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Bullwhip Effect in A Supply Chain

Bull whip effect in SCM

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Nagasuresh Babu
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7 views11 pages

Bullwhip Effect in A Supply Chain

Bull whip effect in SCM

Uploaded by

Nagasuresh Babu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Supply Chain Management

Part 10
Bullwhip Effect in a Supply Chain

1-1
Supply chain coordination

Supply chain coordination – all stages in the supply chain take actions
together (usually results in greater total supply chain profits).

SC coordination requires that each stage take into account the effects of
its actions on the other stages.

Lack of coordination results when:

1. Objectives of different stages conflict or


2. Information moving between stages is distorted
The lack of coordination hurts both responsiveness and cost in a supply
chain by making it more expensive to provide a given level of product
availability. 1-2
Bullwhip effect

One outcome of the lack of supply chain coordination


is the bullwhip effect, in which fluctuations in orders
increase as they move up the supply chain from retailers
to wholesalers to manufacturers to suppliers.
The bullwhip effect distorts demand information
within the supply chain, with each stage having a
different estimate of what demand looks like.

1-3
Bullwhip effect

Small changes in demand can


produce a whip-like effect
upstream.

1-4
Impacts of the bullwhip effect

• Manufacturing Cost: A firm can respond to the increased variability


by either building excess capacity or holding excess inventory both
of which increase the manufacturing cost per unit produced.
• Inventory Cost: To handle the increased variability in demand, a
firm must carry a higher level of inventory.
• Replenishment Lead Time: The increased variability as a result of
the bullwhip effect increases replenishment lead times in the supply
chain.
• Transportation Cost: As a result of the bullwhip effect,
transportation requirements fluctuate significantly over time which
raises transportation cost.
1-5
Impacts of the bullwhip effect

• Labor Cost for Shipping and Receiving: Bullwhip effect


increases labor costs associated with shipping and
receiving in the supply chain.
• Level of Product Availability: Bullwhip effect hurts the
level of product availability and results in more
stockouts in the supply chain.
• Relationships Across the Supply Chain: Bullwhip effect
has a negative effect on performance at every stage
and thus hurts the relationships among different stages
of the supply chain. 1-6
Causes and potential remedies of the bullwhip
effect

1- Forecasting based on orders and not customer demand:


When stages within a supply chain make forecasts that are
based on orders they receive, any variability in customer
demand is magnified as orders move up the supply chain to
manufacturers and suppliers.
2- Lack of information sharing: The lack of information
sharing between stages of the supply chain magnifies the
information distortion.
3-Ordering in large lots: When a firm places orders in lot sizes
that are much larger than those in which demand arises,
variability of orders is magnified up the supply chain. 1-7
Causes of the bullwhip effect

4- Large replenishment lead times: Information distortion


is magnified if replenishment lead times between stages
are long.
5- Rationing and shortage gaming: Order larger
quantities than necessary, in order to eventually get what
you need.
6- Lot-size–based quantity discounts: Lot-size–based
quantity discounts increase the lot size of orders placed
within the supply chain magnifies the bullwhip effect
within the supply chain. 1-8
Causes of the bullwhip effect

7- Price fluctuations: Trade promotions and other short-


term discounts offered by a manufacturer result in
forward buying.
8- Local optimization within functions or stages of a
supply chain: Incentives that focus only on the local
impact of an action result in decisions that do not
maximize total supply chain surplus.

1-9
Counteracting of the bullwhip effect

1- Sharing customer demand data: Make downstream demand data


available to the upstream sites. Both sites can update their forecast
with the same raw data.
2- Designing single-stage control of replenishment: Designing a
supply chain in which a single stage controls replenishment decisions
for the entire supply chain can help diminish information distortion.
3- Reducing replenishment lead time: By reducing the replenishment
lead time, managers can decrease the uncertainty of demand during
the lead time.
4- Reducing lot sizes: A reduction of lot sizes decreases the amount of
fluctuation that can accumulate between any pair of stages of a supply
chain, thus decreasing distortion. 1-
10
Counteracting of the bullwhip effect

5- Rationing based on past sales and sharing information to


limit gaming: Instead of allocating products based on orders,
allocate in proportion to past sales (turn_and_earn approach).
6- Stabilize prices: Managers can dampen the bullwhip effect
by eliminating promotions and using everyday low pricing
(EDLP).
7- Building strategic partnerships and trust: Managers find it
easier to use the levers discussed earlier to achieve
coordination if trust and strategic partnerships are built within
the supply chain.
1-
11

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