The "Bullwhip" Effect


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Reducing the risk of customers’ stock- outs and other disruption in the supply process

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  • Thanks Anand Subramaniam! It's a very nice, coherent and logical presentation. As a professor teaching Strategic management; supply chain management and TQM, I wonder how I missed your presentations earlier. I've a few suggestions: I feel that slide No. 12, Managing the Bullwhip Effect could have been at the end; slide #14 could be split into two slides - pitfalls & opportunities;one picture of Bullwhip effect could perhaps lend conceptual clarity (apart from slide#4).
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The "Bullwhip" Effect

  1. 1. “ Bullwhip” Effect Reducing the risk of customers’ stock- outs and other disruption in the supply process Anand Subramaniam
  2. 2. <ul><li>“ By nature, people are nearly alike; by practice, they get to be wide apart. ” </li></ul><ul><ul><li>- Confucius </li></ul></ul>
  3. 3. Highlights <ul><li>“Bullwhip” Effect – Causes </li></ul><ul><li>“Bullwhip” Effect - On Supply Chain </li></ul><ul><li>“Bullwhip” Effect – Example </li></ul><ul><li>Information Sharing </li></ul>
  4. 4. “ Bullwhip” Effect - Causes
  5. 5. “Bullwhip” Effect Each organisation in the supply chain seeks to solve the problem from its own perspective Wholesaler’s Orders to Manufacture Time 0 5 10 15 20 Consumer Sales Order Quantity 0 5 10 15 20 Time Retailer’s Order to Manufacture Order Quantity 0 5 10 15 20 Time Order Quantity 0 5 10 15 20 Time Manufacturer’s Orders to Supplier Order Quantity
  6. 6. “Bullwhip” Effect – Main Causes “ Bullwhip” Causes Long lead times / to many intermediaries Inflated orders due to lack of information sharing Price fluctuation (Promotional sales) Order batching / large lot size Updating Demand Forecast
  7. 7. Demand Fluctuation.. Causes Demand Forecast Long order lead times Volume / transport discounts Poor customer service rates Promotional activity No minimum or maximum order quantities Product proliferation Poor communication Safety stocks that depend on erratic demand variance / long lead times
  8. 8. Order Batching.. Causes Order Batching Economies of scale in transportation - full truckload rates Periodic planning and ordering as part of MRP and periodic review systems Push” ordering motivated by short term financial performance measures Economies of scale in ordering cost & manufacturing setups - leads to batching
  9. 9. Price Fluctuation.. Causes Price Fluctuation Trade promotions and supply chain management Variance from buying big quantities to the consumption rate Quantity discounts and advance purchases Wide swings resulting in capacity adjustment costs, high inventory costs, transport diseconomies
  10. 10. Inflated / Deflated Needs.. Causes Inflated / Deflated Customers exaggerate their real needs When capacity constraints are removed, orders suddenly drop Where demand exceeds manufacturing capacity leads to rationing of order fulfillment
  11. 11. These causes leads to… <ul><li>Revenue Decrease </li></ul><ul><li>Stock-outs and backlogs mean lost sales, as customers take their business elsewhere </li></ul><ul><li>Low customer service / satisfaction </li></ul><ul><li>Low quality </li></ul><ul><li>Free return policies </li></ul><ul><li>Forecast inaccuracy </li></ul><ul><li>Cost Increase </li></ul><ul><li>High carrying cost </li></ul><ul><li>High stock-out cost </li></ul><ul><li>High shipping cost </li></ul><ul><li>High setups and change-over cost </li></ul><ul><li>High labor cost (due to overtime) </li></ul><ul><li>High materials cost (to cover scarce components) </li></ul><ul><li>High outsized facilities (plants, warehouses) to handle peaks in demand, resulting in alternating under or over-utilisation </li></ul>
  12. 12. Managing the “Bullwhip” Effect Manage <ul><li>Reduce Uncertainty </li></ul><ul><li>Point of sales (POS) </li></ul><ul><li>Sharing information </li></ul><ul><li>Centralising demand information </li></ul><ul><li>Reduce Variability </li></ul><ul><li>Reduce order batches </li></ul><ul><li>Year round or Everyday low pricing </li></ul><ul><li>Forming Alliance </li></ul><ul><li>Vendor managed inventory (VMI) </li></ul><ul><li>Eliminate gaming in shortage situation </li></ul><ul><li>Reduce Lead Time </li></ul><ul><li>Information around lead times (use EDI) </li></ul><ul><li>Order lead times (Cross Docking) </li></ul>
  13. 13. “ Bullwhip” Effect - On Supply Chain
  14. 14. On Supply Chain – Pitfalls / Opportunities Manufacture Customer Warehouse Purchase Operations Design Information Systems <ul><li>High quality </li></ul><ul><li>High produc-tivity </li></ul><ul><li>Long production run </li></ul><ul><li>Low production cost </li></ul><ul><li>Low prices </li></ul><ul><li>High stock levels </li></ul><ul><li>Short order lead time </li></ul><ul><li>Enormous variety of products </li></ul><ul><li>Low inventory </li></ul><ul><li>Quick replenish-ment capability </li></ul><ul><li>Reduced transport-ation costs </li></ul><ul><li>Stable volume require-ments </li></ul><ul><li>Flexible delivery time </li></ul><ul><li>Little variation in mix </li></ul><ul><li>Large quantities </li></ul><ul><li>Ignoring un-certainty impacts </li></ul><ul><li>inadequate inventory stocking policies </li></ul><ul><li>Internal customers discrimi-nated </li></ul><ul><li>Poor Coordi-nation </li></ul><ul><li>Incomplete shipment methods </li></ul><ul><li>Incorrect assess-ment of inventory costs </li></ul><ul><li>Inadequate Supply Chain (SC) product & process design </li></ul><ul><li>No SC Metrics </li></ul><ul><li>Inadequate Customer Service definition </li></ul><ul><li>Inaccurate delivery status data </li></ul><ul><li>Lack integrated infor-mation systems (no EDI) </li></ul>
  15. 15. SC Integration – Dealing with Conflicts <ul><li>Lot Size vs. Inventory </li></ul><ul><li>Cost vs. Customer Service </li></ul><ul><li>Inventory vs. Transportation </li></ul><ul><li>Product Variety vs. Inventory </li></ul><ul><li>Lead Time vs. Transportation Cost </li></ul>
  16. 16. “ Bullwhip” Effect - Example
  17. 17. Example – “Bullwhip” Effect <ul><li>Assume that, you are responsible for order product for ABC’s DC: </li></ul><ul><ul><li>Customer’s order everyday, </li></ul></ul><ul><ul><li>Unfilled demand remains on-order, </li></ul></ul><ul><ul><li>Manufacturer’s deliver once a week, </li></ul></ul><ul><ul><li>Manufacturer’s have a one week lead time, and </li></ul></ul><ul><ul><li>Demand has been $1B each and every week for years </li></ul></ul>Assume that pick up a new customer and their orders are now $1.5B / week (every week) $0 $1B $1B $1B Week 0 Unmet Need Inventory Inbound On Order
  18. 18. Example – “Bullwhip” Effect (Contd.) Impact of a new customer and their orders of $1.5B / week (every week). Impact Before & After If you had all the information, this would result in 3 weeks of disruption (finance, transport, inventory, sales, marketing etc.) and would lead to incorrect demand signals
  19. 19. Example – “Bullwhip” Effect (Contd.) After Before $1.5B $1.5B $1.5B $1.5B Future $.5B $1B $1B $1.5B Week 1 $1.0B $1B $1.5B $1.5B Week 2 $1.5B $1.5B $1.5B $1.5B Week 3 Unmet Need Inventory Inbound On Order $0 $1.5B $1.5B $1.5B Week 4 $.5B $1B $1B $3.0B Week 1 $1.0B $1B $3.0B $1.5B Week 2 $1.5B $3.0B $1.5B $1.5B Week 3 Unmet Need Inventory Inbound On Order
  20. 20. Information Sharing
  21. 21. No Information Sharing Lack of information sharing Product Flow Customer Retailer Wholesaler Manufacturer Tier 1 Supplier Tier 2 Supplier
  22. 22. Buyer / Seller - Information Sharing Sellers Buyers Application providers (point-to-point - EDI) App. Service Providers (ASPs) eHub Market place provider
  23. 23. Sharing Information - Types VMI / Continuous Replinsh-ment / 3 PL Production / Delivery Schedule Order Status (track & trace) Channel Alignment / Consolidate Sales / POS / EDI Data Sales Forecast Information Types Capacity / utilisation or Mixed SKUs Performance Metrics
  24. 24. EDI Challenges Rigid text formats / rigid design for transaction processing EDI Challenges Installation costs Multiple industry specific standards Batch Oriented
  25. 25. Other Challenges Challenges Confidentiality of shared information Timeliness and accuracy of information Anti-trust implications, such as possible price fixing behavior Technological constraints Aligning incentives of different partners Trust and cooperation Upstream variability are always greater than those of the downstream
  26. 26. <ul><li>“ Get your facts first, then you can distort them as you please.” </li></ul><ul><ul><li>- Mark Twain </li></ul></ul>
  27. 27. <ul><li>Good Luck </li></ul><ul><li> </li></ul>