Bullwhip Effect in Supply Chains

Mayur Goyal; Dec 12, 2002

Synonyms:

Whiplash Effect, Whipsaw Effect.

Definition:

Demand order variabilities in supply chains are amplified as they move up the supply chain.

In other words, when there are multiple levels to supply chain - supplier, manufacturer, distributor, OEM customer and user - the further up the chain, the less predictable are the order quantities.

Bullwhip Effect illustrated through the ?Beer Game?:

The Game
In the game, participants (students, managers, analysts, and so on) play the roles of customers, retailers, wholesalers and suppliers of a popular brand of beer. The participants cannot communicate with each other and must make order decisions based only on orders from the next downstream player. The ordering patterns share a common, recurring theme: the variabilities of an upstream site are always greater than those of the downstream site, a simple, yet powerful illustration of the bullwhip effect.

Explanation of Results of Beer Game
This amplified order variability may be attributed to the players' irrational decision making. Indeed, Sterman's experiments showed that human behavior, such as misconceptions about inventory and demand information, may cause the bullwhip effect.

Causes of Bullwhip Effect:

a) Demand Forecast Updation
Forecast variance at each level of supply chain gets amplified if forecast is based on downstream partners' forecast (instead of actual end user demand) and if forecasting policies (like lead time), methodologies and assumptions differ.

b) Order Batching
Orders placed by a company to its upstream partners may be batched and this leads to increased order variance. Order batching may be due to
* Transportation economies
* Seasonal consumer demand
* Order processing and handling costs

c) Forward Buying
Products may be bought in advance of actual demand to take advantage of price promotions.

d) Shortage Gaming
When demand exceeds supply, the buyers may exaggerate their demand to ensure 'allocation'. When demand is fulfilled, such 'buffer' orders may be cancelled. This 'gaming' is very prevalent in new products and high tech.

Mitigation of Bullwhip Effect:

Bullwhip can be effectively mitigated only through measures that are combination of Information Sharing, Channel Alignment and Operational Efficiency measures.

Causes	Information Sharing	Channel Alignment	Operational Efficiency
Demand Forecast Updation	* Visibility of End User demand data across the supply chain	* Vendor Managed Inventory (VMI) * Consumer Direct	* Lead-time reduction * Echelon-based inventory control
Order Batching	* Visibility of End User demand data across the supply chain * Order processing costs reduction (e.g. through Computer/ Internet based Order Management Systems)	* Logistics outsourcing (e.g. 3PLs) * Discounts for truck-load assortments (of different products) * Delivery Consolidation	* Order processing costs reduction (e.g. through Computer/ Internet based Order Management Systems)
Forward Buying	* Visibility of End User demand data across the supply chain	* Continuous Replenishment Program (CRP) * Stabilize prices through Every Day Low Price (EDLP: selling price) and Every Day Low Cost (EDLC: buying price)	* Activity Based Costing (ABC) to clearly analyze inventory costs, handling costs, transportation costs etc. and compare them with product price promotion benefit
Shortage Gaming	* Share sales, capacity and inventory data	* Define cancellation policies

Terms:

MRP Jitters/ DRP Jitters
Periodic execution of MRPs (Materials Requirements Planning)/ DRPs (Distribution Requirements Planning) contributes to the Bullwhip effect.

Vendor Managed Inventory (VMI) OR Continuous Replenishment Program (CRP)
The upstream site (in the supply chain) has access to the demand and inventory information for the downstream site and updates the necessary forecasts and resupply for the downstream site. The downstream site, in turn, becomes a passive partner in the supply chain.

Echelon-based Inventory Control
Echelon inventory: 'the total inventory at its upstream and downstream sites'. Multi-echelon inventory systems (caused by the existence of multiple partners in the supply chain) can operate better when inventory and demand information from downstream sites is available upstream. Echelon inventory is key to optimal inventory control.

References:

1. Lee, Hau L., Padmanabhan, V. & Whang, Seungjin. (1997). The Bullwhip Effect in Supply Chains. Sloan Management Review. 38 (Spring), 93-102.
2. Sterman, J. (1989). Modeling Managerial Behavior: Misperception of Feedback in a Dynamic Decision-Making Experiment. Management Science. Volume 35, number 3, pp. 321-339.
3. Sterman, J. & Senge, Peter (1989). The Fifth Discipline: The Art and Practice of Learning Organization. Doubleday/ Currency: New York.
4. Mentzer, John T. editor (2001). Supply Chain Management. Sage Publications Inc.