The bullwhip effect in supply chains

Hau L. Lee, V. Padmanabhan and Seungjin Whang

Sloan Management Review

1997, Spring 1997, 93-102

1)      What is the Bullwhip effect?

  1. a) With steady consumption, it is the amplification of demand order variability as information moves through the supply chain
  2. b) Causes
  3. i) Demand forecast updating

(1)   Every company the chain has a forecast

(2)   Readjustments are made due to demand signal processing

  1. ii) Order batching

(1)   A supplier accumulates orders and batches them before sending them to a supplier

(2)   MRP systems have monthly or weekly runs causing demand surges

(3)   Economics of transportations is a cause of batching

(4)   Overlapping order cycles: all customers place orders at the same time

iii)     Price Fluctuation

(1)   Causes customers to stockpile

(2)   Sale prices, coupons and other promotions

  1. iv) Rationing and Shortage gaining

(1)   When demand exceeds supply

(2)   Allocating  a percentage of customer’s order

(3)   Causes gaming: customers order more than they need, take the percentage and cancel the remaining order.

  1. c) Symptoms of variations
  2. i) Excessive inventory
  3. ii) Poor product forecasts

iii)     Insufficient/Excessive capacities

  1. iv) Poor customer service due to

(1)   Long back logs

(2)   Unavailable products

  1. v) Uncertain production planning

(1)   Excessive revisions

  1. vi) High costs for corrections

(1)   Expedited shipments

(2)   Overtime

2)      How to solve for distorted information

  1. a) Managers should understand the bullwhip effect so they can counteract it
  2. b) Improve supply chain performance by coordinating information
  3. c) Avoid multiple demand forecast updates
  4. i) Make demand data at a downstream site available at upstream sites
  5. ii) Consider collaborative planning

iii)     Consider data interchange such as EDI

  1. iv) Consider “consumer direct” scheme
  2. v) Improve operational efficiency to reduce long/variable lead times
  3. d) Break order batches
  4. i) Consider data interchange such as EDI to reduce administrative costs
  5. ii) Consider third party logistics carriers to and freight consolidation to reduce less-than-container load transport costs
  6. e) Stabilize prices
  7. i) Reduce frequency and level of wholesale price discounting
  8. ii) Use ABC costing for greater cost transparency

iii)     Implement ‘every day low price’ scheme

  1. f) Eliminate Gaming in shortages
  2. i) Allocate a proportion of past orders
  3. ii) Share capacity and inventory information

iii)     Tighten liberal return policies