Bullwhip Effect
How to Counteract the Bullwhip Effect
- Avoid Multiple Demand Forecast Updates: by making demand data at a downstream site available to the upstream site. - Break Order Batches: Companies need to devise strategies that lead to smaller batches or more frequent resupply. - Stabilize Prices: move to an everyday low price (EDLP) or value pricing strategy. - Eliminate Gaming in Shortage: When a supplier faces a shortage, instead of allocating products based on orders, it can allocate in proportion to past sales records.
Methods for Reducing Bullwhip Effect
• Reduce uncertainty in the supply chain - Centralize demand information. - Keep each stage of the supply chain provided with up-to-date customer demand information. - More frequent planning • Reduce variability in the supply chain - Every-day-low-price strategies for stable demand patterns. • Reduce lead times - Use cross-docking to reduce order lead times. - Use EDI techniques to reduce information lead times. • Eliminate the bullwhip through strategic partnerships - Vendor-managed inventory (VMI). - Collaborative planning, forecasting and replenishment.
Bullwhip Effect
Because forecast errors are a given, companies often carry an inventory buffer called "safety stock". Moving up the supply chain from end-consumer to raw materials supplier, each supply chain participant has greater observed variation in demand and thus greater need for safety stock. The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer).
Order batching
In a supply chain, each company places orders with an upstream organization in batches or accumulates demands before issuing an order. There is a spike in demand at one time during the month, followed by no demands for the rest of the month. This periodic ordering amplifies variability and contributes to the bullwhip effect.
Price fluctuation
The result of price fluctuations is that customers buy in bigger quantities and stock up for the future. When the product's price returns to normal, the customer stops buying until it has depleted its inventory. As a result, the customer's buying pattern does not reflect its consumption pattern, and the variation of the buying quantities is much bigger than the variation of the consumption rate - the bullwhip effect.
There are four major causes of the bullwhip effect
1. Demand forecast updating 2. Order batching 3. Price fluctuation 4. Rationing and shortage gaming
Rationing and shortage gaming
When product demand exceeds supply, a manufacturer often rations its product to customers. Knowing that the manufacturer will ration when the product is in short supply, customers exaggerate their real needs when they order. Later, when demand cools, orders will suddenly disappear and cancellations pour in
Demand forecast updating
With exponential smoothing, future demands are continuously updated as the new daily demand data become available. Now, one site up the supply chain, the daily orders from the company of the previous site constitute your demand. If you are also using exponential smoothing to update your forecasts and safety stocks, the orders that you place with your supplier will have even bigger swings.
