An easy way to understand bullwhip effect

1. S
The Bullwhip effect
By Smita Sharma

2. What is Bullwhip effect?

3. What is Bullwhip effect?
S The Bullwhip effect is an observed phenomenon in
forecast driven distribution channels. It refers to larger
and larger swing in inventory in response to changes in
customer demand, as one looks at firms further back in
the supply chain of the product. The concept first
appeared in Jay Forrester's Industrial Dynamics (1961)
and thus it is also known as the Forrester effect. Since
the oscillating demand magnification upstream of a
supply chain is reminiscent of a cracking whip, it became
known as the bullwhip effect.

4. The Bullwhip effect.

5. Supply Chain in Equilibrium
Customer demand forecast = 10 units
Products &
Services
Information
Cash
Key: = Inventory Levels
10 Units 10 Units 10 Units
10 Units 10 Units
Suppliers Producers Distributors Retailers
Products &
Services
Products &
Services
10 Units
Retailers are selling product at a constant rate and price. Firms along the
supply chain are able to set their inventory to meet demand.

6. Supply chain disrupted
Customer Demand forecast = 20 units
Key: = Inventory Levels
160 Units 80 Units 40 Units
Suppliers
Producers
Distributors
Retailers
Products &
Services
Products &
Services
Products &
Services
Information Flow
Cash Flow
80 Units 40 Units 20 Units
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.

7. Doesn’t place
order to
Wholesaler
6 Beer
Bottles/Day
Sufficien
t Stock
at
Retailer
Doesn’t
place order
to
manufactur
e
Factory
reduces
Production
Quantity
Doesn’t buy
Raw
Material
from
Supplier

8. Finished
Goods
Stock
Reduces
Stock
reduces
Sufficient
stock to meet
normal
Demand
Demand
Increases to
40 Bottles/day
Raw
Material
Stock
vanishes

9. 40 Bottles
Order
Stoc
k
Out
Places
Huge
Order to
wholesale
r
Stoc
k
Out
Places
Huge
Order to
Manufact
urer
Stoc
k
Out
Places
Huge
Order to
Supplier
Stoc
k
Out

10. Raw
Material
Supplie
d
Production
Starts
Waiting for
Replenishment
NO
STOC
K

11. Finished Goods
Inventory piled up
Replenishment
occurs
Full Store
Full
Warehous
e
Replenishme
nt occurs
Demand
returns to 6
Bottles/day

12. S
Material Flow
Order Flow
Demand
Change
by
(+/-)10%
Order = (+/-) 20%
Change by
Demand = (+/-)
10%
Forecast = (+/-)
10%
Order = (+/-)40%
Change by
Demand = (+/-)
20%
Forecast = (+/-)
20%
Order = (+/-) 80%
Change by
Demand = (+/-) 40%
Forecast = (+/-)
40%
HUGE
Change
in
Raw
Material
Supply

13. Down Stream Order Amplification

14. Impact of bullwhip effect
S Excess Inventory
S Unnecessary costs
S Insufficient or excess capacities
S Expedited transportation
S Poor customer service
S Poor forecast accuracy

15. Impact of Bullwhip effect
S Poor quality
S Lengthened and inaccurate lead time
S Loss of sales

16. Causes of Bullwhip effect
Because customer demand is rarely perfectly stable,
businesses must forecast demand to properly position
inventory and other resources. Forecasts are based on
statistics, and they are rarely perfectly accurate. Because
forecast errors are given, companies often carry an
inventory buffer called "safety stock”
Moving up the supply chain from end-consumer to raw
materials supplier, each supply chain participant has greater
observed variation in demand and thus greater need for
safety stock.

17. Causes of Bullwhip effect
S Behavioral causes
S Misuse of base-stock policies
S Misperceptions of feedback and time delays
S Panic ordering reactions after unmet demand
S Perceived risk of other players' bounded rationality

18. Causes of Bullwhip effect
S Operational causes
S Dependent demand processing
S Forecast errors
S Adjustment of inventory control parameters with each
demand observation
S Lead time variability (forecast error during replenishment
lead time)

19. Causes of Bullwhip effect
S Lot-sizing/order synchronization
S Consolidation of demands
S Transaction motive
S Quantity discount
S Trade promotion and forward buying

20. Causes of Bullwhip effect
S Anticipation of shortages
S Allocation rule of suppliers
S Shortage gaming
S Lean and JIT style management of inventories and a chase
production strategy

21. How to cope up with
Bullwhipeffect
S Improve communication along the supply chain
S Improve sources of forecast data
S Share Information
S establish a demand-driven supply chain which reacts to actual customer
orders
S Break order batches
S Stabilize prices
S Eliminate gaming in shortage situations

22. Improve communication along the
supply chain
S Retailers notifying firms upstream of sales promotions will
help clarify demand signals from consumers
S Improved information will improve demand forecasts
upstream in the supply chain

23. Improve sources of forecast
data
S Firms can use data from Point of Sale computer systems
to derive data from forecasting
S Firms along the supply chain can use EDI systems to
retrieve data on items that are legitimately being
purchased by customers

24. Information sharing
S Lack of visibility = rise in costs. Encourage information
sharing among your partners. Be a catalyst and good
example of information sharing. Work with suppliers on
releasing lead times and improving on time delivery.

25. establish a demand-driven supply chain which
reacts to actual customer orders
S In manufacturing, this concept is called kanban. This model has
been successfully implemented in Wal-Mart's distribution
system. Individual Wal-Mart stores transmit point-of-sale (POS)
data from the cash register back to corporate headquarters
several times a day. This demand information is used to queue
shipments from the Wal-Mart distribution center to the store
and from the supplier to the Wal-Mart distribution center. The
result is near-perfect visibility of customer demand and
inventory movement throughout the supply chain. Better
information leads to better inventory positioning and lower
costs throughout the supply chain.

26. Break order batches
S Use EDI Exchange to reduce the cost of placing orders.
Place orders more frequently. Ship assortments of
products in a shipload to counter high transportation
costs or use a third party logistics company to handle
shipping.

27. Stabilize prices
S Manufacturers reduce the frequency and level of wholesale
price discounting to keep customers from stockpiling
S Work to develop consistent pricing of products to avoid
demand fluctuations from the sale of inexpensive products.

28. Eliminate shortage gaming
S Rationing and Shortage Gaming
S When demand exceeds supply, manufacture ration supplies
to distributors
S This results in distributors ordering more than they need, to
fulfill the demand
S When the market cools down, orders start getting cancelled;
excess inventory piles up, leading to the bullwhip effect
S Real demand is never known in such market conditions.
S Most commonly affected is the IT hardware & telecom
industry

29. S
Thank you!