Logistics and Supply Chain Management

BULLWHIP EFFECT

Name: Pooja Patil Class : TYBMS A Roll No. : 37

Introduction • An Unmanaged Supply Chain is not inherently stable. resulting in increased costs and poorer service. and small changes in consumer demand can result in large variations in orders placed upstream. • This phenomenon is known as the bullwhip effect and has been observed across most industries. Demand variability increases as one moves up the supply chain away from the retail customer. • Eventually the network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. .

rather than actual consumer demand. it occurs because the demand for goods is based on demand forecasts from companies. wholesaler. . starting with the retailer. This effect can be observed through most supply chains across several industries. The bullwhip effect usually flows up the supply chain.What is the Bullwhip Effect? The bullwhip effect on the supply chain occurs when changes in consumer demand causes the companies in a supply chain to order more goods to meet the new demand. distributor. manufacturer and then the raw materials supplier.

• Firms that experience large variation in demand are at risk. . • Firms that depend on suppliers upstream or distributors and retailers downstream may be at risk.Who is affected? • Nearly all industries are affected.

variability coupled with time delays in the transmission of information up the supply chain and time delays in manufacturing and shipping goods down the supply chain create the bullwhip effect. •No coordination up and down the supply chain. •No communication up and down the supply chain. .strikes.quality problems. The following can contribute to the bullwhip effect : •Overreaction to backlogs •Neglecting to order in an attempt to reduce inventory.Causes of the Bullwhip Effect Sources of variability can be demand variability. •Delay times for information and material flow. plant fires etc.

Causes of the Bullwhip Effect • Order Batching: Larger orders result in more variance. • Free return policies. • Shortage Gaming :Customers order more than they need during a period of short supply. and to benefit from sales incentives. Over Batching occurs in an effort to reduce ordering costs. to take advantage of transportation economics such as full truck load economics . • Demand Forecast Inaccuracies: Everybody in the chain adds a certain percentage to the demand estimates. hoping that the partial shipments they receive will be sufficient. . The result is no visibility of true customer demand. Promotions often result in forward buying to benefit more from the lower prices.

Behavioral Causes • • • • misuse of base-stock policies misperceptions of feedback and time delays panic ordering reactions after unmet demand perceived risk of other players' bounded rationality .

meaning the retailer will have to increase demand by dropping prices or finding more customers by marketing and advertising. the retailer may then order 10 units from the distributor. Let’s say that an actual demand from a customer is 8 units. • Now 40 units have been produced for a demand of only 8 units. allowing them to buy in bulk so they have enough stock to guarantee timely shipment of goods to the retailer. an extra 2 units are to ensure they don’t run out of floor stock. however often the actual demand for a product gets distorted going down the supply chain. .Example The actual demand for a product and its materials start at the customer. • The supplier then orders 20 units from the manufacturer. • The manufacturer then receives the order and then orders from their supplier in bulk. ordering 40 units to ensure economy of scale in production to meet demand.

and retail sales resemble this fact. Even so P&G observed that this product with uniform demand created a wave of changes up the supply chain due to very minor changes in demand. . Babies use diapers at a very predictable rate.Proctor & Gamble coined the term “bullwhip effect” by studying the demand fluctuations for Pampers (disposable diapers). P & G orders to their material suppliers fluctuated even more. This is a classic example of a product with very little consumer demand fluctuation. P&G observed that distributor orders to the factory varied far more than the preceding retail demand. Information is readily available concerning the number of babies in all stages of diaper wearing.

Consequences of the Bullwhip effect The cascading effect of bullwhip causes many difficulties. Among them: • excess inventories • quality problems • higher raw material costs • overtime expenses • additional shipping costs • customer service goes down • lead times lengthen • sales are lost .

Managing the Bullwhip Effect Reduce Uncertainty • Point of Sales (POS) • Sharing Information • Centralizing Demand information Reduce Variability • Reduce order batches • Year around or Everyday Low Pricing Reduce Lead Time • Information around Lead times (use EDI) • Order Lead times (Cross Docking) Forming Alliance • Vendor Managed Inventory • Eliminate Gaming in Shortage Situation .

Countermeasures to the Bullwhip Effect While the bullwhip effect is a common problem. Here are some of these solutions: • • • • • Vendor Managed Inventory (VMI) Just In Time replenishment (JIT) Strategic Partnership Information sharing smooth the flow of products  coordinate with retailers to spread deliveries evenly  reduce minimum batch sizes  smaller and more frequent replenishments • eliminate pathological incentives  every day low price policy . many leading companies have been able to apply countermeasures to overcome it.

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