Bullwhip Effect
The bullwhip effect is the magnification of demand fluctuations, not the magnification of demand. The bullwhip effect is evident in a supply chain when demand increases and decreases. The effect is that these increases and decreases are exaggerated up the supply chain.
The essence of the bullwhip effect is that orders to suppliers tend to have larger variance than sales to the buyer. The more chains in the supply chain the more complex this issue becomes. This distortion of demand is amplified the farther demand is passed up the supply chain.
Proctor & Gamble coined the term "bullwhip effect" by studying the demand fluctuations for Pampers (disposable diapers). This is a classic example of a product with very little consumer demand fluctuation. P&G observed that distributor orders to the factory varied far more than the preceding retail demand. P & G orders to their material suppliers fluctuated even more.
Babies use diapers at a very predictable rate, and retail sales resemble this fact. Information is readily available concerning the number of babies in all stages of diaper wearing. Even so P&G observed that this product with uniform demand created a wave of changes up the supply chain due to very minor changes in demand.Some of the reasons that the bullwhip effect occurs include the following:
• Over reacting to the backlog orders.
• Little or no communication between supply chain partners.
• Delay times between order processing, demand, and receipt of products.
• Order batching: method for reduction of ordering costs due to price discounts for bulk ordering, transportation expense decrease by ordering full-truck loads, etc.
• Limitations on order size (i.e. retailers can order products in cases of 10 from wholesaler; however, distributors receive orders in cases of 1,000)
• Inaccurate demand forecasts.
• Free return policies.
How to remedy the Bullwhip Effect
When the bullwhip effect is first identified in a supply chain, it is important to identify the problem areas. The following areas are places in the supply chain that should be considered when trying to decrease the bullwhip effect. Although many of these areas many seem like proper business practices, the reality is that they diminish the efficiency of the supply chain. Once changes are made in these areas, the productivity and timeliness of the supply chain will increase greatly and the bullwhip effect will be dramatically lessened.
1. Demand Signal Processing
• Retailers often use realized demand as an indicator of future demand.
• Inference and data dependency problems.
2. Rationing Gaming
• Used when demand outstrips supply.
• Rationing might indicate internal problems that limit meeting supply goals.
3. Order Batching
• Used because organizations are attempting to obtain benefits from large-volume pricing discounts and reduced costs of transportation.
• Can lead to large inventory volumes and misleading demand figures for upstream suppliers.
4. Price Variations
• Used to position suppliers that are involved in market share wars with other suppliers.
• Might cut off established relationships in efforts to "shop around" for a better price.
|
|
