Bullwhip Effect

Topics: Supply chain management, Management, Demand chain management Pages: 9 (1868 words) Published: September 3, 2012
Describe the impact of bullwhip effect on supply chain performance Definition of bullwhip effect:
Through the numerous stages of a supply chain; key factors such as time and supply of order decisions, demand for the supply, lack of communication and disorganization can result in one of the most common problems in supply chain management. This common problem is known as the bullwhip effect; also sometimes the whiplash effect. The bullwhip effect can be explained as an occurrence detected by the supply chain where orders sent to the manufacturer and supplier create larger variance then the sales to the end customer. These irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain. This variance can interrupt the smoothness of the supply chain process as each link in the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations. This can be illustrated by the graph shown below:

Take the example of P&G.
Logistics executives at Procter & Camble (P&C) examined the order patterns for one of their best-selling products-Pampers. Its sales at retail stores were fluctuating, but the variabilities were certainly not excessive. However, as they examined the distributors' orders, the executives were surprised by the degree of variability. When they looked at P&C's orders of materials to their

suppliers, such as 3M, they discovered that the swings were even greater. At first glance, the variabilities did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the demand order variabilities in the supply chain were amplified as they moved up the supply chain. P&G called this phenomenon the "bullwhip" effect. (In some industries, it is known as the "whiplash" or the "whipsaw" effect.)

The Bullwhip Effect Impact will result in the following:
* Increase in manufacturing cost.
* Increase in inventory
* Increase in the replenishment lead-time
* Increase in shipping and receiving costs
* Increase in the transportation costs
* Lack of uniformity in demand estimation at each level of supply chain. * Decrease in profitability

a) Identify causes of bullwhip effect
The below factors cause spikes and valleys in orders in the face of relatively consistent and predictable end consumer demand. These spikes confuse members of the supply chain on the true level of demand, causing them to produce and stock goods according to the spikes, resulting in excess inventory. 1) Demand forecasting updating>> Use of recent demand to generate a forecast, which tends to exaggerate both high and low swings, especially as that forecast is propagated back up the supply chain. * Companies usually forecast production scheduling, capacity planning, inventory control, capacity planning, inventory control and materials requirements planning. * Forecasting is often based on order history

* Each SC Company, as well as each division in the company, has its own thought process in projecting the demand patterns leading to the bullwhip effect.

2) Order batching>> The end retailer/distributor combines potential smaller orders to gain efficiencies in administrative costs, volume-pricing opportunities, and/or transportation savings * Companies batch or accumulate demands before issuing an order * Two forms of order batching-periodic ordering or push ordering * Instead of ordering frequently, the companies may order weekly or monthly & in push ordering, companies experienced regular surges in demand.

3) Price Fluctuations>> Deals offered at any level promote orders that exceed true demand, followed by long periods of no orders while true demand continues * In forward buy arrangement, items are bought in advance of requirement at attractive price offers * Forward buying results from price fluctuations(promotions) * Due to promotions, the customers’ buying...
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