BULLWHIP EFFECT

Case 1- Operations Management

Submitted by- Muskan kapoor (401706014)

Shagun Mehra (401756006)
 What is BULLWHIP effect ?

The bullwhip effect is a supply chain phenomenon describing

how small fluctuations in demand at the retail level can cause
progressively larger fluctuations in demand at the wholesale,
distributor, manufacturer and raw material supplier levels
What is BULLWHIP effect ?
Causes of BULLWHIP effect

Demand Forecast updating

Order Batching

Price Fluctuation

Rationing and shortage gaming

 Demand Forecast updating

As each entity along the chain places an order, it replenishes stock and includes some safety
stock. With long lead times, there may be weeks of safety stocks, which make the
fluctuation in demand more significant.
Every company in a supply chain usually does product forecasting for its production
scheduling, capacity planning, inventory control, and material requirements planning.
Forecasting is often based on the order history from the company's immediate customers
 Order Batching

In a supply chain, each company places orders with an upstream organisation using some
inventory monitoring or control. Demands come in, depleting inventory, but the company
may not immediately place an order with its supplier. It often hatches or accumulates
demands before issuing an order. Suppliers, in turn, face erratic streams of orders, and the
bullwhip effect occurs. When order cycles overlap, the effect is even more pronounced.

There are two forms of order batching: periodic ordering and push ordering.

When a company faces periodic ordering by its customers, the bullwhip effect results. If all
customers' order cycles were spread out evenly throughout the week, the bullwhip effect
would be minimal. Periodic execution of MRPs contributes to the bullwhip effect.
 Price fluctuation

Estimates indicate that 80 percent of the transactions between manufacturers and distributors
in the grocery industry were made in a "forward buy" arrangement in which items were
bought in advance of requirements, usually because of a manufacturer's attractive price offer.
Forward buying results from price fluctuations in the marketplace. Such promotions can be
costly to the supply chain.

When a product's price is low (through direct discount or promotional schemes), a customer
buys in bigger quantities than needed. When the product's price returns to normal, the
customer stops buying until it has depleted its inventory. As a result, the customer's buying
pattern does not reflect its consumption pattern, and the variation of the buying quantities is
much bigger than the variation of the consumption rate — the bullwhip effect.
 Rationing and shortage gaming

Rationing and shortage gaming is the fourth cause for Bullwhip effect. It is characterised by
large swings in perceived demand at upstream components of supply chainWhen product
demand exceeds supply, a manufacturer often rations its product to customers.

In one scheme, the manufacturer allocates the amount in proportion to the amount ordered.The
effect of "gaming" is that customers' orders give the supplier little information on the products
real demand, a particularly vexing problem for manufacturers in a products early stages.
 • By Avoiding multiple demand forecast updates- Companies
can make demand data from downstream available
upstream. Or they can bypass the downstream site by selling
SOLUTIONS directly to the consumer. Also, they can improve operational
efficiency to reduce highly variable demand and long
resupply lead times.

• Break order batches- Companies can use electronic data

interchange to reduce the cost of placing orders and place
How to orders more frequently. And they can ship assortments of
products in a truckload to counter high transportation costs
counteract the or use third-party logistics companies to handle shipping

Bullwhip • Stabilize prices- Manufacturers can reduce the frequency

and level of wholesale price discounting to prevent
effect? customers from stockpiling. They can also use activity-
based costing systems so they can recognise when
companies are buying in bulk.
 • Eliminate gaming in shortage situations- In shortages,
suppliers can allocate products based on past sales records,
SOLUTIONS rather than on orders, so customers don’t exaggerate their
orders. They can also eliminate their generous return
policies, so retailers are less likely to cancel orders.

• Make real-time end-item demand information available to

all members of the supply chain. Information technologies
such as electronic data interchange (EDI), bar codes, and
How to scanning equipment can assist in providing all supply chain
members with accurate and current demand information.
counteract the
Bullwhip • Stabilise prices by replacing sales and discounts with
consistent every-day low prices at the consumer stage and
uniform wholesale pricing at upstream stages. Such actions
effect? remove price as a variable in determining order quantities.
 REFERENCES

• http://www.opentextbooks.org.hk/ditatopic/7044
• https://www.business2community.com/strategy/7-ways-cope-bullwhip-effect-0645047
• https://www.dummies.com/business/operations-management/how-to-avoid-the-bullwhip-
effect-in-operations-management/
• http://supplychain-mechanic.com/?p=120