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Bullwhip

Dr. Poonam Madan

Bullwhip Effect
Increasing propagation of
variability upstream through the
supply chain

The Bullwhip Effect


Stakeholders along the supply chain have
different and frequently conflicting
objectives.
Accordingly, they often operated
independently, resulting in a phenomenon
called the bullwhip effect on demand and
supply.
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Inventory: Bullwhip Effect


The magnification of variability in orders in the supply-chain.

Time

A lot of retailers
each with little
variability in their
orders.

Manufacturers Orders

Order
Quantity

Order
Quantity

Wholesalers Orders

Order
Quantity

Retailers Orders

Time

can lead to
greater variability for
a fewer number of
wholesalers, and

Time

can lead to even


greater variability
for a single
manufacturer.

An Illustration of the Bullwhip


Effect

Source: Johnson & Pike, 1999

The bullwhip effect


Slight changes in actual demand create
problems
Partners build just in case inventories
Lack of trust among partners
Stockpilling result in huge cost
The manufacturers can not plan
production
Cannot order material from suppliers

Bullwhip Effect
Distortion of demand information of a product while it passes from
one firm to the next across SC
The information transferred in the form of orders tend to be
distorted and can misguide upstream members in their inventory
and production decisions.
In particular, variance of orders > variance of sales
Information sharing in SCs is important
Sales Information available in the form of orders received from the
downstream member should be used with great caution.

The Bullwhip Effect


Exists, in part, due to the retailers need to estimate the
mean and variance of demand.
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.

Bullwhip Effect (Contd..)


Who is affected?
Nearly all industries are affected !
Firms that experience large variations in demand are at risk
Firms that depend on suppliers upstream or distributors and retailers
downstream may be at risk
Causes of Bullwhip Effect
Finite supply shared by many retailers
Rationing game: retailer orders more than demand
Fixed order cost
Wholesale price varies over time
Inflationary / deflationary environment
Prices with no trend but variability

Slide 9

Bullwhip Effect (Contd)

Bullwhip Effect (Contd)


Retaile
r

Distribut
or

Manufactur
er

Order

Order

Order

Stock

Stock

Stock

Increased Variability

Suppli
er
Order

Stock

Increasing Variability Upstream the


Supply Chain Bullwhip Effect

Bullwhip Effect - Disrupted


Supply
Chain
Customer Demand forecast = 20 units
Information Flow
Suppliers
Products &
Services

Producers

80 Units
160 Units

Products & Distributors Products &


Services
Services
40 Units

80 Units

Retailers

20 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

Impact of the Bullwhip Effect


Performance Measure
Impact on Performance
Manufacturing Cost
Inventories
Lead Time
Transport Cost
Shipping & Receiving Cost
Customer Service Level
Profitability

Bullwhip Effect (Contd..)


Results of Bullwhip effect
Excess inventories
Problems with quality
Increased raw material costs
Overtime expenses
Increased shipping costs
Lost customer service
Lengthened lead time
Solutions
Improve communication along the supply chain
Improve sources of forecast data
Work with firms upstream and downstream in the supply chain

Slide 15

What are the Causes.


Demand forecasting
Min-max inventory level
Order-up-to level
orders increase more than forecasts

Long cycle times


Long lead times magnify this effect
Impact on safety stock
Product life cycle

Batch ordering
Volume & transportation discount

What are the Causes.


Price fluctuation
Promotional sales
Forward buying

Inflated orders
Orders placed increase during shortage
periods
IBM Aptiva orders increased by 2-3 times
when retailers thought that IBM would be out
of stock over Christmas

Ways to Cope with the Bullwhip Effect


Reducing uncertainty
Centralizing demand information
Bullwhip inherent in use of various forecasting
techniques

Reducing variability
Use of EDLP strategy (Payless)

Coping with the Bullwhip Effect


in Leading Companies
Reduce Variability and Uncertainty
- POS
- Sharing Information
- Year-round low pricing
Reduce Lead Times
- EDI
- Cross Docking
Alliance Arrangements
Vendor managed inventory
On-site vendor representatives

Ways to Cope with the Bullwhip


Effect (contd)
Lead time reduction
Order lead time (time to produce and ship)
Information lead time (time to process order)
Efficient network distribution design

Strategic partnership
Vendor managed inventory (VMI)
Sharing of customer information
Collaborative forecasting

Avoiding the sting of the


bullwhip

Information sharing is a must


Trust and agreements
How to do it?
$30 billion/year just in the grocery industry

Push-Based Supply Chains


Production and distribution decisions based on
long-term forecasts.
Manufacturer demand forecasts based on orders
received from the retailers warehouses.
Longer reaction time to changing marketplace:
Inability to meet changing demand patterns.
Obsolescence of supply chain inventory as demand
for certain products disappears.
Variability of orders received much larger than the
variability in customer demand due to the bullwhip
effect.
Excessive inventories due to the need for large safety
stocks
Larger and more variable production batches
Unacceptable service levels
Product obsolescence

Bullwhip Effect in Push-Based


Supply Chains
Leads to inefficient resource utilization
Planning and managing are much more difficult.
Not clear how a manufacturer should determine
production capacity? Transportation capacity?
Peak demand?
Average demand?

Results:
Higher transportation costs
Higher inventory levels and/or higher manufacturing
costs
more emergency production changeovers

Mitigating the Bullwhip Effect

EDI and the Internet

The information available to supply chain partners, and the


speed with which it is available, has the potential to radically
reduce inventories and increase customer service.

Everyday low pricing eliminate forward buying of bulk


orders
Changes in pricing and trade promotions and channel
initiatives, such as VMI, CPFR, continuous
replenishment can significantly reduce demand
variance.
Postponement
Etc.
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Vendor Managed Inventory


Wal-Mart and Procter & Gamble, Late 1980s
Other companies in the United States, including
Campbell Soup and Johnson & Johnson, and by
European firms like Barilla (the pasta manufacturer).
VMI became one of the key programs in the grocery
industrys pursuit of efficient consumer response and
the garment industrys quick response.

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The VMI Partnership

The supplierusually the manufacturer but sometimes a reseller or


distributormakes the main inventory replenishment decisions for
the consuming organization.
The supplier monitors the buyers inventory levels (physically or
via electronic messaging) and makes periodic resupply
decisions regarding order quantities, shipping, and timing.
Transactions customarily initiated by the buyer (like purchase
orders) are initiated by the supplier instead.
The purchase order acknowledgment from the supplier may be
the first indication that a transaction is taking place; an advance
shipping notice informs the buyer of materials in transit.

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