Bullwhip Effect

Supply Chain Management

Fluctuation in orders increase as they move up the supply chain

Demand information is distorted as it travels within the supply chain, so that different stages have different perspectives and estimates of the chain demand

The Bull Whip Effect is the uncertainty caused from distorted information flowing up and down the supply chain.

Supply Chain Management

Who is Affected ?

Nearly at all industries are affected.

Firms that experience large variation is demand are at risk.

Firms that depend on supplier upstream or distributor or retailer down stream may be at risk.

Supply Chain Management

Example• Company sales a FMCG item on open market, Retailer offer a

sales promotion to boost sales of that item.

• Retailer fail to notify of this sales to Manufacture. Company recognize that sales has increased.

• Company increases inventory to allow for increased manufacturing of particular item.

• Company notice to supplier for increase demand.

• Supplier increase inventory to meet demand.

Supply Chain Management

Bullwhip Effect

Supply Chain Management

Result of Bullwhip Effect Excess Inventory. Problem with quality. Increased raw material cost. Over time expenses. Increased shipping cost. Lost customer service excellence. Lost sales. Un necessary adjust capacity.

Supply Chain Management

Barrier to Coordination in a Supply Chain

Information Processing Barriers Operational Barriers Pricing Barriers Incentive Barriers

Supply Chain Management

Supply Chain Management

Information Processing Barriers

Independent forecasting at each stage based on received orders

Lack of information sharing among the various stages of the chain

Supply Chain Management

Potential Solutions

Sharing point of sale data

Collaborative forecasting and planning

Single stage control of replenishment◦Continuous replenishment programs (CRP)◦Vendor managed inventory (VMI)

Supply Chain Management

Operational Barriers

Ordering in large lots in order to reduce the fixed costs associated with order placement and transportation.

Rationing and shortage gaming: Ordering larger quantities than necessary, in order to eventually get what you need.

Potential Solutions

Reduce replenishment lead times, by taking advantage of modern IT capabilities◦Computer-assisted ordering◦EDI

Reduce lot sizes◦Computer-assisted ordering◦Shipping in LTL sizes by combining shipments

Ration based on past sales and information sharing to limit gaming

Supply Chain Management

Pricing Barriers

Lot size-based discounts

Price fluctuations (e.g., due to promotions) resulting in “forward buying”

Supply Chain Management

Potential Solutions

Move from lot size-based to volume-based quantity discounts (consider total purchases over a specified period)

Stabilize pricing◦ Limit quantity purchased during a promotion

Supply Chain Management

Best way for tackling Bullwhip effect is

Supply ChainVisibility

Supply Chain Management

End of Topic

Supply Chain Management