Bullwhip Effect in Supply Chains

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Summary

What is the Bullwhip Effect in Supply Chains? Meaning.


The Bullwhip Effect in Supply Chains is a logistic phenomenon named after the way the amplitude of a whip increases down its length. It was described by Lee, Padmanabhan, and Whang in Sloan Management Review, Spring 1997. The phenomenon occurs in forecast-driven distribution channels and has some roots in J. Forrester's Industrial Dynamics (1961).


Customer demand is often and increasingly unstable. Businesses must forecast demand in order to properly position inventory and other resources. Forecasts are traditionally based on statistics, and they are rarely perfectly accurate. Because forecast errors are a 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. In periods of rising demand, down-stream participants will increase their orders. In periods of falling demand, orders will fall or stop in order to reduce inventory. The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer).
 

Common symptoms of Bullwhip variations are excessive inventory (shortages of Working Capital), poor product forecasts, insufficient or excessive capacities, poor customer service due to unavailable products or long backlogs, uncertain production planning (i.e., excessive revisions), and high costs for corrections, such as for expedited shipments and overtime.


The Bullwhip effect is amplified by separate ownership at different stages of the Supply chain, thereby decreasing the overall profitability of the Supply Chain.

Additional factors contributing to the Bullwhip Effect are:

  • Forecast errors and updates

  • Lead time variability

  • Order batching

  • Price fluctuation

  • Rationing and shortage gaming, product promotions, inflated orders

Thousands have felt the frustration of supply chain management in a simulation model developed at MITís Sloan School of Management called the Beer Game. The simulation is run as a board game in teams playing the roles of retailers, wholesalers, distributors, and brewers of beer. As the backlog for orders increase, players order too much inventory, forcing their teammates into severe backlogs further down the supply chain.


The effect can be reduced by basing forecasts on the actual demand (Demand Forecasting). Specific countermeasures against the Bullwhip Effect are: information sharing (exchange and reduce inventory levels, Vendor Managed Inventory), channel alignment (Alliances, coordination, Synchromarketing, improve Supply Chain Design, partnerships, Disintermediation), and operational efficiency (Kanban, Just-in-time, reduced costs and lead times, Lean Production).  Technologies such as EDI, ECR, Internet, advanced scheduling and Supply Chain planning software also play an important enabling role in the field.


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Table of Causes and Corrective Actions for Bullwhip Effect
Who has a list of causes and for each corrective actions to control bullwhip effects in supply chains? (...)
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Bullwhip or Chinese Whisper
Look what happens in the Chinese Whisper Game: the first player whispers a phrase or sentence to the next one, each peop (...)
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Bull Whip Effect and Working Capital
Companies needs to be very mindful of Bullwhip effects. It can destroy your working capital. (...)
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🔥 NEW Factors in Information Exchange / Distortion in the Supply Chain
Strong exchange of information and various distortions of information across the supply chain are both playing an import (...)
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Ways to Deal with the Bullwhip Effect
How can companies deal with bullwhip effects? (...)
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Is Toyota Kata a Universal Answer to Deal with Bullwhip Effects?
How about Toyota Kata (Editor: kata ~ a pattern, a way of doing things), can we see it as a good practice, a universal a (...)
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Compare with: 3rd Party Logistics (3PL)  |  Elasticity of Supply  |  Feedback Loops  |  RFID Technology  |  Quick Response Manufacturing

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