Hau L. Lee • V. Padmanabhan • Seungjin Whang
Distorted information from one end of a supply chain to the other can lead to tremendous inefficiencies: excessive inventory investment, poor customer service, lost revenues, mis^ided capacity plans, ineffective transportation, and missed production schedides. How do exaggerated order swings occur? What can companies do to mitigate them? ot long ago, 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.) When Hewlett-Packard (HP) executives examined the sales of one of its printers at a major reseller, they found that there were, as expected, some fluctuations
over time. However, when they examined the orders from the reseller, they observed much bigger swings. Also, to their surprise, they discovered that the orders fTom the printer division to the company's integrated circuit division had even greater flucttiations. What happens when a supply chain is plagued with a bullwhip effect that distorts its demand information as it is transmitted up the chain? In the past, without being able to see the sales of its products at the distribution channel stage, HP had to rely on the sales orders from the resellers to make product forecasts, plan capacity, control inventory, and schedtile produaion. Big variations in demand were a major problem for HP's man^ement. The common symptoms of such variations could be excessive inventory, poor product forecasts, insufficient or excessive capacities, poor customer service due to unavailable products or long backlogs, uncertain producdon planning (i.e., excessive revisions), and high costs for corrections, such as for expedited shipments and overtime. HP's product division was a victim of order swings that were exaggerated by the resellers relative to their sales; it, in turn, created additional exa^erations of order swings to suppliers. In the past few years, the Efficient Consumer Response (ECR) initiative has tried to redefine how the grocery supply chain shotild work.' One motivation for the initiative was the excessive amount of inventory in the supply chain. Various industry studies found that the total supply chain, fi-om when products leave the manufacturers' production lines to when they arrive on the retailers' shelves, has more than 100 days of Hau L. Lee is the Kkiner Perkins, MayfieU, Sequoia Capital Professor in Industrial Engineering and Engineering Management, and professor of operations management at the Graduate School of Business. Stanford University. V. Padmanabhan is an associate professor of marketing, and Seungjin Whang is an associate profissor of operations information and technology, also at Stanford.
SLOAN MANAGEMENT REVIEW/SPRING
LEE ET AL.
Figure 1 Increasing Variability of Orders up the Supply Chain
Consumer Sales 20 r 20 r
Retailer's Orders to Manufacturer
Time Wholesaler's Orders to Manufacturer Manufacturer's Orders to Supplier 20 r
Time distributors' warehouses, and store warehouses along the distribution channel have inventory stockpiles. And in the...