The Bullwhip Effect

Large Swings
at Tip

Small
Perturbation
Bullwhip Handle

Supply Chain Management and

Uncertainty
Inventory and back-order levels fluctuate considerably across
the supply chain even when customer demand doesnt vary
The variability worsens as we travel up the supply chain
Forecasting doesnt help!
Wholesale
Distributors

Time

Retailers

Time

Consumers

Sales

Sales

Sales

Manufacturer

Sales

Multi-tier
Suppliers

Time

Bullwhip Effect

Time

Bullwhip Effect: Increasing Variability of

Orders up the Supply Chain

Consequences of the Bullwhip Effect

Lower revenues
Higher costs
High carrying cost and Stockout
cost
Distributors need to expedite
orders (at higher shipping
expenses)
Manufactures need to adjust jobs
(higher setups and changeover
expenses, higher labor expenses for
overtime, even higher materials
expenses for scarce components.)

All entities in the supply chain

must also invest heavily in
outsized facilities (plants,
warehouses) to handle peaks in
demand, resulting in alternating
under or over-utilization.

Worse quality.
Quirky, unplanned changes
in production and delivery
schedules disrupt and
subvert control processes,
begetting diverse quality
problems that prove costly
to rectify.

Poorer service.
Irregular, unpredictable
production and delivery
schedules also lengthen lead
time, causing delay and
customer dissatisfaction.
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Factors Contributing to the Bullwhip

Demand forecasting
practices

Min-max inventory
management (reorder points
to bring inventory up to
predicted levels)

Lead time

Longer lead times lead to

greater variability in
estimates of average
demand, thus increasing
variability and safety stock
costs

Batch ordering

Peaks and valleys in orders

Fixed ordering costs
Impact of transportation
costs (e.g., fuel costs)
Sales quotas

Price fluctuations

Promotion and discount

policies

Lack of centralized
information

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Taming the Bullwhip

Four critical methods for reducing the 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 (continuous real-time planning the goal)

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 (CPFR)
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