Bullwhip effect & value of

information
By
Dr. Debadyuti Das
Bullwhip Effect
Fluctuations in orders increase as they
move up the supply chain from retailers to
wholesalers to manufacturers to suppliers
Distorts demand information within the
supply chain, where different stages have
very different estimates of what demand
looks like
Results in a loss of supply chain
coordination
Examples: Proctor & Gamble (Pampers); HP
(printers); Barilla (pasta)
Figure 1. Point-of-sales
Data-Original
Figure 2. POS Data After
Removing Promotions
The Bullwhip Effect and its
Impact on the Supply Chain
Figure 3. POS Data After Removing Promotion & Trend
The Bullwhip Effect and its
Impact on the Supply Chain
Higher Variability in Orders Placed by
Computer Retailer to Manufacturer than
Actual Sales
Increasing Variability of Orders
Up the Supply Chain
We Conclude .
Order variability is amplified up
the supply chain; upstream
echelons face higher variability.
What you see is not what they
face.
What are the Causes of Bullwhip
effect?
Demand forecasting & Inventory
management
Order-up-to points are modified as
forecasts change
Long cycle times
Long lead times magnify this effect
Promotional sales
Forward buying
What are the Causes of Bullwhip
effect?
Price fluctuation
Volume and transportation discounts
Batch ordering
Inflated orders
IBM Aptiva orders increased by 2-3 times
when retailers thought that IBM would
be out of stock over Christmas
Motorola cell phones


What are the Causes.
Single retailer, single manufacturer.
Retailer observes customer demand, Dt.
Retailer orders q
t
from manufacturer.

Retailer Manufacturer
D
t
q
t
L
How big is the increase?
Suppose a P period moving average is used.
2
2
2 2
1
) (
) (
P
L
P
L
D Var
q Var
+ + >
Var(q)/Var(D):
For Various Lead Times
L=5
L=3
L=1
0
2
4
6
8
10
12
14
0 5 10 15 20 25 30
L=5
L=3
L=1
Consequences.
Increased safety stock
Reduced service level
Inefficient allocation of
resources
Increased transportation costs
Multi-Stage Supply Chains
Consider a multi-stage supply chain:
Stage i places order q
i
to stage i+1.
L
i
is lead time between stage i and i+1.


Retailer
Stage 1
Manufacturer
Stage 2
Supplier
Stage 3
q
o
=D
q
1
q
2
L
1 L
2
Multi stage systems
Centralized: each stage bases orders on
retailers forecast demand.


Decentralized: each stage bases orders on
previous stages demand


2
2
1
1
2
2
1
) (
) (
P
L
P
L
D Var
q Var
k
i
i
k
i
i k
|
.
|

\
|
+ + >

=
=
[
=
(

+ + >
k
i
i i
k
P
L
P
L
D Var
q Var
1
2
2
2 2
1
) (
) (
Multi-Stage Systems:
Var(q
k
)/Var(D)

0
5
10
15
20
25
30
0 5 10 15 20 25
Dec, k=5
Cen, k=5
Dec, k=3
Cen, k=3
k=1
The Bullwhip Effect:
Managerial Insights
Exists, in part, due to the retailers need to
estimate the mean and variance of demand.
The increase in variability is an increasing
function of the lead time.
The more complicated the demand models
and the forecasting techniques, the greater
the increase.
Centralized demand information can
significantly reduce the bullwhip effect, but
will not eliminate it.
Coping with the Bullwhip Effect /
Achieving SC Coordination

Reduce uncertainty
Sharing POS data
Sharing forecasts and inventory policies
Implementing CPFR
Designing single stage control of
replenishment
Reduce variability
Eliminate promotions
Year-round low pricing

Coping with the Bullwhip Effect /
Achieving SC Coordination
Reduce lead times (order lead time & delivery
lead time)
EDI
Cross docking
ASN
Reduce lot sizes
Combine shipments of different products
Combine shipments for several retailers
Combine shipments from multiple suppliers
Distribute demand evenly over time

Coping with the Bullwhip Effect /
Achieving SC Coordination
Rationing based on past sales
Turn and earn
Information sharing
Strategic partnerships
Vendor managed inventory (VMI)
Continuous replenishment programs (CRP)
Aligning goals and incentives
Align incentives across functions
Pricing for coordination
Alter sales force incentives from sell-in (to the
retailer) to sell-through (by the retailer)


Example: Quick Response at Benetton
Benetton, the Italian sportswear
manufacturer, was founded in 1964. In
1975 Benetton had 200 stores across
Italy.
Ten years later, the company expanded
to the U.S., Japan and Eastern Europe.
Sales in 1991 reached 2 trillion.
Many attribute Benettons success to
successful use of communication and
information technologies.
Example: Quick Response at Benetton
Benetton uses an effective strategy,
referred to as Quick Response, in which
manufacturing, warehousing, sales and
retailers are linked together. In this
strategy a Benetton retailer reorders a
product through a direct link with
Benettons mainframe computer in Italy.
Using this strategy, Benetton is capable of
shipping a new order in only four weeks,
several week earlier than most of its
competitors.

How Does Benetton
Cope with the Bullwhip Effect?
1. Integrated Information Systems
Global EDI network that links agents with
production and inventory information
EDI order transmission to HQ
EDI linkage with air carriers
Data linked to manufacturing
2. Coordinated Planning
Frequent review allows fast reaction
Integrated distribution strategy
Information for Coordination of
Systems
Information is required to move from local to
global optimization
Questions:
Who will optimize?
How will savings be split?
Information is needed :
Production status and costs
Transportation availability and costs
Inventory information
Capacity information
Demand information
Locating Desired Products
How can demand be met if products
are not in inventory?
Locating products at other stores
What about at other dealers?
What level of customer service will be
perceived?
Lead-Time Reduction
Why?
Customer orders are filled quickly
Bullwhip effect is reduced
Forecasts are more accurate
Inventory levels are reduced
How?
EDI
POS data leading to anticipating
incoming orders.
Information to Address Conflicts
Lot Size Inventory:
Advanced manufacturing systems
POS data for advance warnings
Inventory -- Transportation:
Lead time reduction for batching
Information systems for combining
shipments
Cross docking
Advanced DSS
Information to Address Conflicts
Lead Time Transportation:
Lower transportation costs
Improved forecasting
Lower order lead times
Product Variety Inventory:
Delayed differentiation
Cost Customer Service:
Transshipment