2fa81Bullwhip Effect

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Bullwhip Effect


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Increasing Variability of Orders

Up the Supply Chain

Lee, H, P. Padmanabhan and S. Wang (1997), Sloan Management Review


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Finding .

Increase in variability as one travels upstream

in the supply chain .Bullwhip Effect


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What are the Causes.

Promotional sales

Volume and Transportation Discounts

Inflated orders Demand Forecast

Long cycle times


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We Conclude .

Order Variability is amplified up the supply

chain; upstream echelons face higher variability.


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Consequences.

Increased safety stock

Reduced service level

Inefficient allocation of resources

Increased transportation costs


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The effect of lack of coordination onperformance

Manufacturing cost

Inventory cost

Replenishment lead time

Transportation cost

Labor cost for shipping and receiving

Level of product availability

Profitability

Remark: All of the above essentially result from the increased

variability experienced by certain parts of the supply chain, due

to information distortion and lack of coordination.


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The Bullwhip Effect: Managerial

Insights Exists, in part, due to the retailers need to estimate the mean

and variance of demand.

The increase in variability is an increasing function of the lead

time.

The more complicated the demand models and the

forecasting techniques, the greater the increase.

Centralized demand information can reduce the bullwhip

effect, but will not eliminate it.


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Coping with the Bullwhip Effect in

Leading Companies Reduce Variability and Uncertainty

- Sharing Information

- Year-round low pricing Reduce Lead Times

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Alliance Arrangements

Vendor managed inventory On-site vendor representatives


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Obstacles to Coordination in a SC

Information Processing Obstacles

Operational Obstacles

Pricing Obstacles Incentive Obstacles

Behavioral Obstacles


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Information Processing Obstacles

Independent forecasting at each stage based onreceived orders

Lack of information sharing among the various stages ofthe chain


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Potential Remedies

Sharing point of sale data

Collaborative forecasting and planning

Single stage control of replenishment

Continuous replenishment programs (CRP)

Vendor managed inventory (VMI)


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Operational Obstacles

Ordering in large lots in order to reduce the fixed costs associatedwith order placement and transportation.

Large replenishment lead times that expose the company to

higher levels of variability, and raise the need for higher levels ofsafety stock.

Rationing and shortage gaming: Ordering larger quantities than

necessary, in order to eventually get what you need.


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Potential Remedies

Reduce replenishment lead times, by taking advantage ofmodern IT capabilities

Computer-assisted ordering

Reduce lot sizes

Computer-assisted ordering

Exploit technology and other methods to simplify receiving

Ration based on past sales and information sharing to limit

gaming


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Pricing Obstacles

Lot size-based discounts

Price fluctuations (e.g., due to promotions) resulting

in forward buying


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Potential Remedies

Move from lot size-based to volume-based quantity discounts(consider total purchases over a specified period)

Stabilize pricing

Eliminate promotions (EDLP) Limit quantity purchased during a promotion


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Incentive Obstacles

E.g., sales force incentives based on the amount of sellsduring an evaluation period in a month or quarter.

Sell-in rather than sell-through based evaluation.

Local optimization within functions or stages of the supply

chain (e.g., the shipping department trying to control the

transportation cost by reducing the frequency of the

shipments, ignoring the impact of this decision on theinventory costs and the customer service)


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Potential Remedies

Align incentives across functions

Alter sales force incentives from sell-in to sell-through

Pricing for coordination, e.g.,

Buy-back contracts

Quantity-flexibility contracts

Build strategic partnerships and trust!


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Behavioral Obstacles

Each stage of the supply chain views its actions locally, being unable to seethe impact of its actions on other stages

Different stages react to the current local situation rather than trying toidentify the root causes

Eventually, stages start blaming each other for the experienced problems,becoming enemies rather than partners

Lack of trust results in opportunism, duplication of effort and lack ofinformation sharing

From a more pragmatic standpoint, it is generally hard to trace theconsequences of certain actions because they will occur in some otherstage(s) of the supply chain.


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Building Trust into a Supply ChainRelationship

Deterrence-based view

Use formal contracts

Parties behave in trusting manner out of self-interest

Process-based view

Trust and cooperation are built up over time as a result of aseries of interactions

Positive interactions strengthen the belief in cooperation ofother party

Neither view holds exclusively in all situations


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2fa81Bullwhip Effect

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