Posted in Operations & IT Articles, Total Reads: 8558
, Published on 30 October 2010
Bullwhip Effect also known as whiplash effect is a phenomenon observed in forecast driven distribution channels. It is basically the amplification of the demand variance up the supply chain, from the customer to factory, as demand information passes back through the supply chain. The issues associated with bull whip effect are excess inventory, quality problems, increased raw material costs, increased shipping costs, lost sales and lost customer service.
The example given below can help us in understanding the Bullwhip Effect better
•Company X produces widgets for sale on the open market
•Customer demand for Company X’s widgets become stagnant
•Retailers offer a sale promotion to boost sales of Company X widgets
•Retailers fail to notify manufacturers of sales promotion
•Company X assumes that the demand for widgets has increased
•Company X increases inventory to allow for increased manufacturing of widgets
•Company X notifies part suppliers of increased demand
•Suppliers increase inventory to meet demand.
Therefore distorted information along the supply chain caused the inventory levels to increase along the supply chain which may result in increased inventory costs, poor customer service, adjusted capacity and other problems which are associated with the Bullwhip Effect.
The major causes of Bullwhip effect are
1.Demand Forecast Updating
Demand forecast updating refers to the situation where demand is non-stationary and one uses past demand information to update forecasts.
The rationing gaming refers to the strategic ordering behavior of buyers when supply shortage is anticipated.
When fixed order cost is nonzero, ordering in every period would be uneconomical, and batching of orders would occur.
Price variations refer to non-constant purchase prices of the product.
Bullwhip effect as seen in a traditional supply chain:
Impact of Vendor Managed Inventory on causes of Bullwhip effect:
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