Tuesday, April 6, 2010

The bullwhip effect

1. Definition:

"It is a phenomenon observed in forecast driven supply chain and describes that the variation in demand increases up the supply chain from consumer to supplier." [http://www.scribd.com/doc/17392509/Bullwhip-Effect]

-> the more steps that are in between of the consumer and the supplier, the bigger the variation gets

Therefore it can be said that the bullwhip effect is an inefficiency of the supply chain and small changes in customer demand can result in large swings in orders placed upstream.

2. Causes of the Bullwhip effect:

Primary cause:
  • lead time of information and material

Secundary causes:

demand forecast updating
  • Forecasting is based on order history from company’s immediate customer
  • Often, forecasts are made at whims & fancies of managers
  • Upstream manager updates his/her demand forecasts based on customer demand variations, longer lead times, price fluctuations etc.
  • Techniques like exponential smoothing creates bigger swings at the supplier’s end

order batching
  • Periodic Ordering:
  • weekly, Fortnightly, Monthly etc.
  • Creates spikes in order sizes, disrupting supplier’s demand forecasts
  • Benefits from transportation & distribution side
  • Push Ordering:
  • Orders are pushed by sales personnel
  • Done usually at monthly/quarterly sales review and demand estimates from sales team
  • This results in uneven spread of customer orders resulting in the bullwhip effect

price fluctuation

  • Forward buys; discount sales; offer merchandise; coupons; rebates; end of season sales
  • Customers buy in bulk
  • But the buying pattern never matches the consumption pattern
  • This results in overstocking at the far ends of the supply chain and also results in idle capacity

rationing and shorage gaming

  • When demand exceeds supply, manufacture ration supplies to distributors
  • This results in distributors ordering more than they need, to fulfill the demand
  • When the market cools down, orders start getting cancelled, excess inventory piles up, leading to the bullwhip effect
  • Real demand is never known in such market conditions.
  • Most commonly effected is the IT hardware & telecom industry

3. Countermeasures against the bullwhip effect

First of all long lead times should be reduced if possible.

demand forecast updating
One way to avoid inaccuracies is by reducing the lack of demand visibility by providing access to point of sale (POS) data. Also it is possible to overcome exaggerated demand forecasts by single control of replenishment or vendor Management Inventory (VMI).

order batching
  • One countermeasure would be Electronic Data Interchange (EDI) and computer aided ordering (CAO).
  • Random or correlated ordering is countered with regular delivery appointments
  • More frequent ordering results in smaller orders and smaller variance

price fluctuation
High-low pricing can be replaced with everyday low prices. This way, special purchase contracts can be implemented in order to specify ordering at regular intervals to better synchronize delivery and purchase.

rationing and shorage gaming
One solution is to allocate units based on past sales. 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.


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