01a Bullwhip Effect


Published on

Detailed explanation of Bullwhip effect

Published in: Business, Technology

01a Bullwhip Effect

  1. 1. The Bullwhip Effect Henry C. Co Technology and Operations Management, California Polytechnic and State University
  2. 2. Variability increases as one moves up the supply chain Source: Johnson & Pike, 1999 The BullWhip Effect 2
  3. 3. The Bullwhip Effect The BullWhip Effect 3
  4. 4. The Beer Game  Role-playing simulation developed in the 1960’s at MIT’s Sloan School of Management  Production and distribution of beer.  Players divide themselves into groups: Retailer, Wholesaler, Distributor, and Brewer.  Weekly consumer demand simulated by a deck of cards  Retailer sells from his inventory and reorders from the Wholesaler, who sells from his inventory and reorders from the Distributor, who in turn sells from his inventory and reorders from the Brewer, who finally sells from his inventory and restocks from his production.  Order processing delays; Shipping delays  Inventory carrying costs; Stockout costs  Players base their decisions strictly on the orders they receive from their respective buyers. The BullWhip Effect 4
  5. 5.  “During the game emotions run high. Many players report feelings of frustration and helplessness. Many blame their teammates for their problems; occasionally heated arguments break out.”  “In virtually all cases, the inventory levels of the retailer decline, followed in sequence by a decline in the inventory of the wholesaler, distributor, and factory. As inventory falls, players tend to increase their orders. Players soon stock out. Backlogs of unfilled orders grow. Faced with rising orders and large backlogs, players dramatically boost the orders they place with their supplier. Eventually, the factory brews and ships this huge quantity of beer, and inventory levels surge. In many cases one can observe a second cycle.” John Sterman, one of the original proponents of the Beer Game The BullWhip Effect 5
  6. 6.  Stakeholders along supply chain  Have different and frequently conflicting objectives.  Often operated independently.  The network can oscillate in very large swings as each organization in the supply chain seeks to solve the problem from its own perspective. The BullWhip Effect 6
  7. 7. Consequences of the Bullwhip Effect  Lower revenues.  Higher costs.  Stockouts and backlogs  High carrying cost mean lost sales, as  Stockout cost customers take their business elsewhere.  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 7
  8. 8.  Worse quality.  Poorer service.  Quirky, unplanned  Irregular, changes in unpredictable production and production and delivery schedules delivery schedules disrupt and subvert also lengthen lead control processes, time, causing delay begetting diverse and customer quality problems that dissatisfaction. prove costly to rectify. The BullWhip Effect 8
  9. 9. Causes of Bullwhip Effect
  10. 10.  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
  11. 11. 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
  12. 12. 1. 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. 2. 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
  13. 13. 1. Demand forecast inaccuracies: everybody in the chain adds a certain percentage to the demand estimates. The result is no visibility of true customer demand. 2. Free return policies The BullWhip Effect 13
  14. 14. Countermeasures to the Bullwhip Effect
  15. 15. 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 15
  16. 16. Order Batching  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 16
  17. 17. Shortage Gaming  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 17
  18. 18. Fluctuating Prices  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 18
  19. 19. Demand Forecast Inaccuracies  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 19
  20. 20. Free Return Policies  Free return policies are not addressed easily.  Often, such policies simply must be prohibited or limited. The BullWhip Effect 20
  21. 21. Vendor Managed Inventory
  22. 22.  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 22
  23. 23. The VMI Partnership  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
  24. 24. The manufacturer is responsible for both its own inventory and the inventory stored at is customers’ distribution centers. The BullWhip Effect 24