The Bullwhip Effect

It seems that  “The Beer Game” has shed some light on my traditional approach to the supply chain management. So I have decided to search some more info about The Bullwhip Effect and share it with you. Moreover, we can improve our performance in the next seminar.

The bullwhip effect basically consists on the fact that low variances in the demand (consumer demand) can cause high variances in the supply chain orders in the Manufacturer and Distributor levels (high levels of the supply chain).  This variance can interrupt the smoothness of the supply chain process, as each link in the supply chain will over or underestimate the product demand resulting in exaggerated fluctuations. So these irregular orders in the lower part of the supply chain develop to be more distinct higher up in the supply chain.

But why this really happens? There are many factors said to cause or contribute to the bullwhip effect in supply chains. In the following list I mention the reasons I found:

  • Lack of communication/ information between each link in the supply chain makes it difficult for processes to run smoothly. Managers can perceive a product demand quite differently within different links of the supply chain and therefore order different quantities.
  • Order batching; companies may not immediately place an order with their supplier; often accumulating the demand first. Companies may order weekly or even monthly.  This creates variability in the demand as there may for instance be a surge in demand at some stage followed by no demand after.
  • Disorganization between each supply chain link; with ordering larger or smaller amounts of a product than is needed due to an over or under reaction to the supply chain beforehand.
  • Price variations – special discounts and other cost changes can upset regular buying patterns; buyers want to take advantage on discounts offered during a short time period, this can cause uneven production and distorted demand information.
  • Demand information – relying on past demand information to estimate current demand information of a product does not take into account any fluctuations that may occur in demand over a period of time.
  • Free return policies; customers may intentionally overstate demands due to shortages and then cancel when the supply becomes adequate again, without return forfeit retailers will continue to exaggerate their needs and cancel orders; resulting in excess material.
  • Local optimisation in terms of local forecasting and individual cost optimisation. A good example for local optimisation is the batch order phenomenon. In practice, ordering entails fix cost, e.g. ordering in full truck loads is cheaper than ordering smaller amounts. Furthermore, many suppliers offer volume discounts when ordering larger amounts.

Note also that it would be interesting to share the stock level of each link of the supply chain (Factory, Distributor, Wholesaler and Retailer) in order to avoid ordering too much or having backorder costs

By: Josep Massana

Sources: EntrepreneurBeer GameWikipediaAdapt a Lift

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