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Speculation, Postponement and Bullwhip Effect
Outbound Logistics Flows The lead times are shorter in outbound than inbound logistics Companies having short lead times in outbound logistics tend to have short lead times in inbound logistics and vice-versa Companies that have a high level of outbound inventory turnover tend to have a high level of inbound inventory turnover and vice-versa There is a higher inventory turnover in outbound logistics than in inbound logistics There is thus an association between the inventory trends in outbound and outbound logistics flows overall inventories are higher in inbound logistics than in outbound logistics
Implications There is a potential Bull Whip Effect between inbound and outbound logistics flows. This has a managerial implication that managers have to consider upstream activities in the supply chain when they are striving to improve their performance in the interface towards their present and potential customers and vice-versa. It is also reasoned that the Bullwhip Effect between inbound and outbound logistics is because principle of postponement in outbound and principle speculation in inbound.
Principles of Postponement Postponement of companies business operations reduces the risk by moving the differentiation nearer to the time of exchange. It provides a point of departure for a critical examination to enhance the performance of companies business operations.
Postponement and Value Chain Porters concept of value chain indicates that there is an adding of value in a companys successive business activities. Therefore, the finished goods have generated costs that represent a higher value. The financial costs of inventories is higher in outbound logistics. It forces companies to be more restricted in maintaining these inventories.
Principles of Speculation The principle of speculation facilitates a counter view in relation to the principle of postponement. The Bullwhip effect therefore, exists because of the gap between speculation and postponement of business activities. In a managerial context, Bullwhip effect is eliminated if there is no gap between the degree of speculation and postponement of business activities.
The See-Saw Model of Bullwhip Effect In this model, the gap between the degree of speculation and postponement of business activities is assumed to influence the Bullwhip Effect. If there is a high degree of speculation (i.e. a low degree of postponement) in inbound logistics and a high degree of postponement (i.e. a low degree of speculation) in outbound logistics, then the Bullwhip Effect is high (i.e. an upstream unbalanced see-saw scenario)
If there is low degree of speculation (i.e. a high degree of postponement) in inbound logistics and a low degree of postponement (i.e. a high degree of speculation) in outbound logistics, then the Bullwhip Effect might be interpreted as high (i.e. downstream unbalanced seesaw scenario)
Multiple Facets of the Bullwhip Effect Construct1.Dynamics model of the bullwhip effect construct 2.Rubber-band principle 3.A typology of stocking level variability 4.Different levels of analysis of the Bullwhip Effect. 5.Size of the company 6.Redefinition of the Bullwhip Effect Construct
Dynamics Model of the Bullwhip Effect Construct Bullwhip Effect is caused by a sequence of happenings in and between value change and value systems. It may be estimated by measuring the construct in one or several occasions. Therefore, Bullwhip Effect can be dynamic (i.e. continuous - several occasions) or static (i.e. discontinuous one occasion)
Parameters that influence the dynamics of Bullwhip Effect1. 2. Time Context As time moves on, the context evolves and therefore, stocking level variability increases. These two parameters in conjunction create a generic conceptual model and contribute to describe the dynamics of the Bullwhip Effect construct. When Bullwhip Effect between stocking levels is explored on one occasion, the research reflects on the spot account construct (static). When it is explored on several occasions, the research reflects a periodic construct (dynamic).
Rubber-band Principle 1. 2. Stocking level variability is affected by up-downstream or down-upstream business operation between value change. This should be explored based upon the outcome of a set of interactive and iterative processes. The dynamics of stock level variability can be illustrated by rubber-band principle. Rubber has two components:Rubber: refers to elasticity, flexibility and changeability of business operations. Band: refers to that stocking level variability is derived from the lack of synchronization in sequential and continuous processes of business operations
Comparison with congested traffic There is desynchronized reaction pattern among drivers in queues of vehicles (demand cycles in upstream or downstream value systems affect the stock level. Lack of synchronization is reflected in spasmodic movements (some inventories are kept in stock , others are delivered to another stock level. Some vehicles move fast or slow than others (some stock levels are more or less inventories in stock and are kept longer or shorter periods of time). Lack of synchronization disappears when the drivers leave the traffic (stocking level variability continues until inventories reach point of consumption.
Rubber-band comparison Movement of vehicles and movement of inventories resemble the characteristics of the rubber-band as it is tensioned and slackened. Repeated pulling of rubber-band at one end and having a small weight at the other end illustrates congestion Vs. decongestion and also dilemma of stocking level variability (Bullwhip Effect).
Pulling of Rubber-band As the rubber-band is pulled, it will be tensioned, thinner in the middle, both ends relatively thicker. When inventories are demanded downstream, stocking level variability occurs as real time transfer of demand cycles between levels does not usually take place in the system.
Slackening of the Rubber-band When the rubber-band is slackened, the middle becomes thicker, the ends will become relatively thinner. It means that as the demand in the marketplace changes, it effects the stocking level variability in value systems. The width of the rubber band illustrates the stock level variability; thinner band represents decreased variability and a thicker band represents increased variability. By repeated repulling the rubber impact of the seasonality of demand cycles may be used to illustrate stock level variability.
Rubber-band and dynamics of Bullwhip Effect Bullwhip Effect has neither a beginning nor an end in value system. It is dependent upon the continuous dynamics in the marketplace (i.e. seasonality of demand cycles) It also reflects consequences of continuous spasmodic stock level variability. Therefore, the construct is both dynamic and continuous. Bullwhip Effect is usually seen as a unidirectional construct that is down-upstream variability approach. If we push the rubber-band from an upstream location, it will slacken, bend and jam (i.e. causing the build-up of inventories further downstream) The rubber-band has to be pulled as well as inventories should be pulled based upon market place demand cycle.
Typology of Stocking Level Variability Bullwhip Effect is explored in terms of increased upstream variability as well as increased downstream variability. Equilibrium between the degree of speculation and postponement in different stock levels smoothens both Bullwhip Effect and Reversed Bullwhip Effect. A typology of stock level variability consists of two stock levels:1. Upstream unit of analysis 2. Downstream unit of analysis
Each unit of analysis (stock level) is divided into principles of speculation and postponement. This creates four stock level variability situation each with its own unique characteristics that separate them from each other.
4 Cells of TypologyCell: Top right hand corner Principle of speculation dominates in inbound logistics, (inventories are higher) than in the outbound logistics (inventories are lower). This is the traditional approach of the Bullwhip Effect. Bullwhip Effect occurs when degree of speculation in inbound flows is stronger in relation to postponement in outbound flows. Cell: Bottom left hand corner Principle of speculation dominates in outbound logistics (inventories are higher) than in the inbound logistics (inventories are lower). This is Reversed Bullwhip Effect and occurs when degree of speculation in inbound flows is weaker than postponement in outbound flows.
Reversed Bullwhip EffectIt occurs when there are: Uncertainties upstream in the supply (limited production capacity, product quality deficiencies, unreliable deliveries, unreliable transport, inaccurate information sharing) 1. Reverse Bullwhip effect scenario occurs when the degree of speculation in the inbound logistics in relation to the degree of postponement in the outbound flows is weaker.
Cells: Top left and bottom right corners No Bullwhip Effect signifies that there is a balance between inventory management of business activities in inbound and outbound logistics. That means the principle of speculation (or postponement) dominates equally in a companys inventory management of business activities in inbound and outbound logistics.
Network Model The network model consists of three components. 1. Actors:- this can be a company, a group of companies, an individual or a group of individuals. Actors consume resources when activities are performed. 2. Activities:- these are business functions performed in the business environment. 3. Resources:- these are tangible and intangible assets for actors to perform business activities.
DependenciesThere are three generic categories of depen