What Is Bullwhip Effect free essay sample

Bullwhip effect, also known as Whiplash or Whipsaw effect, is the effect of amplification of the demand order variabilities found in the upstream supply chain. The demand variabilities swell as they move up in the supply chain, from the customer to the manufacturer or supplier. Small changes in customer’s demand can lead to large magnified variations in orders placed to the supplier. An example of the effect on the dynamic behavior of a supply chain is shown in Figure 1. Figure 1: Bullwhip effect as seen in a traditional supply chain (Based on Description by Stalk and Hout, 1990) Bullwhip effect can be seen as a result of â€Å"Law of Industrial Dynamics† explained by Burbidge (1989) which is as below: â€Å"If demand for products is transmitted along a series of inventories using stock control ordering, then the demand variation will increase with each transfer† Bullwhip effect creates unstable production schedules which lead to unnecessary extra cost in supply chain. We will write a custom essay sample on What Is Bullwhip Effect? or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Companies may have to invest and spend on labor costs in extra capacity in order to meet the high variable demand. This capacity will be under-utilized during the period in which demand drops. High variable demand also increases lead times and the requirements safety stock in the supply chain. What causes Bullwhip Effect? There are four major causes of the Bullwhip Effect: 1. Demand forecast updating – A manager, who has to determine how much to order from a supplier, will generally use a simple method to do demand forecasting, e. g. exponential smoothing. By using exponential smoothing method, future demands are continuously updated based on the new daily demand. The order sent to the supplier consists of the amount required to replenish the stock and the amount for safety stock. These two amounts are updated using the smoothing technique. With long lead time, the fluctuations in the order quantities over time can be much greater than those in the demand data. If the manager of the next tier in the supply chain also uses exponential smoothing to update forecast and safety stock, the order quantity to the supplier will have larger swing. 2. Order Batching – By using periodic ordering and push ordering, the supplier will face a highly inconsistent flow of orders. For example, there will be a spike in demand at one time during the month and no demand for the rest of the month. 3. Price Fluctuation – Most of the transactions between distributors and manufacturers are made by forward buying due to price fluctuation caused by discounts, quantity discounts, special promotions, and etc. When a product’s price is low, customers buy more than needed but when the price returns to normal, customers stop buying. As a result, the buying pattern does not reflect the actual consumption pattern. 4. Rationing and Shortage Gaming – During the period that demand exceeds supply, manufacturer usually ration their supplies to customers. This results in customers ordering more than they need, in order to fulfill the demand. However, when the market returns to normal status, customers start to cancel the orders since excess inventory piles up. Real demand is never known in this kind of market condition. How to alleviate Bullwhip Effect? We can categorize the remediation for Bullwhip Effect by base on coordination system as follow: 1. Information Sharing – Demand information at a downstream site should be transmitted upstream in a timely fashion. 2. Channel Alignment – Channel alignment is the coordination of pricing, transportation, inventory planning, and ownership between the upstream and downstream sites in a supply chain. 3. Operational Efficiency – Operational efficiency refers to activities that improve performance, e. g. cost cutting and lead-time reduction. Causes of BullwhipInformation SharingChannel AlignmentOperational Efficiency Demand Forecast Update- Understanding system dynamics Use point-of-sale data Electronic data interchange (EDI) Internet Computer-assisted ordering (CAO)- Vendor-managed inventory Discount for information sharing Consumer direct- Lead-time reduction Echelon-based inventory control Order Batching- EDI Internet ordering- Discount for truck-load assortment Delivery appointments Consolidation Logistics outsourcing- Reduction in fixed cost of ordering by EDI CAO Price Fluctuations- Continuous replenishment program Everyday low cost- Everyday low price Activity-based costing Shortage Gaming- Sharing sales, capacity, and inventory data- Allocation based on past sales Table 1: A Framework for Supply Chain Coordination Initiatives – Ways to remediate Bullwhip Effect References Lee, H. L. (2010) â€Å"Taming the bullwhip† Journal of Supply Chain Management 46, pp. 7-7. Lee, H. L. , Padmanabhan, V. and Whang, Seungjin (1997). The Bullwhip Effect in Supply Chains. Sloan Management Review 38, pp. 93–102. Mason-Jones, Rachel; Towill, Dennis R. (2000). Coping with Uncertainty: Reducing Bullwhip Behaviour in Global Supply Chains. Supply Chain Forum, pp. 40–44.