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The Bullwhip Effect

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Variability increases as one moves up the supply chain. Source: Johnson & Pike, 1999 ... Role-playing simulation developed in the 1960's at MIT's Sloan School ... – PowerPoint PPT presentation

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Title: The Bullwhip Effect


1
The Bullwhip Effect
  • Henry C. Co
  • Technology and Operations Management,
  • California Polytechnic and State University

2
Variability increases as one moves up the supply
chain
Source Johnson Pike, 1999
3
The Bullwhip Effect
4
The Beer Game
  • Role-playing simulation developed in the 1960s
    at MITs Sloan School of Management
  • Production and distribution of beer.
  • Players divide themselves into groups Retailer,
    Wholesaler, Distributor, and Brewer.
  • Weekly consumer demand simulated by a deck of
    cards
  • Retailer sells from his inventory and reorders
    from the Wholesaler, who sells from his inventory
    and reorders from the Distributor, who in turn
    sells from his inventory and reorders from the
    Brewer, who finally sells from his inventory and
    restocks from his production.
  • Order processing delays Shipping delays
  • Inventory carrying costs Stockout costs
  • Players base their decisions strictly on the
    orders they receive from their respective buyers.

5
  • During the game emotions run high. Many players
    report feelings of frustration and helplessness.
    Many blame their teammates for their problems
    occasionally heated arguments break out.
  • In virtually all cases, the inventory levels of
    the retailer decline, followed in sequence by a
    decline in the inventory of the wholesaler,
    distributor, and factory. As inventory falls,
    players tend to increase their orders. Players
    soon stock out. Backlogs of unfilled orders grow.
    Faced with rising orders and large backlogs,
    players dramatically boost the orders they place
    with their supplier. Eventually, the factory
    brews and ships this huge quantity of beer, and
    inventory levels surge. In many cases one can
    observe a second cycle.

John Sterman, one of the original proponents of
the Beer Game
6
  • Stakeholders along supply chain
  • Have different and frequently conflicting
    objectives.
  • Often operated independently.
  • The network can oscillate in very large swings as
    each organization in the supply chain seeks to
    solve the problem from its own perspective.

7
Consequences of the Bullwhip Effect
  • Lower revenues.
  • Stockouts and backlogs mean lost sales, as
    customers take their business elsewhere.
  • Higher costs.
  • High carrying cost
  • Stockout cost
  • Distributors need to expedite orders (at higher
    shipping expenses)
  • Manufactures need to adjust jobs (at higher
    setups and changeover expenses, higher labor
    expenses for overtime, perhaps even higher
    materials expenses for scarce components.)
  • All entities in the supply chain must also invest
    heavily in outsized facilities (plants,
    warehouses) to handle peaks in demand, resulting
    in alternating under or over-utilization.

8
  • Worse quality.
  • Quirky, unplanned changes in production and
    delivery schedules disrupt and subvert control
    processes, begetting diverse quality problems
    that prove costly to rectify.
  • Poorer service.
  • Irregular, unpredictable production and delivery
    schedules also lengthen lead time, causing delay
    and customer dissatisfaction.

9
Causes of Bullwhip Effect
10
  • Demand variability, quality problems, strikes,
    plant fires, etc.
  • Variability coupled with time delays in the
    transmission of information up the supply chain
    and time delays in manufacturing and shipping
    goods down the supply chain create the bullwhip
    effect.

11
  • Overreaction to backlogs
  • Neglecting to order in an attempt to reduce
    inventory
  • No communication up and down the supply chain
  • No coordination up and down the supply chain
  • Delay times for information and material flow

12
  • Order batching - larger orders result in more
    variance. Order batching occurs in an effort to
    reduce ordering costs, to take advantage of
    transportation economics such as full truck load
    economies, and to benefit from sales incentives.
    Promotions often result in forward buying to
    benefit more from the lower prices.
  • Shortage gaming customers order more than they
    need during a period of short supply, hoping that
    the partial shipments they receive will be
    sufficient.

13
  • Demand forecast inaccuracies everybody in the
    chain adds a certain percentage to the demand
    estimates. The result is no visibility of true
    customer demand.
  • Free return policies

14
Countermeasures to the Bullwhip Effect
15
  • Countermeasures to order batching
  • Countermeasures to shortage gaming
  • Countermeasures to fluctuating prices
  • Countermeasures to demand forecast inaccuracies
  • Free return policies

16
Order Batching
  • High order cost is countered with Electronic Data
    Interchange (EDI) and computer aided ordering
    (CAO).
  • Full truck load economics are countered with
    third-party logistics and assorted truckloads.
    Random or correlated ordering is countered with
    regular delivery appointments.
  • More frequent ordering results in smaller orders
    and smaller variance.
  • However, when an entity orders more often, it
    will not see a reduction in its own demand
    variance - the reduction is seen by the upstream
    entities.
  • Also, when an entity orders more frequently, its
    required safety stock may increase or decrease
    see the standard loss function in the Inventory
    Management section.

17
Shortage Gaming
  • Proportional rationing schemes are countered by
    allocating units based on past sales.
  • Ignorance of supply chain conditions can be
    addressed by sharing capacity and supply
    information.
  • Unrestricted ordering capability can be addressed
    by reducing the order size flexibility and
    implementing capacity reservations.
  • For example, one can reserve a fixed quantity for
    a given year and specify the quantity of each
    order shortly before it is needed, as long as the
    sum of the order quantities equals to the
    reserved quantity.

18
Fluctuating Prices
  • High-low pricing can be replaced with every day
    low prices (EDLP). Special purchase contracts can
    be implemented in order to specify ordering at
    regular intervals to better synchronize delivery
    and purchase.

19
Demand Forecast Inaccuracies
  • Lack of demand visibility can be addressed by
    providing access to point of sale (POS) data.
  • Changes in pricing and trade promotions and
    channel initiatives, such as vendor managed
    inventory (VMI), coordinated forecasting and
    replenishment (CFAR), and continuous
    replenishment can significantly reduce demand
    variance.

20
Free Return Policies
  • Free return policies are not addressed easily.
  • Often, such policies simply must be prohibited or
    limited.

21
Vendor Managed Inventory
22
  • Popularized in the late 1980s by Wal-Mart and
    Procter Gamble, VMI became one of the key
    programs in the grocery industrys pursuit of
    efficient consumer response and the garment
    industrys quick response.
  • Successful VMI initiatives have been trumpeted by
    other companies in the United States, including
    Campbell Soup and Johnson Johnson, and by
    European firms like Barilla (the pasta
    manufacturer).

23
The VMI Partnership
  • The supplierusually the manufacturer but
    sometimes a reseller or distributormakes the
    main inventory replenishment decisions for the
    consuming organization.
  • The supplier monitors the buyers inventory
    levels (physically or via electronic messaging)
    and makes periodic resupply decisions regarding
    order quantities, shipping, and timing.
  • Transactions customarily initiated by the buyer
    (like purchase orders) are initiated by the
    supplier instead.
  • The purchase order acknowledgment from the
    supplier may be the first indication that a
    transaction is taking place an advance shipping
    notice informs the buyer of materials in transit.

24
The manufacturer is responsible for both its own
inventory and the inventory stored at is
customers distribution centers.
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