What is Bullwhip Effect in Supply Chain?
The concept of bullwhip effect was first mentioned by
Procter and Gamble in order to explain the increase in variance in demand of
Pamper diapers from the customer to the supplier (Lee et al., 1997). As per Lee,
Padmanabhan and Whang (1997), the bullwhip effect is when change in one
end causes an exponential change in the other end. In supply chain, the
bullwhip occurs when change in consumer demand causes the companies to order
more goods to meet the new demand.
The increase in demand flows upstream in the supply
chain, starting with the end user, retailer, wholesaler, distributor,
manufacturer and then supplier to manufacturer. The increase in demand
compounds as the demand of each supply chain node is based on the demand
forecasted by the company and not the end user.
The bullwhip effect is also known by various other names
such as ‘whiplash effect’, ‘whipsaw effect’, ‘acceleration principle’ etc.
(Ertek 2008). The essence of supply chain management, to match the customer
demand with supply fosters the forecasting by managers in different
distribution channels. This leads to increase in costs- inventory holding host,
variability- difference between demand and supply which magnifies as one moves
upstream in the supply chain cycle.
Fig 1: Bullwhip Effect in Supply Chain Management
Example
of Bullwhip Effect
In this example, amplification of demand from
customer to manufacturer is 8 times. When the customer demands only 5 units of
a product, the echelons start maintaining a safety stock at every level thereby
increasing the amount of manufacturing exponentially. The above graph shows
that the high variability that can exist due to bullwhip effect. Although the
impact of bullwhip cannot be eradicated completely but understanding the
reasons for such high variance can help to reduce the bullwhip effect.
Fig 2: Example of Bullwhip Effect
Reasons
of Bullwhip Effect
Demand is forecasted by various
companies based on historical data. When the demand placed by downstream
echelon increases, the upstream echelon considers this as an increase in
overall market demand. The forecasted future demand requires safety stock to be
maintained by upstream echelons. The situation results in higher order variance
as compared to the actual demand, giving rise to bullwhip effect.
2)
Order
Batching
The various nodes in supply chain
management use push ordering strategies or periodic ordering and do not place the
orders immediately (Lee et al., 1997). In both the cases, the upstream echelon
faces a higher demand variability than the downstream echelon. Hence, a
bullwhip effect occurs due to a higher variance in the companies’ order
patterns as compared to the consumer’s demand pattern.
3)
Price
Fluctuations
Price fluctuation can occur due to any
reason like discounts, coupons, seasonal discounts, forward buy rates etc. A
higher variance in price fluctuation makes it difficult to estimate the actual
consumption pattern and hence the misinformed data to the upstream echelons
creates higher variance leading to bullwhip.
4)
Shortage
Gaming
Shortage gaming causes bullwhip as
demand variance is amplified from customer to the supplier. When the demand
exceeds supply the downstream members place a higher demand than market demand
to meet the market needs. The amplification of demand at each node of supply
chain results in higher variability as we move towards the upstream supply
chain.
5)
Disorganization
When the ordering pattern is not
consistent by the supply chain participants, primarily due to change in
consumption pattern of consumer, a disorganized supply chain link is formed.
The ordering of larger or smaller amounts results in higher variability of
product demanded by upstream supply chain echelons. Hence the disorganized
supply chain link leads to a bullwhip effect.
6)
Lack
of communication
This hampers the smooth functioning of
a supply chain link. Due to lack of communication, the information is falsely
perceived and false judgments are made. This results in erroneous future
demands leading to a higher variability of demand as we move from customer to
supplier.
Strategies to deal with Bullwhip Effect
1)
Data
transparency
In order to mitigate demand signal
processing, it is important that data is made available from downstream to
upstream and vice-versa. The transparency of data can be achieved using Electronic
Data Interchange (EDI) and Point of Sale systems (POS) wherein upstream and
downstream use the same data while forecast. This will help in eliminating
shortage gaming.
2)
Vendor
Managed Inventory (VMI)
A study conducted by Ruggles (2005), suggested
that collaborative tool like VMI can help to reduce the impact of bullwhip in a
supply chain through making information available on demand data and inventory
position. This helps in eliminating order batching through structured
information flow.
Example: Home Depot uses this technique with
its large suppliers of manufactured goods. This technique is also used by oil
companies like, Petrolsoft Corporation to manage the inventory at service
stations.
3)
Collaborative
planning, forecasting and replenishment (CFPR)
This model represents a strong
collaboration between various nodes of supply chain management through quality
information sharing. The information helps in calculated demand forecasts which
helps in decelerating variance amplification and thereby reducing the bullwhip
effect.
Example: This technology is applied by giant
retailer Walmart wherein 100 suppliers in 2005 were using Radio Frequency
Identification (RFID). This helped in sharing of information in real time
position.
4)
McCullen
and Towill’s four supply chain strategies
A study conducted in 2001 by McCullen
and Towill categorized the supply chain strategies into four major principles. When
authors implemented this process, a drastic reduction of 36% was seen in the
bullwhip effect.
a)
Control
System principle
This
helps in strengthening the dynamic stability of supply chain.
b)
Time
Compression Principle
This
helps in reduction of lead time through reducing time taken in material and
information flow.
c)
Information
Transparency Principle
This
helps in sharing of information between various nodes of supply chain link
thereby increasing transparency which helps in future decision making.
d)
Echelon
Elimination Principle
This
process focuses on removing echelons from the supply chain link and connecting
two echelons directly without a mediator. This would reduce the amplification
of demand variance.
5)
Stabilize
and Simplify planning process
A stabilized and simplified planning
like smoothing technique in case of seasonality of product whilst focusing on
developing the communication with suppliers will reduce the impact of bullwhip
effect.
References:
Lee, H. L., Padmanabhan, V., &
Whang, S. (1997). The bullwhip effect in supply chains1. Sloan
management review, 38(3), 93-102.
Ertek, G., & Eryılmaz, E. (2008). THE BULLWHIP EFFECT IN SUPPLY CHAIN
Reflections after a Decade. Working Paper, CELS 2008.
Ruggles, K., (2005).
Technology and the Service Supply Chain, Supply Chain Management Review,9(7),
12-13.
McCullen,
P., & Towill, D. (2001). Achieving lean supply through agile manufacturing. Integrated Manufacturing Systems, 12(7), 524-533.
