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Dr.S.Yogananthan
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Systems Perspective Understand supply chain dynamics and adopt a
holistic view. Consider the business ecosystem in which you
are operating. Supply Chain Dynamics
Enterprises can experience huge variations ateach step in the chain, with variations typicallymore pronounced the further upstream theenterprise is from the ultimate user.
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Results in: Larger inventory carrying costs
Lost sales from stock outs
Lack of responsiveness to customer demand
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Bullwhip effect - is the uncertainty caused fromthe distorted information flowing up and downthe supply chain stream and which may cause excessive swelling up of stocks and inventories,
order size, stagnation in supply chain stream,stock outs, etc.
Results in: excessive inventory investment poor customer service lost revenues misguided capacity planning
ineffective transportation
Ineffective production schedules.
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Underscores the importance of understandingsupply chain dynamics and applying systemsthinking to coordinate activities within andbetween enterprises.
Explains the crucial role lead times play inenhancing or inhibiting competitiveness
Elaborates on the role ofinformation systems inthe lean supply chain.
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Assumes a linear SC, 4 enterprises, one type of beer
Goal is to manage demand as imposed by itscustomer
Each enterprise has only one manager
Runs for 50 wks.
RetailerFactory DistributorWholesaler
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Each week, an enterprise receives an orderfrom downstream customers and places anorder upstream.
Two week lead time between when an order isplaced and when it is received.
Another two week lead time before the orderis delivered.
Each enterprise starts with 12 cases of beer.
At the beginning of each week we know whatdemand will be.
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Everyone acts in their own selfinterest on the basis of their ownforecasts
The system is in a steady statewith demand at four cases eachweek.
In week 5, demand is disrupted to
8 cases a week and remainsconstant.
Each players ordering policy isbased on two rules
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The forecast rule: The weekly demand for eachof the next four weeks is the average of theweekly demand over the four most recentweeks. Four period moving average:
(4+4+4+4)/4=4
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Given the forecasts, the amountordered is just enough to replenishthe ending inventory (Four weeksfrom now-when the order arrives) toa target of 12 cases.
12+(Forecast demand for next 4
weeks)-(current inventory)-(Ordersalready placed for the next threeweeks.
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Customer and Retailer: Week 4
Forecast Demand: (4+4+4+4)/4 4
Demand (this period) 4 4 Order just received
Demand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4
Target Safety Stock 12 12 Inventory on hand
Order 4
Retailer and Wholeseller: Week 4
Forecast Demand: (4+4+4+4)/4 4Demand (this period) 4 4 Order just received
Demand(next 3 periods): 4+4+4 12 12 Orders on the way: 4+4+4
Target Safety Stock 12 12 Inventory on hand
Order 4
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Consumer demand increased by 100%
4 8 cases
The retailers order to the wholesaler increased by200%
4 12 cases
The retailer doubled the variation in demand
Customer and Retailer: Week 5
Forecast Demand(4+4+4+8)/4 5
Demand (this period) 8 4 Order just received
Demand(next 3 periods): 5+5+5 15 12 Orders on the way: 4+4+4
Target Safety Stock 12 8 Inventory on hand
Order 12
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Retailer and Wholeseller: Week 5Forecast Demand (4+4+4+12)/4 6
Demand (this period) 12 4 Order just received
Demand(next 3 periods): 6+6+6 18 12 Orders on the way: 4+4+4
Target Safety Stock 12 4 Inventory on hand
Order 20
The wholesalers order to the distributor
increased by 400%. 4 20
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Distributor and Factory: Week 5
Forecast Demand (4+4+4+36)/4 12
Demand (this period) 36 4 Order just received
Demand(next 3 periods): 12+12+12 36 12 Orders on the way: 4+4+4
Target Safety Stock 12 -20 Inventory on hand
Order 68
Wholeseller and Distributor: Week 5
Forecast Demand (4+4+4+20)/4 8
Demand (this period) 20 4 Order just received
Demand(next 3 periods): 8+8+8 24 12 Orders on the way: 4+4+4
Target Safety Stock 12 -4 Inventory on hand
Order 36
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200% 400% 800% 1,600%
FactoryRetailer Wholesaler Distributor
The variation doubles at each stage.
However, of the 64-case increase in the factory'sorders, only four cases were directly attributableto a change in consumer demand.
The lead times present in this value streamcreated 94 percent of the variation observed inthe factorys orders.
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Warehouses/Distributors
Manufacturers
Retailers
Lead times significantly exacerbate the bullwhipeffect
Reducing lead time, in combination withimproved visibility along the supply chain, can
significantly and positively relieve the bullwhip
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Assume all of the same factors except thateach stage is aware of the customersorders.
Assume we know that demand for week sixand onward is five cases.
Following exactly the same steps.
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Forecast Demand: (4+4+4+8)/4 5Demand (this period) 8 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 8 Inventory on hand
Order 12
Forecast Demand 5
Demand (this period)12
4 Order just receivedDemand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 4 Inventory on hand
Order 16
Forecast Demand 5
Demand (this period) 16 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 0 Inventory on hand
Order 20
Forecast Demand 5
Demand (this period) 20 4 Order just received
Demand(next 3 periods):5+5+5 15 12 Orders on the way:4+4+4
Target Safety Stock 12 -4 Inventory on hand
Order 24
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Retailer
Wholesaler
Distributor
Manufacturer
Retailer orders 12 cases- a 200%
increase
Wholesaler orders 16 cases- a 300%
increase
Distributor orders 20 cases- a 400%
increase
Manufacturer order Raw Materials to make
24 cases- a 500% increase
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Perfect forecasting does not eliminate thebullwhip effect
Lesson: The bullwhip effect is presenteven if there is perfect information aboutthe future that is shared among allchannel partners.
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Lead times can multiply the variation in demandand so everyone in the supply chain should beworking to reduce lead times.
The implications of Little's Law are that wheninventory in the supply chain is high, lead timesincrease, and, conversely, longer lead timesresult in more inventories in the pipeline.
This problematic and cyclical relationshipbetween lead times and inventory is a powerfulreason for reducing lead times.
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Lack of visibility
Long lead time
Many stages in the supply chain
Lack of pull signals
Order batching
Price discount and promotions
Forward buying Rationing
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Over-reaction to backlogs
Neglecting to order to reduce inventory
Hoarding customers
Shortage gaming for customers Demand forecast inaccuracies
Attempts to meet end-of-month metrics
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At Distributionlevel
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At Process(throughput) level
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Product postponement occurs in two ways:Manufacturing PP: Changes in form and identity occur @the latest possible point in the SCN
Logistics PP: Changes in inventory location occur @ thelatest possible point in time
HP Deskjet Printers:Power cords, Voltage requirements, fonts, etc.
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Advantages of PP:Hedge against uncertain customer demand
Reduce inventory holding cost
Reduce Logistics/Warehousing costsMinimize imbalance in stock distribution
Eliminate stages in Manufacturing
Eg: packaging, customer does assembly etc.
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Loss of Economies of Scale!
Requires quick set ups and agile procurement
Reduced risk of product obsolescence
Requires increased capability to process,transmit, and deliver orders
Product should be "DFPP"(Should be technically and economically feasible)
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Information Sharing (Transparency) using ICTSCM/ERP Solutions
B2B Markeplaces
B2C and CRM
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Supply Rationing Problem: Given shortage insupplies, how to allocate stock across echelons
Threshold policies for high priority customers (Ha 1997)
Minimize total imbalance in stock distribution s.t. servicelevel constraints (Van der Heijden 1997)
Hundreds of articles in various journalsincluding OR, MS, EJOR, JORS, IJPR, IJPDLM, JOM,
etc.
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Hierarchical integration of production planningand scheduling
Provide effective decision support for different DM levels
within a hierarchical organizationBased on the following scheme:
Decompose to get hierarchical structure (Stgc-Tac-Opn)
Do Aggregation where possible (eg. Forecasts: agg. ontime,products,markets; Capacity: agg. On resources)
Hierarchical coordination (by setting targets+getting f/b)
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Forrestor: Industrial Dynamics, HBR, 36:4, 1958First research paper to illustrate systems dynamics inSCN's
Base for developing Distribution Games
"BWE" coined by P&GBWE describes the increasing amplification oforders occuring within a SC
Resembles a whip lash
Occurs even if end-item demand is fairly stable!Forrestor studied a simulation model of the simplesttandem supply chain with four entities: Retailer, DC, W/H,Plant
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A fast forwardoutlook onBullwhip
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Sunil Chopra and Peter Meindl, SCM, Pearsonedition.
NRS.Raghavan, Supply chain dynamics, IISClecture material.
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