Bullwhip effect, also known as Forrester effect occurs when the demand order changes in the supply chain are amplified as they moved up the supply chain. It is termed as bullwhip effect because of the large magnitude of disturbances in the chain caused by a small disturbance at one end of the chain.Thus, in a typical supply chain for a consumer product, with less sales variation, there seem to be a pronounced variability in the retailers' orders to the wholesalers.
Considerably, four major causes of the bullwhip effect have been identified. These are:
1. Demand forecast updating: this is the readjustment of demand forecasts by upstream managers as a result of future product demand signal. Forecasting is usually based on the order history from a company's immediate customers.Traditionally,every company in a supply chain usually prepares product forecasting for its production scheduling, capacity planning, inventory control and material requirement planning. It is contended that the signal from demand forecasting is a major contributor to the bullwhip effect. For example, if a manager uses, say, exponential smoothing (future forecast is always updated as demand increases) the order sent to the supplier reflects the amount needed to replenish the stocks to meet the requirements for future demands and safety stocks which might be considered necessary.
2. Order batching: Companies place orders with upstream organisations in a supply chain, using some inventory monitoring or control. As demand comes in, inventory is depleted but the company may not immediately place an order with the supplier. It often batches or accumulates demands before issuing an order. Sometimes the supplier cannot handle frequent order processing because of the substantial time and cost involved so instead of ordering frequently, companies may order weekly or fortnightly.
This leads to two forms of order batching; periodic and pushing ordering. Many manufacturers place purchase orders with suppliers when they run their materials requirement planning (MRP) systems monthly; resulting in monthly ordering with suppliers. This is a periodic ordering. As an illustration, for a company that places orders once a month from its suppliers, the supplier faces a highly erratic stream of orders. Demands go up at one time during the month, followed by no demands for the rest of the month. This periodic ordering amplifies distortions and disruptions and contributes to the bullwhip effect. A similar effect becomes prevalent in push ordering phenomenon.Here, a company experiences regular surge in demand. As a result, customers 'push' orders on the company periodically. Although the periodic surges in demand by some customers would be insignificant suppose all ordering are not made at the same time, however, it does not happen that way. The orders are more likely to overlap and cause the bullwhip effect to be felt most.
3. Price Fluctuations: Because of attractive offers like 'buy one get one free'(BOGOF),price and quantity discounts, rebates and so on usually provided by manufacturers to distributors in the grocery industry, items are bought in advance of what is actually needed. This is referred to as 'forward-buying' which is known to account for about $75bn to...