TO lecture - Bullwhip effect

when does bullwhip effect not occur

when their orders each period exactly match their demands

What causes the bullwhip effect?

- Order batching - Pathological incentives ------Trade promotions and forward buying ------Shortage gaming - Reactive and over-reactive ordering

Suboptimal supply chain performance occurs because

...Each firm makes decision based on their own margin, not the supply chain's margin. This is called double marginalization

bullwhip effect

A stage in the supply chain amplifies the volatility f its orders relative too its demand

Average # of periods between orders =

Batch size / mean demand per period

Why fix coordination failure?

If total supply chain profit increase, the "pie" increases and everyone can be given a bigger piece.

Why is bullwhip effect bad (therefore why is increased volatility bad)

Inefficient production or excessive inventory Necessity to have capacity far exceeding average demand High transportation costs Poor customer service due to stock outs

how does shortage gaming cause bullwhip effect

Once a supplier's customers believe that capacity may be constrained, the supplier's customers may inflate their orders substantially, thereby creating excessive volatility in the supplier's demand

if there are several stages in supply chain, how does this effect bullwhip effect

One level further amplifies the amplified volatility of its downstream customer

How does a retailer decide when to order a batch size?

Order a batch whenever the accumulated demand since the last order exceeds the batch size

strategies to combat the bullwhip effect

Smooth the flow of products - Reduce minimum batch sizes. Eliminate pathological incentives - Every day low price - Order allocation based on past sales in case of shortages Vendor Managed Inventory (VMI): delegation of stocking decisions - Used by Barilla, P&G/WalMart and others.

Coordination failure definition

Supply chain performance may be less than optimal with decentralized operations (i.e., multiple firms making decisions) even if firms choose individually optimal actions.

Reason for coordination failure

The terms of trade do not give firms the proper incentive to choose supply chain optimal actions.

vendor managed inventory

a business model where the buyer of a product provides information to a vendor of that product and the vendor takes full responsibility for maintaining an agreed inventory of the material, usually at the buyer's consumption location.

Trade promotions definition

a discount off the wholesale price that is available only for a short period of time

trade promotions cause retailers to

buy on-deal, also referred to forward buy, which means they purcahse more than they need to to meet short-term needs

downstream

downstream is the opposite end, where products get produced and distributed.

forward buying

each order covers a substantial portion of future demand

Describe reactive and over-reactive demand

how should a firm respond to a "high" demand observation? Hedge by assuming this signals higher future demand, order more than usual. These rational yet sometimes "over-reactive" reactions at one level propagate up the supply chain, increasing bullwhip effect.

Volatility definition

liability to change rapidly and unpredictably, especially for the worse

upstream definition

material inputs needed for production

shortage gaming definition

ordering more than needed due to the anticipation of a possible capacity shortage

phantom orders

orders that have been submitted that are likely to be cancelled

Even if each firm in the supply chain chooses optimal actions, ___________ _______ ______ ____________ may not be optimal.

overall supply chain performance

Order batching definition

retailers may be required to order in integer multiples of some batch size (case quantities, pallet quantities, full truck load, etc.)

Shortage gaming setting

retailers submit orders for delivery in a future period. Supplier produces. If supplier production is less than orders, orders are rationed, and retailers are put on allocation

Trade promotion definition

supplier gives retailer a temporary discount, retailer purchases enough to satisfy demand until the next trade promotion (example: campbell's chicken noodle soup over a one year period)

If the coefficient of variation in the suppler's demand (which is sum of retailers' orders) is greater than the coefficient of variation of the retailers' total demand, then

the bullwhip effect is present in our supply chain

How does order batching cause the bullwhip effect

the bw effect emerges when retailers order in batches that contain more than one unit. in order words, the batch quantity requirement forces the retailer to order in a way that is more variable than consumer demand, even though, on average, it equals consumer demand

demand-pull

the retailer matches orders to current demand

The bullwhip effect is present in a supply chain if

the variability of demand at one level of the supply chain is greater than the variability of demand at the next downstream level in the supply chain, where variability is measured with the coefficient of variation.

how do retailers secure a better allocation during shortage gaming

they inflate their orders, ordering more than they need... so retailer orders do not convey good info about true demand. This can be a big problem for supplier, esp. if retailers are later able to cancel a portion of the order.

How are trade promotions capable of creating an enormous bullwhip effect?

trade promotions cause many retailers to purchase at the same time (order synchronization) and cuz they order in large quantities (order batching)

How does the bullwhip effect affect both upstream and downstream stages of demand?

upsteam: must directly face the impact of variable demand. downstream: which must cope with less reliable replenishments from upstream stages