Bullwhip Effect in Supply Chain
Abstract. A demand variability increase when it moves downstream to upstream in a supply chain, this phenomenon is known the 'Bullwhip effect'. This Bullwhip effect creates pile upon unnecessary inventory in the supply chain and reductions of this make a significant role. In this paper bullwhip effect causes are analyzed and the reducing measures are suggested, such as: Establishing the information sharing mechanism, Coordinating benefit of information sharing, establishing the strategic alliance, strengthening the cooperation & trust, strengthen the stock managing and reduce the lead time of the supply .
Key words: bullwhip effect, inventory, supply chain, lead time.
The variability in demand gets amplified as it reaches the final link of the supply chain, which results in increased cost and reduced margin of profit. The information flow in the supply chain is the most essential factor in determining the effectiveness of the supply chain. Batch sizes reduction and recurrent ordering policy, the technology of making the demand and other information visible to all participants of the supply chain will reduce the Bullwhip Effect to a great extent. This can be achieved by well-organized information exchange between the supply chain participants. It can be concluded that Bullwhip Effect causes distortion of information, delays in procurement, and delays in availability of the goods to the customer. This happens largely due to the decisions at every stage of the supply chain. It is apparent that it is not possible to entirely reduce the Bullwhip Effect, but certain care can be taken in order to ensure that it is reduced so that the end consumer is least affected. Information Technology help in reducing the Bullwhip Effect, and used as powerful tool. Internet based information exchange plays effective role in management of a supply chain. Lee et al. (1997), the bullwhip effect occurs in lots of companies. The most famous case which happened in Procter & Gamble (P&G) and Hewlett-Packard (HP) offer good understandings of the bullwhip effect. This phenomenon was first pointed out by Forrester (1958) in his system dynamics, and he also suggested that the way to tackle is reducing delays in the supply chain (Hussain and Drake, 2011). The most famous ”Beer Distribution Game” was reported by Sterman (1989) as an proof of the bullwhip effect, in this game, players are segregate into four parts and each part represent brewer, distributor, wholesaler and retailer. The four players can only make inventory decisions by the orders from nearest player; they cannot exchange information with other player. The result of the game show that demand information distortion in supply chain internal transfer due to the irregularity of information flow between each node of the enterprises in the chain. The bullwhip effect could easy cause a set of risks gradually, from downstream to upstream; it will influence the operation of the total supply chain, increase the inventory and waste of resources. Therefore, study the bullwhip effect and remove its harmful impacts on the supply chain has an significant significance. to mitigating the bullwhip effect there have different insights according to various researchers. Forrester (1961) hold the view of that the bullwhip effect can be mitigated through alteration in behavioural practice, Sterman (1989) have the insight of adaptation in individual education can help to tackle the bullwhip effect. While according to Lee et al. (1997), there are four main cause of bullwhip effect: 1. Demand forecast updating, 2. Order batching, 3. Price fluctuation, and 4. Rationing and shortage game. Lee et al. (1997) also suggest that the institutional and inter-organization infrastructure and associated processes can create for organizations to manage the bullwhip effect.
Objectives of the Study
The aim of this paper is to give an extensive literature overview of the bullwhip Effect, and explain its causes and proposed remedies.
This paper is purely conceptual in nature which is based on the review of relevant literature. For the purpose of reviewing the literature, we selected the relevant titles thereafter; we conducted an extensive literature review to reach at meaningful conclusion.
Causes of Bullwhip effect
Forecast each entity in the supply chain gives their own forecast about the demand and this multiple demands lead to distortions. Each members demand is based on orders received at his end and not based on the demand given by the end customer.
Order Batching to get the economies of scale in production and transportation every member of the chain practice order batching. Sometimes order bunching takes place due to the planning practices of the firm. For example if firm work on MRP software once a fortnight, of course all the orders for the fortnight will get bunched.
Price Fluctuations price promotions or discount causes forward buying and creates much distortion. Frequent changes in the price affect the pattern of buyer’s ordering and this creates distortions.
Shortage In the case of shortages the suppliers usually resorts to rationing which in turn provides incentives to buyers to inflate orders.
Long Lead Time Due to long lead times the planning horizon of other partners increase further every partner is forced to keep safety stock resulting in an overall distortion increase in the chain.
Impact of Bullwhip Effect
The distortion of demand has led to the Bullwhip effect; the destruction is done not only at the micro level but also at macro level (Deng and Ma, 2009)
At the micro level, the bullwhip effect in supply chain will bring a dual loss for companies i.e. effectiveness and profitability. First, the product stock is to adapt the demand so that the firm try to remove the excessive demand fluctuation caused to supply chain. Second because the demand uncertainty engorged, the difficulty of the firm’s ideal forecast to the demand is also enlarged. Third, the demand distortion also affects firm’s production. Due to distortion of demand information. At macro level, the Bullwhip effect is a typical "market failure" incident, as the upstream node of the supply chain received the demand information deviated from the exact demand; it may lead to over-investment or investment shortage.
Bullwhip Effect remedies
Reducing Uncertainty – Reducing uncertainty is the vital step towards reducing the Bullwhip Effect. Centralizing the demand information can decrease uncertainty to a great extent. This will make the customer demand and forecasted retailer’s demand seen to all partners of the supply chain. This decreases forecasting error. But, different buying policies and forecasting methods used by various supply chain partners induces the Bullwhip Effect into the system. It is also true that even if all the supply chain partners use the identical forecasting technique and buying policy the Bullwhip Effect cannot be totally eliminated. Data desires to be made accessible to all the links in the chain. This simple change in demand data transfer allows parallel forecasting and avoids the magnification that results from a multi-stage forecasting process. It also has the added advantage of eliminating the delays inherent in a multi-stage system.
Reducing Variability- Reducing the inconsistency in the demand can decrease the Bullwhip Effect considerably. Regular variation in product prices results in a pseudo increase or decrease in demand thereby introducing the variation into the system. If a product is offered for a constant price as in EDLP (everyday low pricing), the Bullwhip Effect can be decrease to a substantial level.
Lead Time Reduction – Lead-time can be separated into order lead-time and information lead-time. Reducing both types of lead times will decrease a significant amount of variation. Functions of lead time are safety stock levels and reorder points; reduction in lead-time reduces the variation. Systems such as cross docking and EDI (Electronic Date Interchange) can lessen both the ordering lead-time and the information lead time
Strategic Partnering and Buying – Strategic partnering decreases the lead-time to a great extent. Information sharing in strategic partnering reduces variation in the supply chain system. This can be achieved by the use of a concept called VMI (Vendor Managed Inventory). This requires the manufacturer to sustain the inventory at the point of use thus reducing the variation. The buyer and the manufacturer adopted the policies of strategic buying which in turn reduce the variation caused due to quantity discounts offered by the manufacturer.
Advanced Information Technology – Advances in information technology has made the concept of easily access of the information possible. Elimination of the intermediaries such as the retailer from the system and provides the point-of-sale demand to all the supply chain partners is possible with the help of E-commerce.the process of elimination of the intermediaries is called disintermediation decreases the variation in the system to a large level. This makes the demand information dynamically accessible to all the participants of the supply chain system. This help in enhancing the effective integration of supply chain partners having conflicting objectives and views. Company internal internet called intranet, changes the sequential flow of the information within the system with the dynamic flow of the information help in reducing the manufacturing lead-time and ultimately the Bullwhip Effect. This also incorporates flexibility to the system and increases the speed of response. A good information exchange system, like the internet, united with a good quality warehouse management and transportation management system can significantly reduce the Bullwhip Effect.
The variability in demand gets augmented as it reaches the final stage of the supply chain, which results in increased cost and reduced margin of profit. The information flow in the supply chain system is the most imperative factor in determining the effectiveness of the supply chain. Besides batch sizes reduction and recurrent ordering policy, the technology of making the demand and other information visible to all participants of the supply chain will reduce the Bullwhip Effect to a great level. This can be achieved by adopting information interchanged between the supply chain partners.
It can be summarized that Bullwhip Effect causes information distortion, delays in procurement, and delays in availability of the goods to the end users. This occurs due to the decisions at each stage of the supply chain. This paper has discussed the major factors that lead to the Bullwhip Effect and also listed the possible remedies. It is obvious that it is not possible to completely eliminate the Bullwhip Effect, but certain care can be taken in order to ensure that it is reduced so that the end consumer is least affected. Information technology can be used as controlling instrument to reduce the Bullwhip Effect. Internet based information exchange plays a significant role in effective and efficient management of a supply chain, by increasing the quality and speed of the information interchanged.
1. Baganha, M. P., & Cohen, M. A., 1998, “The Stabilizing Effect of Inventory in Supply Chains,” Operations
Research, 46, S72-S83.
2. Chen, F., Drezner, Z., Levi, D. S., & Ryan, J. K., 2000, “Quantifying the Bullwhip Effect in a Simple Supply
Chain: The Impact of Forecasting, Lead Times & Information,” Management Science, 46(3), 436-443.
3. Kelle, P., & Milne, A., 1999, “The Effect of (s, S) Ordering Policy on the Supply Chain,” Production
Economics, 59, 113-122.
4. Lau, H., 1998, “The New Role of Intranet / Internet Technology for Manufacturing,” Engineering with
Computers, 14, 150-155.
5. Lee, H. L., Padmanabhan, V., & Wang, S., 1997, “Information Distortion in a Supply Chain: The Bullwhip
Effect,” Management Science, 43(4), 546-557.
6. Lee, H. L., Padmanabhan, V., & Wang, S., 1997, “The Bullwhip Effect in Supply Chains,” Sloan
ManagementReview, 38(3), 93-110.
7. Metters, R., 1997, “Quantifying the Bullwhip Effect in Supply Chains,” Operations Management, 15, 89-100.
8. Simchi-Levi, D., Kaminsky, P., & Simchi-Levi, E., 1999, Designing and Managing the Supply Chain.
9. Stevens, C. G., 1989, “Integrating the Supply Chain,” Physical Distribution and Materials Management, 8(8),
10. Walker, L. K., & William .T. A., 1999, “Understanding Supply Chain Management”, The Performance
Advantage, APICS, 99(1).
...(download the rest of the essay above)