M213 OPERATIONS MANAGEMENT
BULLWHIP EFFECT
Bullwhip Effect
• Tendency of a player in the supply chain of a material or product in short supply to buy more than they need in the immediate future. • Logistic phenomenon named after the way the amplitude of a whip increases down its length.
Why the bullwhip effect occurs? Demand Forecasting
• One day, the manager of a retailer observed a larger demand (sales) than expected. • He increased the inventory level because he expected more demand in the future (forecasting). • The manager of his wholesaler observed more demand (some of which are not actual demand) than usual and increased his inventory. • This caused more (non-real) demand to his maker; the manager of the maker increased his inventory, and so on. This is the basic reason of the bull whip effect.
Bullwhip Effect
• Businesses must forecast demand in order to properly position inventory and other resources. • Forecast are traditionally based on statistics and are rarely perfectly accurate. • Because forecast errors are a given, companies often carry inventory buffer (safety stock). • Demand information is distorted as it travels within the supply chain, so that different stages have different perspectives and estimates of the chain demand.
Why the bullwhip effect occurs? Lead time
• With longer lead times, a small change in the estimate of demand variability implies a significant change in safety stock, reorder level, and thus in order quantities. • Thus a longer lead time leads to an increase in variability and the bull whip effect.
Why the bullwhip effect occurs? Batch Ordering
• When using a min-max inventory policy, then the wholesaler will observe a large order, followed by several periods of no orders, followed by another large order, and so on. • The wholesaler sees a distorted and highly variable pattern of orders. • Thus, batch ordering increases the bull whip effect.
Why the bullwhip effect occurs? Variability of Price
•... [continues]
BULLWHIP EFFECT
Bullwhip Effect
• Tendency of a player in the supply chain of a material or product in short supply to buy more than they need in the immediate future. • Logistic phenomenon named after the way the amplitude of a whip increases down its length.
Why the bullwhip effect occurs? Demand Forecasting
• One day, the manager of a retailer observed a larger demand (sales) than expected. • He increased the inventory level because he expected more demand in the future (forecasting). • The manager of his wholesaler observed more demand (some of which are not actual demand) than usual and increased his inventory. • This caused more (non-real) demand to his maker; the manager of the maker increased his inventory, and so on. This is the basic reason of the bull whip effect.
Bullwhip Effect
• Businesses must forecast demand in order to properly position inventory and other resources. • Forecast are traditionally based on statistics and are rarely perfectly accurate. • Because forecast errors are a given, companies often carry inventory buffer (safety stock). • Demand information is distorted as it travels within the supply chain, so that different stages have different perspectives and estimates of the chain demand.
Why the bullwhip effect occurs? Lead time
• With longer lead times, a small change in the estimate of demand variability implies a significant change in safety stock, reorder level, and thus in order quantities. • Thus a longer lead time leads to an increase in variability and the bull whip effect.
Why the bullwhip effect occurs? Batch Ordering
• When using a min-max inventory policy, then the wholesaler will observe a large order, followed by several periods of no orders, followed by another large order, and so on. • The wholesaler sees a distorted and highly variable pattern of orders. • Thus, batch ordering increases the bull whip effect.
Why the bullwhip effect occurs? Variability of Price
•... [continues]
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