The Bullwhip Effect

1. The Bullwhip Effect By Karlo Cantor

2. What is the Bullwhip Effect? • Demand variability increases as you move up the supply chain away from the consumers • Small changes by customers can result in large variations on orders placed up the chain creating a bullwhip effect

3. Supply Chain Management • SCM is the management of a network of interconnected businesses involved in getting the product or service required by the end customers in a supply chain

4. Why is it called a Bullwhip Effect? • “This phenomenon occurs when companies significantly cut or add inventories. Economists call it a bullwhip because even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain.” – Wall Street Journal

5. Background • The concept first appeared in Jay Forrester's “Industrial Dynamics” in 1961 and thus, it is also known as the Forrester effect • Also can be called the Whiplash Effect

6. Importance • It is frequently the cause of serious inefficiencies that result from ordering too much or too little of a given product • Links in the supply chain react to changes further downstream

7. Consumer • Bill likes Coke • Bill goes to the store and drinks a lot of Coke daily • So the store has to refill its stock regularly

8. What if… • But what if Bill gets sick and can’t drink Coke for a few weeks? • The store has too much inventory and stops its orders due to decreased demand • The supplier stops orders as well • The manufacturer will slow down production of Coke

9. But Wait… • Bill gets better and starts buying Coke from the store and starts drinking again (this time more!) • Now the store places more orders to account for the increased demand • The supplier doubles his order with the Coke manufacturer • The manufacturers increase production

10. Coke Supply Chain Consumer Supplier Manufacturer

11. Therefore • A small customer (like Bill) fluctuation can cause a major oscillation in the many stages of the supply chain • The effect is felt greater closer to the manufacturing stages

13. What Causes this Effect? • Over reacting to the backlog orders • Little or no communication between supply chain partners

14. What Causes this Effect? • Delay times between order processing, demand, and receipt of products • Order batching– Instead of ordering frequently, companies may order weekly, biweekly, or even monthly

15. What Causes this Effect? • Limitations on order size (Ex. retailers can order products in cases of 10 from suppliers; however, distributors receive orders in cases of 1,000) • Inaccurate demand forecasts. • Free return policies

16. Consequences • Customer demand is difficult to predict and relatively unstable • When demand increases, customers will increase their orders • When demand decreases, orders will fall or stop

17. Countermeasures to the Bullwhip Effect • Make use of Electronic Data Interchange (EDI) to facilitate better communication and data sharing • More frequent orders instead of order batching

18. Countermeasures to the Bullwhip Effect • Stabilize Prices – reduce both the frequency and the level of wholesale price discounting • Eliminate Gaming in Shortage – information sharing and allocating units on past sales instead of number of orders

19. Countermeasures to the Bullwhip Effect • Vendor Managed Inventory (VMI) • Just in Time Replenishment (JIT) • Computer Aided Ordering (CAO)

20. Works Cited • http://www.quickmba.com/ops/bullwhip-effect/ • http://en.wikipedia.org/wiki/Bullwhip_effect • http://www.ehow.com/about_6367519_example-bullwhip-effect.html • http://www.quickmba.com/ops/vendor-managed-inventory/ • http://sloanreview.mit.edu/improvisations/2010/01/27/understanding-the-bullwhip-effect-in-supply-chains/#.UJvpmbT3C2w • Hau L Lee, V Padmanabhan, and SeungjinWhang. The Bullwhip Effect In Supply Chains. Sloan Management Review, Spring 1997, Volume 38, Issue 3, pp. 93-102

21. Time’s Up! • About your speaker: • Name: Karlo Cantor • School: University of Toronto Mississauga