Rate (AGR) in this field during current
decade is very high and is expected to reach to 65% per year at stability. The detailed annual
growth per year is expressed in Fig. 1. The Compound Annual Growth Rate (CAGR) is
measured as to grow very fast viz. 25% in initial years i.e. till fourth quarter of 2018 or first
quarter of 2019 and after which, it is expected to gradually decreases to 14.9 percent per year
until 2020. In 2017, the value of the online food delivery market in Bangladesh was 45.58
Billion Tk. Because of its popularity, it is expected to develop at a Compound Annual Growth
Rate (CAGR) of 38.08% from 2018 to 2023.

Percentage
45
40
35
30
25
20
15
10
5
0
2010 2012 2014 2016 2018 2020 2022

Fig. 1 Percentage of annual growth rate (AGR) from 2011 to 2020.

In comparison of worldwide CAGR, it is very high. It is because in India, the FDAs are in
penetration phase, started just 4 years back whereas in China, USA, Austria and Brazil it is
mature enough to be stable. According to a study by business consultancy firm Market Research
Future “The online food ordering market in Bangladesh is likely to growat over 16% annually to
touch $ 17.02 billion i.e., Tk 1191.4 billion by 2023”. In 2017, metropolitan urban cities like
Dhaka, Chittagong, Sylhet, Khulna, Gazipur, Narayangong and Barishal accounted for 87% of
the overall online food delivery market in Bangladesh by volume. Initially volume of orders was
high in Dhaka, as HangriNaki is Dhaka based company, so all start-ups are firstly launched there,
but over the period of time, the platform attains popularity in other cities also. In March
2018,share of Dhaka reduce to 20% of total market, which was 32% in the year 2017. The cause
of reduction is due to the fact that other cities started using FDAs extensively. By March 2018,
contribution of metropolitan cities reduced to 82% of total share.

Distribution of orders across the cities of Bangladesh

Dhaka Chittagong Sylhet Khulna Barishal Other cities

18% 20%

12%

18%

15%

17%

Fig. 2 Distribution of orders in different cities of Bangladesh

 50000
Order Volume
45000
45000
40000
35000
30000
25000 27000
25000
20000
15000 18000
15000
10000
5000
0
FoodPanda efood HangriNaki Shohoz Food Khaas Food

Fig. 3 Order volume of different FDAs for March 2018 in Bangladesh

Thus we can also see how Bull whip effect decreases after a certain period of time by means of
proper forecasting and data analysis.

Bullwhip Effect on Food Industry Due to FDA

70%
65%

60% 58%
55%

50%
45%
43%
40%
35%
33%
30%
30%
23%
21%
20%

10%

0%

Fig 4: Percentage of Bullwhip Effect on Food Industry.

Hence, it is evident from qualitative and quantitative analysis that FDAs had increased the
demand, value and performance of supply chain. Further, by providing better platform for
information sharing, it had reduced the bullwhip effect in food supply chain. Furthermore, even
discounted pricing policy had not enhanced the bullwhip effect, which usually happens because
of price variation. The reason being, in usual supply chain, customers can do bulk purchase in
anticipation of future demand, which causes bullwhip effect but in case of food supply chain this
can’t happen because cooked food is highly perishable item and can’t affect future demand.

Discussion and Conclusion

Internet has fundamentally changed the nature of supply chains and has redefined the definition
of selecting, purchasing, and use of products and services. As a result, the supply chain has been
shifted from profit oriented to product oriented and now from product oriented to consumer
oriented. The emergence of E-supply chain in the form of FDAs had changed the structure of
supply chain totally. In the traditional “push” demand model, only the member attending the
customer remain in contact of customer and the information traversed at higher echelon might
have personal perception also. Contrary to this, now in new “pull” demand model each member
of supply chain has direct electronic connections with end customer and hence E-supply chain
connectivity gives end customers the opportunity to become better informed through the ability
to research and give direction to suppliers. Moreover, by getting true feedback high level of
customer’s satisfaction can be achieved. Particularly in case of food supply chain, through
feedbacks, supplier can get accurate information about the product quality delivered, from
customer’s point of view. It helps the higher echelon of supply chain to understand exact
requirement of customer viz. quality, quantity, price, lead time etc. In this case, information
traverses without distortion and in real time so reduces bullwhip effect.

Finally it is possible to reduce Bullwhip effect on food industry due to Food Delivery Apps.