BULLWHIP EFFECT( WHIP

LASH EFFECT)

“LEAD T I M E O F I N F O R M AT I O N & M AT E R I A L
I S T H E P R I M A RY C A U S E O F B U L LW H I P
EFFECT”
 OVERVIEW

 Coined by Procter & Gamble management- Noticed an amplification of

information distortion as order information travelled up the supply chain

 Also referred as the Whiplash Effect

 The effect indicates a lack of synchronization among supply chain members

 Is a phenomenon noticed in the forecast driven distribution channel

 Amplification of order size variation as one moves up the supply chain

 Retailer>>> wholesaler>>> manufacturer>>> supplier

 Leads to inefficiencies in supply chains- increases the cost for logistics and
lowers its competitive ability
 WHAT IS BULLWHIP EFFECT?

 Fluctuations in orders increase as they move up the supply

chain from retailers to wholesalers to manufacturers to
suppliers.
 It distorts demand information within the supply chain,
with each stage having a different estimate of what
demands looks like.
 E.g. Apparel & Grocery industry.
 The Bullwhip Effect
4

The BullWhip Effect

Distortions at various levels!!
 Consequences of the Bullwhip Effect
6
 Higher
Lower revenues.
costs.
 High carrying
Stockouts and cost
backlogs mean lost sales, as customers take their business
 elsewhere.
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.

The BullWhip Effect

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Poorer
Worse quality.
service.
 Irregular,
Quirky, unplanned
unpredictable
changes
production
in production
and delivery
and delivery
schedules
schedules
also
disrupt and
lengthen lead
subvert
time, causing
control processes,
delay and customer
begettingdissatisfaction.
diverse quality
problems that prove costly to rectify.

The BullWhip Effect

Causes of Bullwhip Effect
 9

Demand variability, quality problems, strikes, plant

fires, etc.
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.

The BullWhip Effect

 10

1. Overreaction to backlogs
2. Neglecting to order in an attempt to reduce
inventory
3. No communication up and down the supply chain
4. No coordination up and down the supply chain
5. Delay times for information and material flow

The BullWhip Effect

 11

6. Order batching - larger orders result in more variance.

Order batching occurs in an effort to reduce ordering
costs, to take advantage of transportation economics
such as full truck load economies, and to benefit from
sales incentives. Promotions often result in forward
buying to benefit more from the lower prices.
7. Shortage gaming: customers order more than they need
during a period of short supply, hoping that the partial
shipments they receive will be sufficient.

The BullWhip Effect

 12

8. Demand forecast inaccuracies: everybody in the

chain adds a certain percentage to the demand
estimates. The result is no visibility of true
customer demand.
9. Free return policies

The BullWhip Effect

Countermeasures to the
Bullwhip Effect
 14

1. Countermeasures to order batching

2. Countermeasures to shortage gaming
3. Countermeasures to fluctuating prices
4. Countermeasures to demand forecast inaccuracies
5. Free return policies

The BullWhip Effect

 Order Batching
15

High order cost is countered with Electronic Data

Interchange (EDI) and computer aided ordering (CAO).
 Full truck load economics are countered with third-party logistics
and assorted truckloads. Random or correlated ordering is
countered with regular delivery appointments.
 More frequent ordering results in smaller orders and smaller
variance.
 However, when an entity orders more often, it will not see a
reduction in its own demand variance - the reduction is seen by the
upstream entities.
 Also, when an entity orders more frequently, its required safety
stock may increase or decrease; see the standard loss function in
the Inventory Management section.

The BullWhip Effect

 Shortage Gaming
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Proportional rationing schemes are countered by

allocating units based on past sales.
 Ignorance of supply chain conditions can be addressed by sharing
capacity and supply information.
 Unrestricted ordering capability can be addressed by reducing the
order size flexibility and implementing capacity reservations.
 For example, one can reserve a fixed quantity for a given year and
specify the quantity of each order shortly before it is needed, as
long as the sum of the order quantities equals to the reserved
quantity.

The BullWhip Effect

 Fluctuating Prices
17

High-low pricing can be replaced with every day low

prices (EDLP). Special purchase contracts can be
implemented in order to specify ordering at regular
intervals to better synchronize delivery and
purchase.

The BullWhip Effect

 Demand Forecast Inaccuracies
18

Lack of demand visibility can be addressed by

providing access to point of sale (POS) data.
Changes in pricing and trade promotions and
channel initiatives, such as vendor managed
inventory (VMI), coordinated forecasting and
replenishment (CFAR), and continuous
replenishment can significantly reduce demand
variance.

The BullWhip Effect

 Free Return Policies
19

Free return policies are not addressed easily.

Often, such policies simply must be prohibited or
limited.

The BullWhip Effect

Vendor Managed Inventory
 21

Popularized in the late 1980s by Wal-Mart and

Procter & Gamble, VMI became one of the key
programs in the grocery industry’s pursuit of
“efficient consumer response” and the garment
industry’s “quick response.”
Successful VMI initiatives have been trumpeted by
other companies in the United States, including
Campbell Soup and Johnson & Johnson, and by
European firms like Barilla (the pasta manufacturer).

The BullWhip Effect

 The VMI Partnership
22

The supplier—usually the manufacturer but sometimes a

reseller or distributor—makes the main inventory
replenishment decisions for the consuming organization.
 The supplier monitors the buyer’s 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.

The BullWhip Effect

 23

The manufacturer
is responsible for
both its own
inventory and the
inventory stored at
is customers’
distribution
centers.

The BullWhip Effect

A Game Involving…
The Beer Distribution Game
 The Beer Distribution Game

Goal
Idea ●
● To minimise cost of capital
●
● Simulation of a Make to Stock
employed in stock while
Supply Chain
avoiding stock out situations
 Rules of the Game

Give your brewery a NAME

No communication is allowed between two nodes
other than passing on the orders and beer
Real customer demand is only known by the
retailer
Each node is directly linked –
 Material and information passes through the nodes without
skipping any node in between
The Game will last for 26 weeks
 Rules of the Game

Cost of holding inventory per week = Re.

0.50/bottle/week
Cost of stock out/back-orders/backlogs = Re.
1.0/bottle/week
Orders to fill = New orders + Backlogs
Lead Time between any two nodes is 3 weeks
Every node will start with an inventory of 15
bottles
In-transit stock to each node per week is 4
bottles
 FACTORS CONTRIBUTING TO
BULLWHIP EFFECT
Information processing errors

Forecast errors

Lead Time Variability

Batch Ordering

Price fluctuations

Rationing and shortage gaming

Free return policies

 Results of the bullwhip effect..

Excess inventories
Problems with quality
Increased raw material costs
Overtime expenses
Increased shipping costs
Lost customer service
Lengthened lead time
Lost sales
Unnecessary adjusted capacity
 Impact of Bullwhip On Supply Chain

 Dimensioning of capacities
 Variation in demand causes varying capacities
 Capacities based on average demand  Non

serviceability during peak loads

 Capacities based on peak demand  poorly used

resources
 Variation in Inventory Levels
 High levels of inventory  poor liquidity and high
carrying costs
 Lower levels of inventory  reliability at risk

 Safety Stock
 Stronger the bullwhip effect  higher is the safety stock
needed
 Solutions to Bullwhip Effect

Sharing accurate Demand Information across

supply chain partners
Reduce ordering cost, transportation costs to bring
down EOQ
3PL providers are efficient way to bring down
logistics costs.
Sharing marketing plans, demand information
helps reduce short-gaming & rationing
To eliminate the problem of price fluctuations, the
concept of “everyday low prices” and “everyday low
costs” to smooth of buying spikes
Solving The Bullwhip Effect
THANK YOU