‘ Bull-Whip Effect. Causes & Impact. How Can Improved It Support Reduce Bullwhip Effect

Topics: Supply chain management, Inventory, Electronic Data Interchange Pages: 15 (3844 words) Published: November 20, 2008
Bullwhip Effect Causes and Impact. How Can Improved IT Support Reduce Bullwhip Effect

Dnyanesh Sarang

Table of Contents


2Supply Chain & Bullwhip Effect2

3Causes of Bullwhip effect4
3.1Demand Forecast Updating4
3.2Order Batching5
3.3Price Fluctuation 5
3.4Rationing and shortage gaming5

4Impact of Bullwhip Effect6
4.1Manufacturing Cost6
4.2Inventory Cost6
4.3Replenishment Lead Time 6
4.4Transportation Cost6
4.5Level of Product Aavailability6

5How can improved IT reduce Bullwhip effect7
5.1Sharing Point of Sales Data(POS)8
5.2Implementing Collaborative Forecasting & Planning (EDI & CAO) ……….. 9 5.3Designing Single Stage Control of Replenishment (CRP & VMI) 10 5.4Conclusion11



From many years Bullwhip Effect has played crucial role in supply chain management. Proctor & Gamble (P&G) has seen the bullwhip effect in case of supply chain of Pampers diapers, which caused increase in cost and more and more tedious to cope up supply with demand in market.(LPW 2004). Lee, Padmanabhan and Whang (2004) define the bullwhip effect as “the amplification of demand variability from a downstream site to an upstream site” These same authors, Lee, Padmanabhan and Whang (1997),outline four major causes of the bullwhip effect; Demand forecast updating, Order batching, Price Fluctuation, Rationing and shortage gaming respectively. S.Chopra, P.Meindl summarize the impact of bullwhip effect on different performance measure like Manufacturing Cost, Inventory Cost, Replenishment lead time, Transportation Cost, Shipping and receiving cost, Level of product availability and profitability. Lee, Padmanabhan and Whang (1997) summarized framework and various initiative against bullwhip effect. Different majors elaborated here for the best policies of information enrichment and information sharing smoothly at each stage of supply chain. IT solutions are discussed for the same.

2. Supply Chain and Bullwhip Effect:

As per S.Chopra, P.Meindl, A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer request. Sale of good involves series of operations. Consider a customer walking in pharmacy to purchase paracetamol tablet. The supply chain starts from need of customer’s need. Pharmacy stocks inventory based on demand for it. The pharmacy stores inventory in warehouse and transports the same from distributor. The distributor stocks different medicines from pharmaceutical manufacturer. Production department of Pharmaceutical company manufacturer different dosage forms using raw material received from raw material supplier. In the above process one can observe downstream flow of physical good, and upstream flow of money & information (fig1). Flow of information and flow of money flows from final customer to manufacturer, whereas flow physical demand flows from manufacturer to final customer. In all these flows, flow of information plays crucial role. It is quite important to have coordination in all stages of supply chain to improve the smoothness and to maximize profit. Its very clear that each stage should take in account the impact of its action on other stages of chain. It is possible that lack of coordination can occur as different stages may have different goals. It creates obstacles in information movement between different layers. Information distortion occurs. If every stage owns by different owner, they tries to maximize own profit and diminishes total profit.

Figure 1. Different flows in Supply Chain

One can illustrate the bullwhip effect by “Beer Game”. This game is ideal introduction to understand in-depth knowledge of supply chain management. In this game participants enjoys the role of supplier, manufacturer, distributor/stockist, retailer and customer. The participants are isolated and can not communicate with each...

References: Benjamin, R.I., De Long, D.W. and Scott, M.S., 1990. Electronic data interchange: how much competitive advantage?. Long Range Planning 23 1, pp. 29–40.
Chen et al., 2000a. F. Chen, Z. Drezner, J. Ryan and D. Simchi-Levi , Quantifying the bullwhip effect in a simple supply chain: The impact of forecasting, lead times, and information. Management Science 46 3 (2000), pp. 436–443
Chen, J
Chopra, S., & Meindl, P,. Supply Chain Management: Strategy, Planning and Operations (2nd ed.) (2004).. New Jersey: Prentice Hall
Emmelhainz, M.A., 1993
H.L. Lee, V. Padmanabhan and S. Whang, Information transformation in a supply chain: the bullwhip effect. Management Science 43 4 (1997), 546–558
Kaminsky, P., Simchi-Levi, D., 1998
a supply chain: The bullwhip effect”. Management Science. 50(2004), 1887-1893.
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