Bullwhip Effect in Supply Chains

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Description of Bullwhip Effect in Supply Chains. Explanation.




Definition Bullwhip Effect in Supply Chains. Description.

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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