Bullwhip Effect in Supply Chains

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Bullwhip Effect in Supply Chains

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Why was it discovered?

• Pamper order to factory much more erratic than
  sales in stores
• Computer sales less erratic than factory orders
• 100 days of supply in chain chainmembers
• Year of inventory in entire supply chain
• Grocery industry had 30 billion in inventory
  (excess)

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Each Order Process Makes Orders More Erratic
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Cause of Bullwhip Effect

• Demand Forecasting Updating
• Order batching
• Price fluctuations
• Rationing and shortage gaming

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Demand Forecasting

• Based on Orders received
• Based on smoothing of sales and safety stock data
• Not uncommon to have weeks of safety stock
• Accuracy increases if you can get to lowest level
  of inventory activity

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Order Batching

• Cost of Ordering (time process)
• Cost of Transportation (TL vs. LTL)
• Hockey stick effect (Wait till last minute)
• Accounting period
• EDI or XML to reduce ordering cost
• Alternative delivery methods to allow LTL
• 3PLs
• Regional warehouses
• Mixed loads

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Orders Jitters
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Price Promotion

• Price promotions encourage forward buying
• Trade deals 47 of buying
• Consumer promotion 28
• How do you respond to promotions?

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Effect of Promotions
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Rationing and Shortage Gaming

• If product is in short supply
• Suppliers ration
• Buyer overbuy to get what they need

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Approaches

• Data interchange rather than forecasting
• Frequent orders
• Short frequent lead times
• Every Day Low Prices (EDLP)

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• Last Bull Whip Slide