Eliminate Bullwhip Effect-----Smoothen supply chain

The Executives of Procter & Gamble (P&G) analysed the replenishment

patterns for one of their best selling products: “Pampers’ (disposable diapers).
These studies revealed that orders placed by distributors had more variation
than the actual sales at retail stores. Additionally, manufacturer showed even
greater variation while ordering raw materials from the suppliers. Since the
demand for diapers from consumers was quite steady, the variance in the supply
chain should be low. P&G coined the term “bullwhip” effect to explain this
phenomenon.

 Bullwhip effect is a phenomenon where greater variability is

observed in a supply chain even when there is a steady demand at
retailers. It has also been referred to as “whiplash” or “whipsaw’
effect.

This phenomenon was observed by other firms as well. HP (Hewlett

Packard) experienced the bullwhip effect in sales patterns of its printers.
Orders placed by wholesaler showed wider fluctuations than retail sales,
and orders placed by the printer division to the company’s
manufacturing centre had even wider swings.

The reasons for the evolution of bullwhip effect 

      In a basic ‘two level MRP’ (Material Requirements Planning)

system, when pattern of final demand is constant, and items are
produced in batch size, demand ‘one level’ lower found to be
fluctuating.

     The tendency of lower levels in the supply chain to batch

orders is the root cause of the bullwhip effect.

     According to Lee, Padmanabhan and Whang (1995) there are

four causes of the bullwhip effect: 

o Demand forecast updating

o Order batching
o Price fluctuations
 o Shortage gaming

The retailer, while ordering, builds in safety stocks to protect against

uncertainty in consumer demand. The distributor, observing swings in
retailers, builds in even larger safety stocks. This is what Demand
Forecast means. The natural tendency to save fixed costs by more
frequent orders gives rise to Order Batching. Retailers have a business
motive to hold inventories when prices fluctuate. Many manufacturers
also provide incentives for forward buying. Large orders are placed
when promotions are offered. In a steady consumer demand situation,
speculation triggers the bullwhip effect. Shortage gaming occurs when a
product is in short supply. Retailers in anticipation of shortfall tend to
inflate their requests. The result is that the manufacturer gets an inflated
picture of the real demand.

Bullwhip effect is not the result of poor planning or irrational behaviour

on the part of players in the supply chain. But is due to each individual
acting to optimise his position.

To eliminate this behaviour, which leads to the bullwhip effect, the

following four initiatives are recommended:

 Information Sharing: If all parties involved share

information on POS (Point of Sale), the swing in
ordering will reduce.
 Channel alignment: Is the co-ordination of efforts
in pricing, transportation, inventory planning, and
ownerships between all the participants in the
supply chain. One of the practices that defeats
channel alignment is order batching.
 Price stabilisation: By stabilising pricing, sales
patterns will have less variation. For example, a
majority of grocery manufacturers are moving
towards a value-pricing strategy and away from
promotional pricing.
 Minimise excessive orders: To minimise excessive
orders as a result of shortage gaming, allocation
should be based on past sales records rather than
orders.

In short, to mitigate the bullwhip effect

 Reduce demand forecast errors

 Moderate supplies during a shortage (allocation situation)
  Share information on POS (Point Of Sale)
 Encourage channel alignment.

If these initiatives are implemented, the manufacturer, wholesaler,

distributor, retailer and the consumer would benefit from reduced costs
and improved efficiency in supply chain.