Bull Whip Effect / Coordination

in Supply Chains

- Dr. Akshay Joshi

 Bull Whip Effect
• Bull Whip Effect is an observed phenomenon in forecast driven
distribution channels.
• In managing distribution channels in supply chains information
play important role.
• But many times there are distortions in information.
• Such distortions in demand information results into Bull whip
effect.
• Also known as Whiplash or Whipsaw effect.
• Refers to magnification of demand fluctuations as orders
move up the supply chain.
• Oscillations in demand due to such magnifications reminds of a
cracking whip.
• Bullwhip effect refers to an effect of increasing distortions in
information that occurs along supply chain as a result of
inaccurate demand forecasts at lower levels.
• The inaccuracies in these forecast grow further at higher levels.
• Consequently abnormal fluctuations in aggregate demand
forecast reaches the manufacturing level.
• Fluctuations occur due to inaccuracies in demand forecasting
at downstream supply chain; tried to be overcorrected in next
ordering cycle leading to severe swings in order quantities.
 Explanation

• Because customer demand is rarely perfectly stable,

businesses must forecast demand to properly position
inventory and other resources.
• Because forecast errors are a given, companies often carry an
inventory buffer called "safety stock".
• Moving up the supply chain from end-consumer to raw
materials supplier, each supply chain participant has greater
observed variation in demand and thus greater need for safety
stock.
• In periods of rising demand, down-stream participants
increase orders.
 Explanation

• In periods of falling demand, orders fall or stop to reduce

inventory. The effect is that variations are amplified as one
moves upstream in the supply chain (further from the
customer).
• In addition to greater safety stocks, this effect can lead to
either inefficient production or excessive inventory as the
producer needs to fulfill the demand of its predecessor in the
supply chain.
• In spite of having safety stocks there is still the hazard of stock-
outs which result in poor customer service.
• Leading to low utilization of distribution channels.
 Illustration

• Procter & Gamble (P&G) has observed the bullwhip effect in the supply chain for
Pampers diapers .
• The company found that raw material orders from P&G to its suppliers fluctuated
significantly over time.
• Farther down the chain, when sales at retail stores were studied, the fluctuations,
though present, were small.
• It is reasonable to assume that the consumers of diapers (babies) at the last stage
of the supply chain used them at a steady rate.
• Although consumption of the end product was stable, orders for raw material
were highly variable, increasing costs and making it difficult to match supply and
demand.
 Illustration

• Hewlett-Packard (HP) also found that the fluctuation in orders increased

significantly as they moved from the resellers up the supply chain to the printer
division to the integrated circuit division (ibid.).
• Once again, although product demand showed some variability, orders placed
with the integrated circuit division were much more variable.
• This made it difficult for HP to fill orders on time and increased the cost of doing
so.
• Studies of the apparel and grocery industries have shown a similar phenomenon:
• The fluctuation in orders increases as one moves upstream in the supply chain
from retail to manufacturing.
 Illustration

• Barilla, an Italian manufacturer of pasta, observed that weekly orders placed by a

local distribution center fluctuated by up to a factor of 70 in the course of the
year, whereas weekly sales at the distribution center (representing orders placed
by supermarkets) fluctuated by a factor of less than three.
• Barilla was thus facing demand from the distribution center that was much more
variable than customer demand. This led to increased inventories, poorer product
availability, and a drop in profits.
 Causes

1. Demand forecast updating:

• Inaccurate forecast changing according to the demand
patterns.
• Any gap or mismatch between forecast situation & actual
situation being large, results into stock outs or excess
inventory.
• Consumer promotions, advertising in shortage situations &
batch ordering result into customer stockpiling & distorted
customer demand data.
• Future demand & safety stocks are forecasted on the basis of
purchase levels but effects of temporary sales promotions are
ignored, cause problems.
2. Order Batching:
• Companies place periodic orders of bigger sizes rather than
frequent ordering.
• Such order batching is done in order to reduce the ordering
cost, transportation cost is also economized by full truck load
and sales incentives are generated.
• Such order batching increases the pressure on suppliers
resulting in strong fluctuations in demand & highly erratic
orders.
• Fluctuations are very in the orders; sometimes no orders &
sometimes too much orders.
3. Price Fluctuations:
• Manufactures offer attractive pricing to the buyers
encouraging them for more buying.
• This results in big quantity orders placed by the buyers and
they stock pile the goods.
• This is done to take advantage of discounts.
• But when pries are normal than orders are reduced.
• Thus buying patterns do not indicate the consumption patterns
or immediate needs of the customers.
• This leads to inaccurate forecasts.
4. Rationalizing & Shortage gaming:
• When demand exceeds the supply then manufactures ration
out their products.
• This leads to inflated orders by customers hoping to gain more
& more.
• Thus accuracy in demand pattern is reduced.

All these reasons trigger the lack of supply chain coordination

resulting in Bullwhip effect.
 Remedies for Bull whip Effect

• Reducing order batching, working with vendors for creating

smaller orders. This reduces demand fluctuations.
• Ordering costs may be reduced by using Electronic Data
Interchange (EDI).
• Order frequency placed by customers should be increased by
encouraging the customers.
• Assorted products are delivered as truck load rather than a
truck full of same product.
• This will be helpful in increasing the frequency of customer
orders while frequency of deliveries will be unchanged &
transportation efficiency is maintained.
 Remedies for Bull whip Effect

• Batch replenishments are more economical by using 3rd party

logistics.
• Maintaining stable price for the products is essential so as to
reduce uneven buying patterns caused by price fluctuations.
• Uniform pricing policies should be formulated.
• In case of stock outs & shortages rationing of products to be
done on the basis of past orders
• Proper coordination is required in the supply chain so as to
reduce down the information distortions accordingly various
strategies are to formulated.
 Partnering in Supply Chain

• Partnering plays an important role in supply chain

coordination.
• Partnering can result in to strong competitive advantage to the
firms.
Improving Coordination Supply Chain
1. Get top management commitment for coordination
2. Devote resources to coordination
3. Focus on communication with other stages
 Improving Coordination Supply Chain

• Managers can improve coordination in the supply chain by aligning goals

and incentives across different functions and stages of the supply chain.
• Other actions that managers can take to improve coordination include
sharing of sales information and collaborative forecasting and planning,
implementation of single-point control of replenishment, improving
operations to reduce lead times and lot sizes, E D L P and other pricing
strategies that limit forward buying, and the building of trust and strategic
partnerships within the supply chain.
• Top management commitment, the devotion of resources to coordination,
and a focus on communication across the supply chain are important
requirements for coordination to improve in practice.
 Some Practical Approaches to Improve Supply
Chain Coordination

• Continuous replenishment and vendor-managed inventories

• A single point of replenishment
• CRP – wholesaler or manufacturer replenishes based on POS data
• VMI – manufacturer or supplier is responsible for all decisions regarding
inventory
• Substitutes
Some Practical Approaches to Improve Supply
Chain Coordination
• Collaborative planning, forecasting, and replenishment (CPFR)
• Sellers and buyers in a supply chain may collaborate along any
or all of the following

1. Strategy and planning

2. Demand and supply management
3. Execution
4. Analysis
CPFR
• “A business practice that combines the intelligence of multiple partners in the
planning and fulfillment of customer demand.”
• Strategy and planning. The partners determine the scope of the collaboration
and assign roles, responsibilities, and clear checkpoints.
• In a joint business plan, they then identify significant events such as promotions,
new product introductions, store openings/closings, and changes in inventory
policy that affect demand and supply.
• Demand and supply management. A collaborative sales forecast projects the
partners’ best estimate of consumer demand at the point of sale.
• This is then converted to a collaborative order plan that determines future orders
and delivery requirements based on sales forecasts, inventory positions, and
replenishment lead times.
CPFR
• Execution. As forecasts become firm, they are converted to actual orders.
• The fulfillment of these orders then involves production, shipping, receiving, and
stocking of products.
• Analysis. The key analysis tasks focus on identifying exceptions and evaluating
metrics that are used to assess performance or identify trends.
Common C P F R Scenarios
Four Common CPFR Scenarios

Where Applied in
CPFR Scenario Supply Chain Industries Where Applied
Retail event collaboration Highly promoted channels or All industries other than those
categories that practice EDLP

DC replenishment Retail DC or distributor DC Drugstores, hardware, grocery

collaboration

Store replenishment Direct store delivery or retail D Mass merchants, club stores
collaboration C-to-store delivery

Collaborative assortment Apparel and seasonal goods Department stores, specialty

planning retail
Common C P F R Scenarios

• Retail event collaboration :In many retail environments, such as

supermarkets, promotions and other retail events have a significant
impact on demand.
• Stockouts, excess inventory, and unplanned logistics costs during
these events affect financial performance for both the retailer and the
manufacturer.
• In such a setting, collaboration between retailers and suppliers to
plan, forecast, and replenish promotions is effective.
Common C P F R Scenarios
• Retail event collaboration requires the two parties to identify brands and specific
SKUs that are included in the collaboration.
• Details of the event—such as timing, duration, price point, advertising, and
display tactics—are shared. It is important for the retailer to update this
information as changes occur.
• Event-specific forecasts are then created and shared.
• These forecasts are then converted to planned orders and deliveries.
• As the event unfolds, sales are monitored to identify any changes or exceptions,
which are resolved through an iterative process between the two parties.

• P&G has implemented some form of retail event collaboration with a variety of
partners, including Walmart.
Common C P F R Scenarios
• Dc replenishment collaboration
• DC replenishment collaboration is perhaps the most common form of
collaboration observed in practice and also the simplest to implement.
• In this scenario, the two trading partners collaborate on forecasting DC
withdrawals or anticipated demand from the DC to the manufacturer.
• These forecasts are converted to a stream of orders from the DC to the
manufacturer that are committed or locked over a specified time horizon.
• This information allows the manufacturer to include anticipated orders in future
production plans and build the committed orders on demand.
• The result is a reduction in production cost at the manufacturer and a reduction
of inventory and stockouts at the retailer.
Common C P F R Scenarios
• DC replenishment collaboration is relatively easy to implement because it
requires collaboration on aggregate data and does not require sharing of detailed
POS data.
• Barilla implemented this form of collaboration with its distributors.

• Store replenishment collaboration

• In store replenishment collaboration, trading partners collaborate on store-level
POS forecasts.
• These forecasts are then converted to a series of store-level orders, with orders
committed over a specified time horizon.
• This form of collaboration is much harder to implement than a DC-level
collaboration, especially if stores are small; it is easier for large stores .
Common C P F R Scenarios
• The benefits of store-level collaboration include greater visibility of sales for the
manufacturer, improved replenishment accuracy, improved product availability,
and reduced inventories.

• Collaborative assortment planning

• Fashion apparel and other seasonal goods follow a seasonal pattern of demand.
• Thus, collaborative planning in these categories has a horizon of a single season
and is performed at seasonal intervals.
• Given the seasonal nature, forecasts rely less on historical data and more on
collaborative interpretation of industry trends, macroeconomic factors, and
customer tastes. In this form of collaboration, the trading partners develop an
assortment plan jointly.
• The output is a planned purchase order at the style/color/size level.
Common C P F R Scenarios
• The planned order is shared electronically in advance of a show, at which sample
products are viewed and final merchandising decisions are made.
• The planned orders help the manufacturer purchase long-lead-time raw
materials and plan capacity.
• This form of collaboration is most useful if capacity is flexible enough to
accommodate a variety of product mix and raw materials have some
commonality across end products.
Collaborative Planning, Forecasting, and
Replenishment (C P F R)

Collaborative Organizational Structure

 Vendor Manage Inventory(VMI)
• VMI is an integration process whereby vendors of a material manage as many
factors of the supply chain as possible.
• The essential difference between VMI and traditional inventory management is
that rather than the buyer making independent decisions about order size, with
VMI the buyer shares their inventory and demand data and their delivery
parameters with the supplier (vendor).
• By sharing this information, the buyer enables the supplier to determine the
order size.
• Consequently, the supplier is responsible for managing the supply chain from
end-to-end and the buyer is responsible for the provision of accurate and timely
information necessary for forecasting.
 How Does VMI Work?

• Vendor Managed Inventory works by creating a symbiotic relationship between

both sides of a transaction that allows the parties to share risk and work together
for shared benefits.
• By taking care of a buyer’s inventory and supply chain management, the vendor
can oversee and manage the entire supply chain.
• VMI will generally involve management of all aspects of the supply chain
including sourcing of the materials, overseeing trends in the market, managing
the shipping process and delivering the required destination and warehouse.
• For the buyer, VMI will ensure the only factor they are concerned with is the
delivery date of the raw material or product to its final destination.
 How Does VMI Work?
• Better communication, inventory accuracy, forecasting and overall service is
possible through VMI as intermediaries are removed to create a service that has
considered all aspects of the supply chain and any areas for concern.
• This allows VMI to decrease the impact of the bullwhip effect, a phenomenon
that sees accuracy of information on customer consumption decreasing in
accuracy as you move further up the supply chain (further from the consumer).
• By keeping analysis of consumer behaviour and appropriate stock size in the
hands of the supplier, VMI prevents excessive stock and inefficiency in the supply
chain.
 To Sum Up
•V M I and C P F R are two practical approaches to improve coordination in the
supply chain. Under V M I, the supplier is responsible for managing product
inventories at the retailer while ensuring an agreed upon level of service.
•Under C P F R, supply chain members manage forecasting, planning, and
replenishment in a collaborative manner.
•Partners may set C P F R relationships to collaborate on store events, D C
replenishment, store replenishment, or assortment planning.
•D C replenishment collaboration is often the easiest to implement because it
requires aggregate-level data.
•Store replenishment collaboration requires a higher level of investment in
technology and data sharing to be successful.