BULLWHIP
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The document discusses the bullwhip effect in supply chains. It describes how demand variability is amplified as information moves up the supply chain, due to factors like forecast updating, order batching, price fluctuations, and shortage gaming. This can lead to issues like excess inventory, poor forecasts, and stockouts. The document recommends strategies to mitigate the bullwhip effect, such as information sharing, post-sales data availability, and stable pricing policies.
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BULLWHIP
- 1. 1 The Bullwhip Effect in Supply Chains Leslie Gardner, Ph.D. University of Indianapolis School of Business Institute for Emerging Careers
- 2. 2 Institute for Emerging Careers Funded by Lilly Endowment Research emerging and expanding career fields in Indiana as well as to find ways to prevent "brain drain." Identify future Indiana industries and determine careers needed to support future business development in Indiana.
- 3. 3 $50,000 Grants For emerging careers Develop curriculum Develop internships Do research to develop faculty expertise in area of emerging career
- 4. 4 Planning, organizing, directing, & controlling flows of materials Begins with raw materials Continues through internal operations Continues through distribution of finished goods Ends with returns or disposal of used up goods Involves everyone in supply-chain Example: Your supplier’s supplier, logistics providers, information systems Objective: Maximize value & lower waste Materials arrive when and where they should, JIT Minimize excess inventory, minimize backorders Supply-Chain Management
- 5. 5 Consumer Retailer Manufacturing Material Flow VISA ® Credit Flow Supplier Supplier Wholesaler Retailer Cash Flow Order FlowSchedules The Supply-Chain
- 6. 6 The Supply Chain Supplier Supplier Supplier Inventory Inventory Distributor Inventory Inventory Manufacturer Customer Customer Customer Market research data Scheduling information Engineering and design data Order flow and cash flow Ideas and design to satisfy end customer Material flow Credit flow
- 7. 7 Demand Amplification & Forrester Flywheel Effect Shortages Over Ordering Late Deliveries Increase in Safety Stock Excess Inventories Reduce Inventories
- 8. 8 Bullwhip Effect With the Bullwhip effect demand order variability is amplified as one moves up the supply chain. This is because demand information is distorted as it is transmitted up the supply chain. Causes erratic shifts in orders up and down the supply chain. Proctor and Gamble – Pampers Hewlett-Packard - Printers
- 9. 9 Symptoms of the Bullwhip Effect Excessive Inventory Poor Forecasts Insufficient and/or excessive capacities Unavailable Products Long Backlogs Costs for Expedited Shipments and Overtime
- 10. 10 The Beer Game Prod’n Delay oooo RETAIL oooooo oooooo WHLSLR oooooo oooooo DIST’R oooooo oooooo FACT’RY oooooo oooooo Shipping Delay oooo Shipping Delay oooo Shipping Delay oooo Shipping Delay oooo Shipping Delay oooo Shipping Delay oooo Prod’n Delay oooo Raw Mat’l Cust Order Order Plac’d Inc’g Order Order Plac’d Inc’g Order Order Plac’d Inc’g Order Prod Order Developed at MIT more than 40 years ago to teach students about simulation and economic dynamics Does a good job of teaching students about the bullwhip effect but not how to prevent it
- 11. 11 What can we learn from the Beer Game? I have developed a Microsoft Excel simulation to test various strategies Goal – teach our students how to minimize the bullwhip effect Bullwhip effect does not occur unless backordering (filling orders late when product is available) is allowed
- 12. 12 Impact of Ordering Strategies on Bullwhip Effect Naïve forecast – order only what is ordered Exponential smoothing at α=0.1, 0.5, and 0.9 Order what is ordered plus cumulative backlog Order what is ordered + cumulative backlog unless inventory is some amount more than order + cumulative backlog Order what is ordered + this period backlog (not cumulative)
- 13. 13 Naïve Forecast Order what was ordered from you Last time 4 units were ordered from you Order 4 this time Last time 8 units were ordered from you Order 8 this time
- 14. 14 No bullwhip, but you never catch up on orders Beer Game - Naive Forecast -15 -10 -5 0 5 10 15 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 15. 15 Exponential smoothing at 0.1 Forecast = (0.1)(last actual) +(1-0.1)(last forecast) Forecast=(0.1)(8)+(0.9)(4)=4.4 Order 4
- 16. 16 No bullwhip, but retailer falls further and further behind Beer Game - Exponential Smoothing (0.1) -150 -100 -50 0 50 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 17. 17 Exponential smoothing at 0.5 Forecast = (0.5)(last actual) +(1-0.5)(last forecast) Forecast=(0.5)(8)+(0.5)(4)=6 Order 6
- 18. 18 No bullwhip, but retailer, wholesaler and distributor are always behind Beer Game - Exponential Smoothing (0.5) -20 -10 0 10 20 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 19. 19 Exponential smoothing at 0.9 Forecast = (0.9)(last actual) +(1-0.9)(last forecast) Forecast=(0.9)(8)+(0.1)(4)=7.6 Order 8
- 20. 20 No bullwhip, but retailer, wholesaler and distributor are always behind, but not as far as for 0.5 Beer Game - Exponential Smoothing (0.9) -20 -10 0 10 20 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 21. 21 Naïve plus cumulative backlog Order what is ordered plus cumulative backlog Last time 12 were ordered from you, you have 8 in stock, and you have a backlog of 12 Order 12+12=24 Ship 8, your backlog is now 16 What happens upstream? The person upstream has nothing in stock, a backlog of 16, and 8 coming in He/she ships out the 8, now has a backlog of 32, and orders 24+32=56
- 22. 22 Bullwhip with inventory staying high Beer Game - Order Naive + Backlog -200 0 200 400 600 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 23. 23 Naïve plus backlog no order if excess inventory Eventually, the material for the large orders starts flowing through the system and the placing of large orders ceases Inventory builds up and orders become small Quit ordering if orders are less than some amount of inventory No order if order less than 3x inventory Inventory=144, last time 12 were ordered from you, don’t order any No order if inventory is 12 more than order size Inventory gradually drains out
- 24. 24 Compensate relative to order size - Bullwhip with inventory gradually draining out Beer Game - Naive +Backlog No Order if < 3xInventory -200 0 200 400 600 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 25. 25 Compensate with inventory anchor - Bullwhip with inventory gradually draining out Beer Game - Naive + Backlog No Order if < 12 + Inventory -200 0 200 400 600 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 26. 26 Naïve plus one period backlog Order what is ordered plus only this backlog, that is, the amount you were short this period Last time 12 were ordered from you, you have 8 in stock, and you have a backlog of 12 Ship 8, your backlog is now 16, but you were only 4 short this time Order 12+4=16
- 27. 27 Minimal bullwhip effect – inventories after bullwhip close but not quite on target Beer Game - Naive + One Period Backlog -40 -20 0 20 40 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 28. 28 Lessons Learned Must compensate for backlog or you fall further and further behind Overcompensation for backlog causes bullwhip effect Undercompensation causes steady or increasing backlog Minimize bullwhip effect by right amount of compensation
- 29. 29 Causes of Poor Compensation Lee, Padmanabhan, Whang (1997) 1. Demand forecast updating 2. Order batching 3. Price fluctuation 4. Rationing and shortage gaming
- 30. 30 Demand Forecast Updating Every manager will project demand based on what he/she sees. Managers at different levels project demand differently (signal processing). Safety stock complicates matters
- 31. 31 Remedies for Demand Forecast Updating Make point-of-sale (POS) data available up supply chain EDI Internet Vendor managed inventory (VMI) Make downstream inventory and demand info available upstream Shorten lead-times Sell directly to consumer
- 32. 32 Point of Sale Data (POS) Information on retailer order passed upstream Everyone orders what retailer ordered
- 33. 33 No bullwhip effect but strange things happen to inventories Beer Game - POS Data Upstream 0 5 10 15 20 0 5 10 15 20 25 30 Week InventoryLevel Retail Wholesale Distributor Factory
- 34. 34 Order Batching Periodic ordering (once a month, once a week, etc.) Cannot handle frequent order processing Transportation costs – full-truckload cheaper than less-than-truckload rates Push ordering Salespeople sign orders early to fill quotas when evaluated Periodic execution of MRP or DRP – sometimes order cycles overlap
- 35. 35 Remedies for Order Batching Reduce ordering cost EDI Blanket orders VMI Mixed SKU truckloads 3PLs
- 36. 36 Price Fluctuation Special promotions, discounts, etc. cause forward buying, that is, consumers buy in larger quantities and don’t buy again until their stocks are depleted Surges in shipments causes premium shipping costs Larger inventories to handle surges result in damage, deterioration, obsolescence
- 37. 37 Remedies for Price Fluctuation Stabilize prices Reduce wholesale price discounting Uniform pricing policies Activity-Based Costing Conventional accounting practices may not show hidden costs of inventory, storage, special handling, premium transportation, etc.
- 38. 38 Rationing and Shortage Gaming When demand exceeds supply, manufacturers ration products on the basis of amounts ordered Customers exaggerate needs to get more When demand cools, customers cancel orders, manufacturers stuck with excess
- 39. 39 Remedies for Rationing and Shortage Gaming Allocate in proportion to past sales records Plan ahead, share information Penalize returns
- 40. 40 Summary Supply chain management is a cutting edge business strategy that integrates internal and external logistics across many manufacturers, suppliers, distributors, retailers, transportation providers, and third party logistics firms to increase productivity and to obtain a competitive advantage for all parties involved.