LACK OF SUPPLY CHAIN

COORDINATION AND
BULLWHIP EFFECT
Lalit Sawant
Ankit Ekka
Punit Beriwal
Sagar Mehta
Abhishek Sharma
Shreya Tripathi

Introduction
An Unmanaged Supply Chain is not
inherently stable. Demand variability
increases as one moves up the supply
chain away from the retail customer,
and small changes in consumer
demand can result in large variations in
orders placed upstream.
Eventually the network can oscillate in
very large swings as each organization
in the supply chain seeks to solve the
problem from its own perspective.
This phenomenon is known as the
bullwhip effect and has been observed
across most industries, resulting in
increased costs and poorer service.
Cont
Conflicts in objectives of different stages of supply chain.

Distorted & delayed information between supply chain stages.

e.g.- FORD MOTORS

Bullwhip Effect.

What is the Bullwhip Effect?
The bullwhip effect on the supply chain occurs when changes in consumer demand causes the
companies in a supply chain to order more goods to meet the new demand.
The bullwhip effect usually flows up the supply chain, starting with the retailer, wholesaler,
distributor, manufacturer and then the raw materials supplier.
This effect can be observed through most supply chains across several industries; it occurs because
the demand for goods is based on demand forecasts from companies, rather than actual consumer
demand.

Who is affected?
Nearly all industries are affected.
Firms that experience large variation in demand are
at risk.
Firms that depend on suppliers upstream or
distributors and retailers downstream may be at risk.
Causes of the Bullwhip Effect
Sources of variability can be demand variability,strikes,quality problems, plant
fires etc. variability coupled with time delays in the transmission of
information up the supply chain and time delays in manufacturing and
shipping goods down the supply chain create the bullwhip effect.

The following can contribute to the bullwhip effect :
Overreaction to backlogs
Neglecting to order in an attempt to reduce inventory.
No communication up and down the supply chain.
No coordination up and down the supply chain.
Delay times for information and material flow.

Cont
Order Batching: Larger orders result in more variance. Over Batching
occurs in an effort to reduce ordering costs, to take advantage of
transportation economics such as full truck load economics , and to
benefit from sales incentives. Promotions often result in forward buying to
benefit more from the lower prices.
Shortage Gaming :Customers order more than they need during a period
of short supply, hoping that the partial shipments they receive will be
sufficient.
Demand Forecast Inaccuracies: Everybody in the chain adds a certain
percentage to the demand estimates. The result is no visibility of true
customer demand.
Free return policies.

Behavioral Causes
misuse of base-stock policies
misperceptions of feedback and time delays
panic ordering reactions after unmet demand
perceived risk of other players' bounded rationality

Example
The actual demand for a product and its materials start at the customer, however often the
actual demand for a product gets distorted going down the supply chain.
Lets say that an actual demand from a customer is 8 units, the retailer may then order 10 units
from the distributor; an extra 2 units are to ensure they dont run out of floor stock.
The supplier then orders 20 units
from the manufacturer; allowing
them to buy in bulk so they have
enough stock to guarantee timely
shipment of goods to the retailer.
The manufacturer then receives the
order and then orders from their
supplier in bulk; ordering 40 units to
ensure economy of scale in
production to meet demand.
Now 40 units have been produced
for a demand of only 8 units;
meaning the retailer will have to
increase demand by dropping prices
or finding more customers by
marketing and advertising.

Proctor & Gamble coined the term
bullwhip effect by studying the demand
fluctuations for Pampers (disposable
diapers).

This is a classic example of a product with
very little consumer demand fluctuation.
P&G observed that distributor orders to the
factory varied far more than the preceding
retail demand. P & G orders to their material
suppliers fluctuated even more.

Babies use diapers at a very predictable rate,
and retail sales resemble this fact.
Information is readily available concerning
the number of babies in all stages of diaper
wearing. Even so P&G observed that this
product with uniform demand created a
wave of changes up the supply chain due to
very minor changes in demand.

Consequences of the Bullwhip effect
The cascading effect of
bullwhip causes many
difficulties. Among them:
excess inventories
quality problems
higher raw material
costs
overtime expenses
additional shipping
costs
customer service goes
down
lead times lengthen
sales are lost

Managing the Bullwhip Effect
Reduce Uncertainty

Point of Sales (POS)
Sharing Information
Centralizing Demand
information
Reduce Variability

Reduce order batches
Year around or Everyday Low
Pricing
Reduce Lead Time

Information around Lead
times (use EDI)
Order Lead times (Cross
Docking)

Forming Alliance

Vendor Managed Inventory
Eliminate Gaming in Shortage
Situation

Countermeasures to the Bullwhip Effect
While the bullwhip effect is a common problem, many leading companies
have been able to apply countermeasures to overcome it. Here are some of
these solutions:

Vendor Managed Inventory (VMI)
Just In Time replenishment (JIT)
Strategic Partnership
Information sharing
smooth the flow of products
coordinate with retailers to spread deliveries evenly
reduce minimum batch sizes
smaller and more frequent replenishments
eliminate pathological incentives
every day low price policy
restrict returns and order cancellations
order allocation based on past sales instead of current size in case
of shortage