The “Bullwhip” Effect in Supply Chains The ordering patterns share a common recurring theme: The variabilities of an upstream site are always greater than those of the downstream site.
Bullwhip Effect
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In 2001, Cisco was forced to write down $2.2 billion worth of obsolete inventory, due to uncertain variations in its demand in its supply chain.
Observations • An effective supply chain management means – efficient flow of quality and timely information between customer and suppliers – which shall enable the supplier to uninterrupted and timely delivery of material to the customer
• But in practical life, there are situations which are never planned, and create oscillations in demand resulting in distortions in the supply chain.
Observations • Suppliers, manufacturers, sales people, and • •
customers have their own, often incomplete, understanding of what real demand is. Each group has control over only a part of the supply chain, but each group can influence the entire chain by ordering too much or too little. This lack of coordination coupled with the ability to influence while being influenced by others leads.
Bullwhip effect… • Proctor & Gamble coined the term “bullwhip effect” • • • •
by studying the demand fluctuations for Pampers (disposable diapers). This is a classic example of a product with very little consumer demand fluctuation. It is well documented that the customer demand for diapers does not fluctuate significantly P&G observed that distributor orders to the factory varied far more than the preceding retail demand P & G orders to their material suppliers fluctuated even more.
After investigating why this was happening • Procter & Gamble discovered that the primary causes of the bullwhip effect were – – – –
the demand signaling from its distributors; order batching, when distributors would order on an infrequent basis; changes in prices by the manufacturer; and distributors placing multiple orders when it is not certain that the manufacturer can meet the distributor’s demand.
Bullwhip effect Wild swings in orders due to lack of coordination and trust among supply chain members Information Distortion and Demand Amplification in the supply chain Bullwhip effect is also known as “whiplash” or the “whipsaw” effect
Definition • The bullwhip effect is the uncertainty caused from distorted information flowing up and down the supply chain – Nearly all industries are affected! – Firms that experience large variations in demand are at risk. – Firms that depend on suppliers upstream or distributors and retailers downstream may be at risk.
Remark.. • 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(local view) rather than looking at the entire chain holistically (global view).
• Variability increases as one moves up the supply chain
Traditional supply chain obsolescence
Direction of product flow
Direction of demand flow Market mediation costs
Manufacturers Tier-I Suppliers Tier-II Suppliers Raw Material vendor
Distribution Centers Retailers Customer Zones
The Bullwhip Effect Upstream amplification of demand variation Progression of a brushfire to an inferno!
Customer
Retailer
Distributor
Factory
Tier 1 supplier
Equipment
Observations • Drivers of bull whip effect can be from Customers, •
•
suppliers, systems, processes, sales, manufacturing, external factors etc. The unplanned demand from retailer oscillates back to distributor to the organization and finally to the supplier with increased degree of magnitude at each leveling supply chain. Demand oscillation becomes higher while traveling up the supply chain resulting in overestimation at each level of the chain.
Some of the causes of Bullwhip effect are • Government Policies – For example in India, whenever government declares that price of Fuels (Motor Sprit, Diesel, LPG etc) shall be increased or decreased, the effect is visible on retail outlets. – This in turn creates oscillations in supply chain and affects the planning at refinery.
• Environmental Factors – If there is a sudden drop to 7 degrees in temperature at place where minimum temperature was never below 25 degrees – then there shall be sudden demand for winter cloths , which was never forecasted by supply chain partners, leading to oscillations in the supply chain
Causes of Bullwhip effect are • Sales Promotions – Many organizations conduct sales promotions and these promotions affect the inventories but supply channels fail to understand the impact of these promotions. – Organizations should conduct the complete analysis of what and how these sales promotions can affect the supply chain.
Causes of Bullwhip effect are • False Orders – Sometimes your customer may give you the orders for quantity more than his requirement – because he has less confidence in you that you will be able to fulfill his demand on time so he places the orders more than his actual demand – When he reaches at a comfortable situation he cancels the balance orders – These canceled order quantities causes excess purchased inventory, under utilization of your capacities
Causes of Bullwhip effect are • Full Truck Load Incentive – If your organization has a policy to provide incentive over transportation based on the utilization of the truck. – In that case your customers keep on accumulating the order quantity and then release the demand. – These kind of distortions affect your supply chain planning capabilities. Such freight incentive practices should be analyzed before actual implementation
Causes of Bullwhip effect are • Demand Forecast Inaccuracies – If every supply chain partner is changing the demand forecasting by adding some percentage by his gut feeling then this hides the true customer demand.
• Variability in the lead time – Customers may not have confidence in your logistic operations because they have experienced in high variability in lead time in past.
Causes of Bullwhip effect are • Procter & Gamble (P&G) and Diapers • •
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Reasonably stable market at consumer level Substantial variability in orders that P&G placed on suppliers (such as 3M) P&G coined the “bullwhip effect”
• Hewlett Packard (HP) and Printers • • •
Some variability in sales Bigger swings at the orders of resellers Even bigger swings for orders from printer division to the IC division
Bullwhip effect - an example Chronology of company “X’s” supply chain problem. • Company X produces widgets for sale on the open market. • Customer demand for Company X’s widgets become stagnant • Retailers offer a sales promotion to boost sales of Company X widgets
Example – continued • Retailers fail to notify manufacturers of • • • •
sales promotion Company X recognizes that demand for widgets has increased. Company X increases inventory to allow for increased manufacturing of widgets Company X notifies part suppliers of increased demand. Suppliers increase inventory to meet demand.
Morale of the story Distorted information along the supply chain caused inventory levels to increase along the supply chain which may result in increased inventory costs, poor customer service, adjusted capacity and many other problems associated with the bullwhip effect.
Supply Chain in Equilibrium Customer demand forecast = 10 units Information
Suppliers
Products & Services
Producers
10 Units 10 Units
Products & Products & Services Distributors Services 10 Units
10 Units
Retailers
10 Units 10 Units
Cash Retailers are selling product at a constant rate and price. Firms along the supply chain are able to set their inventory to meet demand.
Key:
= Inventory Levels
Supply Chain Disrupted Customer Demand forecast = 20 units Information Flow Suppliers
Producers Products & Services
Products & Distributors Products & Services Services
80 Units 160 Units
40 Units 80 Units
Retailers
20 Units 40 Units
Cash Flow As demand increases, the distributor decides to accommodate the forecasted demand and increase inventory to buffer against unforeseen problems in demand. Each step along the supply chain increases their inventory (double in this example) to accommodate demand fluctuations. The top of the supply chain receives the harshest impact of the whip effect.
Key:
= Inventory Levels
A. Framework for supply chain coordination initiatives Cause of Bullwhip: Information Sharing:
• Demand forecast update
Understanding
System Dynamics Use of Point-of-Sale (POS) data Electronic Data Interchange (EDI) Internet Computer Assisted Ordering
A. Framework for supply chain coordination initiatives (cont.) Channel Alignment:
• Vendor Managed Inventory (VMI) • Continuous Replenishment
• • Operational Efficiency:
Program (CRP) at Campbell Soup, Nestle, M&M, P&G, Scott Paper Consumer Direct Programs Discount for Information Sharing
Lead
time reduction Echelon-based inventory control
B. Framework for supply chain coordination initiatives Cause of Bullwhip:
Information Sharing:
• Order Batching
EDI Internet
Ordering (Trading Process Network at GE)
B. Framework for supply chain coordination initiatives (cont.) Channel Alignment:
Operational Efficiency:
Discount
for Truck Load Assortment Delivery appointments Consolidation Third Party Logistics
Reduction
in fixed costs of ordering by EDI or electronic commerce
C. Framework for supply chain coordination initiatives Cause of Bullwhip: Information Sharing:
Operational Efficiency:
• Price Fluctuations Continuous
Replenishment Program
(CRP) Everyday Low Cost (EDLC) Everyday
Low Price (EDLP) Activity Based Costing (ABC)
D. Framework for supply chain coordination initiatives Cause of Bullwhip: Information Sharing: Channel Alignment:
• Shortage Gaming Sharing
Sales, capacity and inventory
data Allocation
based on past sales Placing orders ahead of peak season Stricter return and order cancellation policies
Remedial measures to counteract bullwhip effect ..1.. Avoid multiple demand forecast updates Break order batches Stabilize prices Eliminate gaming in shortage situations
Remedial measures to counteract bullwhip effect..2.. Reduce variability and uncertainty. 1. POS 2. Sharing information 3. Year round low pricing
Reduce lead times. 1. EDI
Alliance arrangements. 1. Vendor managed inventory 2. OnOn-site vendor representative
Remedial measures to counteract bullwhip effect..3..
Understanding system dynamics - Use point point--ofof-sale (POS) data - EDI, Internet - Computer Computer--assisted ordering (CAO) - Internet ordering
Remedial measures to counteract bullwhip effect..4.. Sharing sales, capacity, and inventory date Allocation based on past sales Enhance Operational Efficiency Initiatives for LeadLead-time reduction Echelon Echelon--based inventory control
Remedial measures to counteract bullwhip effect..5.. Discount for information sharing Discount for truckload assortment Delivery appointments Consolidation Logistics outsourcing
Example: Quick Response at Benetton • Benetton, the Italian sportswear manufacturer, was founded in 1964. In 1975 Benetton had 200 stores across Italy.
• Ten years later, the company expanded to the U.S., •
Japan and Eastern Europe. Sales in 1991 reached 2 trillion. Many attribute Benetton’s success to successful use of communication and information technologies.
From Simchi-Levi, 2001
Example: Quick Response at Benetton • Benetton uses an effective strategy, referred to
•
as Quick Response, Response, in which manufacturing, warehousing, sales and retailers are linked together. In this strategy a Benetton retailer reorders a product through a direct link with Benetton’s mainframe computer in Italy. Using this strategy, Benetton is capable of shipping a new order in only four weeks, several weeks earlier than most of its competitors.
From Simchi-Levi, 2001
How Does Benetton Cope with the Bullwhip Effect? 1. Integrated Information Systems • Global EDI network that links agents with production and inventory information • EDI order transmission to HQ • EDI linkage with air carriers • Data linked to manufacturing 2. Coordinated Planning • Frequent review allows fast reaction • Integrated distribution strategy From Simchi-Levi, 2001
Summary The bullwhip effect is the magnification of demand fluctuations, not the magnification of demand Order variability is amplified up the supply chain; upstream echelons face higher variability. “What you see is not what they face” Integration and information sharing is a must. Act as a team in supply chain
