An example of the effect on the dynamic behavior of a supply chain is shown in Figure 1.
Figure 1: Bullwhip effect as seen in a traditional supply chain (Based on Description by Stalk and Hout, 1990)
Bullwhip effect can be seen as a result of “Law of Industrial Dynamics” explained by Burbidge (1989) which is as below:
“If demand for products is transmitted along a series of inventories using stock control ordering, then the demand variation will increase with each transfer”
Bullwhip effect creates unstable production schedules which lead to unnecessary extra cost in supply chain. Companies may have to invest and spend on labor costs in extra capacity in order to meet the high variable demand. This capacity will be under-utilized during the period in which demand drops. High variable demand also increases lead times and the requirements safety stock in the supply chain.
What causes Bullwhip Effect?
There are four major causes of the Bullwhip Effect:
1. Demand forecast updating – A manager, who has to determine how much to order from a supplier, will generally use a simple method to do demand forecasting, e.g. exponential smoothing. By using exponential smoothing method, future demands are continuously updated based on the new daily demand. The order sent to the supplier consists of the amount required to replenish the stock and the amount for safety stock. These two amounts are updated using the smoothing technique. With long lead time, the fluctuations in the order quantities over time can be much greater than those in the demand data. If the manager of the next tier in the... [continues]
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