Bullwhip Effect in Supply Chain

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Supply Chain Class
Module 2, Lesson 3

Question #1

Develop a small group consensus on the impact (increases, decreases, no effect) of the Bullwhip Effect on two of the following six supply chain performance measures: manufacturing cost, inventory cost, replenishment lead time, transportation cost, shipping and receiving cost, level of product availability profitability.

One of the two measures that your team chooses must be inventory cost. For inventory costs, be certain to be specific about the kinds of inventory costs impacted (in-storage cycle stock carrying costs, ordering costs, stockout costs, or safety stock carrying costs). Clearly explain your group’s reasoning or rationale for the impact you have agreed to; that is carefully explain why the bullwhip effect either increases, decreases of has no effect on the given performance measure. In each of your explanations, drill down into the factors that drive each measure, explaining how those factors are affected by the Bullwhip effect.

It is the consensus of Team 10 that the bullwhip effect increases costs associated with the manufacturing of products. We know that the bullwhip effect results in an amplification of the variation of product and material demand as one travels upstream in the supply chain from consumer to material suppliers. In most cases the manufacturer of products will be removed from the actual consumer by multiple layers in the supply chain. The variation in demand (variation in orders) that the manufacturer will experience will be significantly greater than the variation in demand from the actual consumers. There are several costs incurred in the manufacturing of products. Among these costs are direct material costs, direct labor costs and overhead costs. The increased variability in quantity of products demanded from the manufacturer has an impact on each of these items. For most manufactured products, the cost of materials is a significant portion of the cost of the end item. As the demand for products varies from the manufacturer, these swings in demand are amplified and passed on to the material suppliers and various other sub-suppliers. During periods of high demand, the manufacturer is more likely to be forced to pay the material suppliers and sub-suppliers additional fees to expedite shipments. During periods of low demand, the manufacturer is more likely to find itself with a huge stock of unused material on hand. These variations also make it more difficult to negotiate competitive prices with the suppliers, further adding to the cost of the bullwhip effect. In an effort to protect against some of this variation, manufacturers will often stockpile materials, adding further warehousing and capital costs. Labor costs are another key component of the total cost of most products, including products which may be manufactured offshore in low-wage countries. In periods of extremely high demand, manufacturers are faced with an option of either hiring more employees or working their existing employee’s longer hours and paying overtime. Most companies are extremely reluctant to hire additional workers, particularly if they have reason to believe that the spike in demand will only be temporary. As a result, companies will typically choose to work longer hours and pay overtime wages to their employees. Paying overtime is costly, not only from a wage standpoint but also from an effectiveness standpoint. Employees are not robots, and diminishing marginal return should be expected when working employees longer hours. As hours go up, productivity typically declines at a rate that increases as the severity of the work schedule increases. The result is an increasing cost per unit of the products produced. Likewise, when product demand is extremely low, employees are not able to be utilized as effectively and labor cost per unit also increases. Further, there are the overhead costs which are...
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