Bullwhip Effect in supply chain

By
S P Sarmah
Discussion Points
• What is the bullwhip effect ?
• Consequences of the bullwhip effect over the supply chain
performance
• Causes of the bullwhip effect
• Counter measure of bullwhip effect by implementation of
policy based replenishment program
• An Example
• Summary
What is Bullwhip effect?

The bullwhip effect refers to the phenomena that the variability of orders
in supply chain increases as one moves closer to the source of
production.
It causes costly effect to the supply chain
As an example :
• Excessive inventories,
• Unsatisfactory customer service,
• Uncertain production planning. etc.
 Example: Supply Chain in Equilibrium
Customer demand forecast = 10 units

Information

Products & Products & Products &

Suppliers Services Producers Services Distributors Services Retailers
10 Units 10 Units 10 Units

10 Units 10 Units 10 Units

Cash Flow

Retailers are selling product at a constant rate and price. Firms along the
supply chain are able to set their inventory to meet demand.

Key: = Inventory Levels

-4-
 Example: Supply Chain Disrupted
Customer demand forecast = 20 units

Information

Suppliers
Producers
Products & Products & Distributors Products &
Services Services Services Retailers
80 Units 40 Units 20 Units

160 Units 80 Units 40 Units

Cash Flow
As demand increases, the distributor decides to accommodate the
forecasted demand and increase inventory to buffer against unforeseen
problems in demand.
Each step along the supply chain increases their inventory (double in this
example) to accommodate demand fluctuations. The top of the supply
chain receives the harshest impact of the whip effect.
Key: = Inventory Levels
-5-
Variability in order size increases as one moves up the supply chain

Source: Johnson & Pike, 1999

Mathematical realization of bullwhip effect

What is the relation between variance of orders and variance of demand

If variance (order) > variance (demand) {bullwhip effect}
If variance (order) = variance (demand) {no bullwhip effect}
Demand Order

Retailer

Bullwhip effect = variance (order) > variance (Demand)

Example1: Procter & Gamble (P&G): Supply Chain Flows

Information Capacity, promotion plans, delivery schedules

Material Raw materials, in-process products, finished goods
Finance Credits, payment terms, invoices

Suppliers manufacturer Distributors Retailers Customers

Sales, orders, inventory, quality, promotion plans Information

Returns, repairs, servicing, recycling, disposal Material
Payments, Finance
 Example: P&G Dynamics of the SC

Order Size

Customer
Demand

Retailer Orders
Distributor Orders

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
 Example: P &G What Management gets
Order Variability is amplified up the supply chain;
upstream echelons face higher variability

Order Size

Customer
Demand

Production Plan

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
Example: P &G: What Management wants ?
Volumes

Production Plan
Customer
Demand

Time
Source: Tom Mc Guffry, Electronic Commerce and Value Chain Management, 1998
We Conclude ….

• Order Variability is amplified up the supply chain;

• upstream echelons face higher variability.
Causes of Bullwhip Effect

• Demand Variability
• Rationing and shortage gaming
• Order batching:
• Price fluctuations
• Long lead times or Delay between information and
material flow
 Demand Variability

Demand variability coupled with time delays in the transmission of information to

upstream member of the supply chain and time delays in manufacturing and
shipping goods down the supply chain create the bullwhip effect.

• Contributing factors
• No visibility of end demand
• Multiple forecasts
• Long lead-time
• Demand forecast inaccuracy

• Counter Measures
• Access POS (Point of sales ) data
• Direct sales (natural on web)
• Single control of replenishment
• Lead time reduction
 Rationing or shortage gaming

Shortage gaming: Customers order more than they need during a period of short
supply, hoping that the partial shipments they receive will be sufficient.

• Contributing factors
• Proportional rationing scheme
• Ignorance of supply conditions
• Unrestricted orders

• Counter Measures
• Allocation based on past sales.
• Shared Capacity and Supply Information
• Flexibility Limited over time, capacity reservation
 Order Batching
Order batching - Order batching occurs in an effort to reduce ordering costs, to take
advantage of transportation economics and benefits from sales incentives. Larger orders
result in more variance.
• Contributing factors
• High Order Cost
• Full Truck load economies
• Counter Measures
• Electronic Data interchange (EDI) & Computer Assisted Ordering (CAO)
• Discounted on Assorted Truckload, consolidated by 3rd party logistics
• Regular delivery appointment
• Volume and not lot size discounts
 Price fluctuation
When, product’s price is low (through the direct discount or any promotional scheme),
customer buys in bigger amount than the needed. When product’s price returns to
normal the customer stops buying until it has exhausted its inventory. Thus, High-low
pricing produces the difficulty to access the actual demand of product.
• Contributing factors
• High-Low Pricing leading to forward buy
• Delivery and Purchase not synchronized
• Counter Measures
• Every day low prices (EDLP)
• Limited purchase quantities
 Consequences of the Bullwhip Effect
• Lower revenues
• Stockouts and backlogs mean lost sales, as customers take their business elsewhere.
• Higher costs
• High carrying cost

• Stockout cost

• Distributors need to expedite orders (at higher shipping expenses)

• Manufactures need to adjust jobs (at higher setups and changeover expenses, higher labor
expenses for overtime, perhaps even higher materials expenses for scarce components.)

• All entities in the supply chain must also invest heavily in outsized facilities (plants,
warehouses) to handle peaks in demand, resulting in alternating under or over-utilization.
 Continue..

• Increased safety stock

• Reduction in product quality.
• Unplanned changes in production and delivery schedules disrupt and subvert
control processes, getting diverse quality problems that prove costly to rectify.
• Poor customer service.
• Irregular, unpredictable production and delivery schedules also lengthen lead
time, causing delay and customer dissatisfaction.
Managerial Insights:

• The increase in variability is an increasing function of the lead time

• The more complicated the demand models and the forecasting techniques, the
greater the increase.

• Centralized demand information can reduce the bullwhip effect, but will not
eliminate it.
Summary: Causes of Bullwhip Effect and Remedial measure
Causes of Information Sharing Channel Alignment Operational Efficiency
the Bullwhip
Effect
Demand Vendor Managed Lead-time reduction
Forecasting Using point of sale (POS) Inventory (VMI) Echelon-based
Update data Information sharing inventory control
EDI, XML (internet) Consumer direct
Computer Assisted
Ordering

Order EDI Discounts for assortment Reducing order costs

Batching Internet ordering planning Computer Assisted
Delivery appointments Ordering
Consolidation
Logistics outsourcing

Price Continuous Every Day Low Pricing

Fluctuations Replenishment Programs (EDLP)
(CRP) Activity Based Costing
Every Day Low Pricing (ABC)
(EDLP)
Shortage Sharing sales, capacity, Allocation based on past
Gaming and inventory data sales
Source: Lee et al. (1997)
 Example: Quick Response at Benetton

• Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975

Benetton had 200 stores across Italy.

• Ten years later, the company expanded to the U.S., Japan and Eastern Europe.
Sales in 1991 reached 2 trillion.

• Many attribute Benetton’s success to successful use of communication and

information technologies.
 Example: Quick Response at Benetton (Contd.)

• Benetton uses an effective strategy, referred to as Quick Response, in

which manufacturing, warehousing, sales and retailers are linked together.
In this strategy, a Benetton retailer reorders a product through a direct
link with Benetton’s mainframe computer in Italy.

• Using this strategy, Benetton is capable of shipping a new order in only

four weeks, several week earlier than most of its competitors.
How Does Benetton Cope up with the Bullwhip Effect? (Contd)

1. Integrated Information Systems

• Global EDI network that links agents with production and inventory information
• EDI order transmission to HQ
• EDI linkage with air carriers
• Data linked to manufacturing
2. Coordinated Planning
• Frequent review allows fast reaction
• Integrated distribution strategy
THANKS