Purchasing Decisions and the Bullwhip Effect

What is the bullwhip effect?

- It is the increasing fluctuation in the orders that often occurs as orders move upstream through the supply chain (from retailer to factory) -Order variability is amplified upstream in the SC

Countermeasures for bullwhip effect:

-Avoid multiple demand forecasts -Break order batches

Things that lead to bullwhip effect:

-Delivery delay -demand uncertain -inaccurate forecast -large lot size -Price variations -Stock-outs -info sharing -# of echelons in the supply chain

In order to countermeasure the bullwhip effect you avoid multiple demand forecasts. How do you do this?

-Information sharing: 1) Share Point of Sale (POS) info across SC, 2) use Electronic Data Interchange (EDI) to share data, 3) use internet, 4)Collaborative forecasting method - PLC has a say -Channel Alignment: 1) Vender Management Inventory (VMI) or 2) Continuous Replenishment Program (CRP), 3) Remove layers in channel if possible, 4) create incentives for info sharing -Operational Efficiency: 1) Lead time reduction, 2) Focus on 'supply chain inventory' rather than 'local inventory'.

5 Main causes for Bullwhip Effect

-Lack of information sharing -large lead times -promotions -poor forecasting -large lot size

Name the 4 purchasing decisions

-Purchasing quantities -Timing of the orders -Selection of vendor shipping points -Transportation method

Quantity Discounts

-Sometimes provided with larger purchases -Buyer's Dilemma

When lead time decreased, what happens to bullwhip effect?>

decreases

If the inventory cost outweighs reduction achieved from forward buying then...

don't do forward buying

Why does deal buying happen?

one time price discount to promote their products or to clear excess inventory

Hand-to-mouth strategy

policy of buying for immediate needs only

Forward strategy

policy of buying in advance of the time when item is actually needed

Decentralized Information:

supply chain partners do NOT share real demand info about end-customer demand

Mixed buying:

Combo of Hand-To-Mouth and Forward. -Use when item has a predictable seasonable price pattern -leads to cost savings: Requires balancing the purchase cost reduction of Forward against the increased inventory cost.

Which leads to a greater bullwhip effect, Centralized info or Decentralized info?

Decentralized b/c end-customer demand information sharing reduces the BW effect across the supply chain. Decentralized does not share end-customer info.

When Demand observations (p) increase, what happens to Bullwhip effect?

Decrease

Hand to mouth is good when prices are expected to _______

Fall. We only buy for our current needs and not future because the price will fall in the future.

If prices are expected to drop throughout the year then use which purchasing strategy?

Hand-to-mouth, until price begins to increase.

Then higher the lead time the (higher or lower) the inventory level?

Higher

During the Deal Buying, what must purchaser decide?

How much more he will buy if the one-time discount appears attractive

2 forms of price incentives:

Inclusive Discount Non-inclusive discount

When lead time increases, what happens to the bullwhip effect?

Increases

Bullwhip effect does what to overall supply chain cost and customer service level?

Increases supply chain cost Decreases Customer service level

In order to countermeasure the bullwhip effect how do we break order batches?

Information sharing -increase frequency of ordering: Use EDI to lower order processing cost, resort to standardization to minimize OP cost

What is the caution of Deal Buying?

It can create bullwhip effect if not coordinated with SC partners

Inclusive quantity discount formula

TCi= Ci*D+(DS/Qi)+(ICiQi/2)

What do purchasing decisions effect?

The flow of goods in the SC

Buyer's Dilemma:

Trade-off between increase on inventory holding cost vs. volume discounts.

2 types of information that have impact on bullwhip effect.

Centralized information Decentralized information

Deal buying

-one-time price discounts

What does purchasing quantities and timing affect?

-price paid -transportation cost -inventory holding cost

More demand observations lead to (higher or lower) bullwhip effect.

Lower

Who will have more fluctuation in orders, the manufacturers or the retailers?

Manufacturers order to their suppliers.

Inclusive: if the feasible EOQ is on the lowest total cost curve...

Q has been found, if not then compute TCeoq

Forward is good when prices are expected to ________

Rise. We buy in advance while the price is low before it rises

Non-inclusive discounts

When discount only applies to those units within the quantity discount range, a slight modification is necessary. -beyond the break points the average unit price continues to drop -Find OPQ by assessing TC with Qi incremental increases Example: If you need over 500 units for discount, you order 525 and you will get a discount on only 25 items

Who will have more fluctuation in orders, the wholesaler or the retailer?

Wholesaler because it is further upstream

Centralized information:

all supply chain partners share real demand information about end-customer demand