The “bullwhip effect”
When each member of a group in a supply chain tries to maximize his or her own benefit without regard to the impact of other members of the group, the overall effectiveness may suffer. Such inefficiencies often creep in when rational members of supply optimize individually instead of coordinating their efforts.
A well known example of such inefficiency in staged supply chains is the bullwhip effect.
This effect refers to the tendency of replenishment orders to increase in variability as one moves up the supply chain from retailer to manufacturer. A lack of coordination may even outweigh the benefits from specialization and economics of scale. Therefore it can be said that the bullwhip effect is the key example for supply chain inefficiency. So the bullwhip effect is near-hand term for a dynamical phenomenon in supply chains.
Let’s make an example to make the bullwhip effect clear:
The Barilla company, a major pasta producer located in Italy provides a demonstrative of issues resulting from the bullwhip effect. Barilla offered special discounts to their customer who ordered full truckload of their goods. Such marketing deals created customer demand-patterns were highly peaked and volatile. The supply chain costs were so high that they outstripped the benefits from full truckload transportation. The Barilla case was one of the first published cases that empirically supported the bullwhip phenomenon.
What are the major causes for the bullwhip effect? Lee identified five major reasons. These are:
- demand signal processing
- lead-time
- order batching
- price fluctuations
- rationing and shortage gaming
Demand signal processing is the is the practice of decision makers adjusting the parameters of the inventory replenishment rule. Target stock levels, safety stocks and demand forecasts are updated in view of information or deviations from targets.
Another major cause of the bullwhip problem is the lead-time, which is caused by two components. The physical delays and also delays in cause of information. The lead-time is a key parameter to calculate safety stocks.
The third bullwhip creator is the practice of order batching. Economies of scale in ordering, production set-ups or transportation will quite clearly increase order variability.
The fourth major cause of bullwhip is highlighted by Lee has to do with price fluctuations. Price discounts and quantity discounts are often offered by retailers. So the retailers buy goods in advance and quantities and store them. This do not reflect their immediate needs.
The fifth cause of bullwhip is connected with rationing and shortage gaming. Inflated orders placed by supply chain occupants during shortage periods tend to boost the bullwhip effect.
With what is it possible to reduce and eliminate the bullwhipe effect in order to avoid costs?
- better communication in the supply chain concerning the actual demand
- simultaneousness of actions (avoid time delay and reaction times)
- centralization of disposition
- to establish strategic alliances
- reduce the variability
Sources:
Werner, Hartmut (2008), “Supply Chain Management”, Gabler.
Disney, Steven M.; Lambrecht Marc R. (2007), “On Replenishment Rules, Forecasting, and the Bullwhip Effect in Supply Chains”, Publishers Inc.
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