Bullwhip Effect

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MANAGING THE BULLWHIP EFFECT
Joseph H. Wilck, IV
Ph.D. Dual Degree, Industrial Engineering and Operations Research, College of Engineering

The bullwhip effect is the inherent increase in demand
fluctuation up the supply chain (i.e., away from
customer). Managing the bullwhip effect is minimizing
the fluctuation and variation of the demand (i.e., orders
from one stage of a supply chain to the next stage of the
supply chain) throughout the supply chain. This paper
will offer a literature review of this topic, note the key
contributions, discuss current practices for managing the
bullwhip effect, and explain why it is necessary for more
research to be done in the area, specifically for continuous review policies.

Orders/Time Period

ABSTRACT

Time

1. INTRODUCTION

Demand

Retailer

Factory

Figure 1.1: The Bullwhip Effect
The bullwhip effect is the inherent increase in demand
fluctuation up the supply chain (i.e., away from
customer), as shown in Figure 1.1. Managing the
bullwhip effect is minimizing the fluctuation and variation
of the demand (i.e., orders from one stage of a supply
chain to the next stage of the supply chain) throughout the
supply chain.
In order to effectively manage the bullwhip effect, the
primary causes of the bullwhip effect must be understood.
The main causes of the bullwhip effect were identified,
and analytical proofs were constructed to show why these
four causes contributed to the bullwhip effect and
solutions were offered to manage the bullwhip effect by
Lee, Padmanabhan, and Whang [9] and [10].
The idea of businesses sharing information was
introduced by Forrester [5]. This concept, when extended
to individual businesses within a supply chain, is
considered the best strategy when trying to reduce the
bullwhip effect. However, it is impossible to completely
eliminate the bullwhip effect from a supply chain (at least, in realistic supply chains).
The main purposes of this paper are to: explain the
causes and implications of the bullwhip effect, summarize
the techniques utilized to manage the bullwhip effect, and
present research detailing why the bullwhip effect is
inherent to all supply chains.

2. CAUSES AND IMPLICATIONS OF
THE BULLWHIP EFFECT
Lee, Padmanabhan, and Whang [9] logically and
mathematically proved that the key causes of the bullwhip
effect are: demand forecast updating, order batching,
price fluctuation, and shortage gaming.
When
considering a periodic review policy (i.e., review the
inventory at specified periods and place an order to bring
inventory to a certain level), the following assumptions
are made: demand is constant over time, and past demand
is not used to forecast future demand, no fixed order costs, per unit cost of the product is constant over time, and an
infinite amount of supply is available for a constant lead
time.
The optimal periodic review policy for the above
assumptions is to order the previous period’s demand for
each upcoming period. Therefore, the demand and orders
will have the same distribution and variation, and hence
no bullwhip effect in the system. However, none of the
aforementioned assumptions are entirely realistic for an
authentic supply chain.
Removing the assumptions (one at a time) leads to the
four causes of the bullwhip effect. The following
subsections of the report explain the analytical evidence

behind the causes of the bullwhip effect that were
identified by Lee, Padmanabhan, and Whang [9].
2.1. Demand forecast updating
Demand forecast updating, also known as demand signal
processing, and occurs when the first assumption is
violated. Hence, demand is not constant and observed
past demand is used to forecast future demand.
By finding a closed form solution relating the
variance of an order to the variance of the demand for a
single stage within a supply chain, a theorem was proved
providing two major inferences: variance of orders (i.e.,
which...
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