Demand Variability: The Bullwhip Effect

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If not anticipated adequately, demand fluctuations could wreak havoc throughout all tiers of the supply chain.

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Demand Variability: The Bullwhip Effect

  1. 1. Demand Variability: The Bullwhip Effect Dr. Joe Hage © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 1
  2. 2. Demand Variability – 1/2 • Increases as one moves up the supply chain away from end customers • Small changes in customer demand may result in large variations in orders placed upstream • Network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own narrow, often self-serving, perspective © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 2
  3. 3. Demand Variability – 2/2 • Sources of Variability – – – – Demand Variability Quality Issues Strikes and Disruptions Plant Shutdown • Variability coupled with time delays in the transmission of information up and down the supply chain and time delays in manufacturing and shipping goods up and down the supply chain create the Bullwhip Effect © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 3
  4. 4. Bullwhip Effect – 1/2 • Distortion of orders along the supply chain, where small fluctuations in end customer demand result in amplification of demand upstream, aka Demand Amplification • The term „bullwhip‟, where just a small flick of the wrist at the handle will create a large crack of the whip at its tip © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 4
  5. 5. Bullwhip Effect – 2/2 Quantities Ordered by Distribution Centers Quantities Ordered by Retailers time Manufacturers Quantities Ordered by End Customers time time Distribution Centers Fluctuation Increases © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. Retailers Fluctuation Increases 5
  6. 6. Cracking the Whip © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 6
  7. 7. The Bullwhip Effect – Orders Bottled Water Corporation – Orders 50 Orders (Thousand Cases) 45 40 35 30 25 20 15 10 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Weeks Consumers Retailer © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. Wholesaler Distributor Factory 7
  8. 8. The Bullwhip Effect – Cost Bottled Water Corporation – Inventory Cost 160 140 Cost (Million $) 120 100 80 60 40 20 0 1 2 3 4 5 Retailer © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 6 7 8 Wholesaler 9 Weeks 10 Distributor 11 12 13 14 15 16 17 Factory 8
  9. 9. The Bullwhip Effect – Stockouts Bottled Water Corporation – Stockout 50 Quantity (Thousand Cases) 40 30 20 10 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 -10 -20 -30 Weeks Retailer © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. Wholesaler Distributor Factory 9
  10. 10. Bullwhip Effect Creates Problems – 1/2 • High – Inventory Levels – Inventory Cost – Demand Fluctuation / Variability • Low – Service Level (Backorders / Backlogs) – Efficiency – Customer Satisfaction • Friction among Supply Chain Partners © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 10
  11. 11. Bullwhip Effect Creates Problems – 2/2 • To cope with peaks and valleys, variation in demand along the supply chain requires: – Shipment Capacity – Production Capacity – Inventory Capacity • Most of the time capacity is idle – Resulting in significant costs and investments • Conclusion – High overall cost in the supply chain – Unhealthy competition between supply chains and networks, not just between individual companies! © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 11
  12. 12. Structure Creates Behavior • Different people in the same organizational structure produce the same (or at least similar) results Losses Events (Backlogs/Surges/Friction) Behavior (Process Oscillation/Demand Variation) Structure © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 12
  13. 13. Reactions • Typical organizational response is to find “the person responsible”, i.e. the person placing the orders or the inventory manager, and blame him or her • However, such a response is inappropriate because different people following different decision rules for ordering have created similar variations and oscillations • The structural setup must be changed © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 13
  14. 14. Factors Contributing to Bullwhip Effect – 1/2 • Demand Forecasting – Usage of aggregate and thus inaccurate data does not allow for good predictions – High variability leads to continuous adaptations of order policies, thus increasing variability upstream • Lead Time – Longer lead times create uncertainty – Requires high safety stock levels – Reduces flexibility and adaptability to unforeseen changes in demand • Inflated Orders – In time of shortages, suppliers place big orders when the expectation is to be on proportional allocation © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 14
  15. 15. Factors Contributing to Bullwhip Effect – 2/2 • Batch Ordering – At one stage in supply chain leads to observing high variability at next stage upstream – One week large order followed by weeks with no order – Contributors: fixed ordering costs, transportation and price discounts • Price Fluctuation – Stock up when prices are lower are leading to large orders – Promotions and discounts © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 15
  16. 16. Lessons • In traditional supply chains, information about consumer demand is only passed upstream through the orders placed with aggregated figures • Information is therefore lost resulting in high buffer stocks • Even if each partner acts “optimally” individually, the result is less than optimal for the entire supply chain • Result is higher prices, lower sales, less margins • However, competition is now supply chain against supply chain and network against network © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 16
  17. 17. Dr. Joe Hage’s Contact Info • • • • • • • E-mail: DR@JOE.ME Skype: joe_hage Web: www.joe.me LinkedIn: http://www.linkedin.com/in/joehage Twitter: http://twitter.com/DrJoeHage Facebook: http://facebook.com/DrJoeHage Amazon: http://www.amazon.com/author/joe-hage © 2008-2014. Copyright, Dr. Joe Hage. Proprietary Information. All Rights Reserved. 17

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